Churchill Capital Corp XI

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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: 001-35420
ChemoCentryx, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
850 Maude Avenue
Mountain View, California
(Address of Principal Executive Offices)

94-3254365
(I.R.S. Employer
Identification No.)

94043
(Zip Code)

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

Name of Each Exchange on Which Registered
The Nasdaq Stock Market LLC

(650) 210-2900
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol(s)
CCXI

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 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 emerging growth company. See 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 ☐

Accelerated filer ☒

Non-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 Securities Exchange Act of

1934). Yes ☐ No ☒

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of the last business day of

the registrant’s most recently completed second fiscal quarter was approximately $286.4 million, based on the closing price of the
registrant’s common stock on the Nasdaq Global Select Market of $9.30 per share.

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of February 28, 2020 was

61,644,571.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A in connection with the registrant’s 2020 Annual Meeting of Stockholders, which will be filed subsequent to the date
hereof, are incorporated by reference into Part III of this Annual Report on Form 10-K. Such proxy statement will be filed with the
Securities and Exchange Commission not later than 120 days following the end of the registrant’s fiscal year ended December 31, 2019.

CHEMOCENTRYX, INC.

FORM 10-K — ANNUAL REPORT

For the Fiscal Year Ended December 31, 2019

Table of Contents

Page

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Business

PART I
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.

Properties
Legal Proceedings
Mine Safety Disclosures

PART II
Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information

PART III
Item 10.
Item 11.
Item 12.

Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters

Item 13.
Item 14.

Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services

PART IV
Item 15.
Item 16.

Signatures

Exhibits, Financial Statement Schedules
Form 10-K Summary

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PART I

Forward-Looking Statements and Market Data

This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties.
All statements other than statements of historical facts contained in this Annual Report on Form 10-K are forward-
looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,”
“could,” “will,” “would,” “should,” “expect,” “plan,” “aim,” “anticipate,” “believe,” “estimate,” “intend,” “predict,”
“seek,” “contemplate,” “potential” or “continue” or the negative of these terms or other comparable terminology.
These forward-looking statements include, but are not limited to, statements about:

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

our ability to advance drug candidates into, and successfully complete, clinical trials;

the commercialization of our drug candidates;

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

the scope of protection we are able to establish and maintain for intellectual property rights covering our
drug candidates and technology;

estimates of our expenses, future revenues, capital requirements and our needs for additional financing;

the timing or likelihood of regulatory filings and approvals;

our ability to maintain and establish collaborations or obtain additional government grant funding;

our financial performance; and

developments relating to our competitors and our industry.

These statements relate to future events or to our future financial performance and involve known and
unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements expressed or implied by these forward-
looking statements. Factors that may cause actual results to differ materially from current expectations include,
among other things, those listed under “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Any forward-looking statement in this Annual Report on Form 10-K reflects our current views with respect to
future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results
of operations, industry and future growth. Given these uncertainties, you should not place undue reliance on these
forward-looking statements. For all forward-looking statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Except as required by
law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new
information becomes available in the future.

This Annual Report on Form 10-K also contains estimates, projections and other information concerning our

industry, our business, and the markets for certain drugs, including data regarding the estimated size of those
markets, their projected growth rates, the incidence of certain medical conditions, statements that certain drugs,
classes of drugs or dosages are the most widely prescribed in the United States or other markets, the perceptions and
preferences of patients and physicians regarding certain therapies and other prescription, prescriber and patient data,
as well as data regarding market research, estimates and forecasts prepared by our management. Information that is
based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to
uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in
this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from
reports, research surveys, studies and similar data prepared by market research firms and other third parties,
industry, medical and general publications, government data and similar sources. In particular, unless otherwise
specified, all prescription, prescriber and patient data in this Annual Report on Form 10-K is from Datamonitor or
Global Data. In some cases, we do not expressly refer to the sources from which this data is derived. In that regard,
when we refer to one or more sources of this type of data in any paragraph, you should assume that other data of this
type appearing in the same paragraph is derived from the same sources, unless otherwise expressly stated or the
context otherwise requires.

1

ChemoCentryx® and the ChemoCentryx logo are our trademarks in the United States, the European

Community, Australia and Japan. EnabaLink® and RAM® are our trademarks in the United States. Each of the other
trademarks, trade names or service marks appearing in this Annual Report on Form 10-K belongs to its respective
holder.

Unless the context requires otherwise, in this Annual Report on Form 10-K the terms “ChemoCentryx,” “we,”

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

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Item 1. Business.

Overview

ChemoCentryx is a biopharmaceutical company focused on the development and commercialization of new

medications targeted at inflammatory disorders, autoimmune diseases and cancer. Each of our drug candidates is
designed to selectively block a specific chemoattractant receptor, leaving the rest of the immune system intact. Our
drug candidates are small molecules, which are orally administered, and, if approved, could address unmet medical
needs, including improved efficacy, and offer significant quality of life benefits, since patients swallow a capsule or
pill instead of having to visit a clinic for an infusion or undergo an injection.

In November 2019, we announced positive topline data from the pivotal Phase III ADVOCATE trial of
avacopan, our lead drug candidate that is an orally-administered selective complement 5a receptor inhibitor, for the
treatment of patients with anti-neutrophil cytoplasmic antibody-associated vasculitis, or ANCA vasculitis. The
ADVOCATE trial compared avacopan with the currently used glucocorticoid (most commonly prednisone) active
comparator containing standard of care, or SOC. Subjects in both study arms received background therapy with
rituximab or cyclophosphamide. The trial met both of its primary endpoints, showing that avacopan therapy without
the need for daily prednisone could achieve disease remission at 26 weeks and sustained remission at 52 weeks, as
assessed by the Birmingham Vasculitis Activity Score, or BVAS. BVAS remission at week 26 in the avacopan
treated subjects was numerically superior and statistically non-inferior to the prednisone active comparator SOC
control group, where BVAS remission was achieved in 72.3% of the avacopan treated subjects vs. 70.1% of subjects
in the prednisone active comparator SOC control group (p<0.0001 for non-inferiority). Sustained remission at 52
weeks was observed in 65.7% of the avacopan treated subjects vs. 54.9% in the prednisone active comparator SOC
control group, achieving both non-inferiority and superiority to prednisone active comparator SOC (p=0.0066 for
superiority of avacopan). Reduction in overall burden of disease management and improvement in quality of life
was also demonstrated through key secondary endpoints, including improved kidney function and reduction of
adverse events and illnesses associated with steroids, such as prednisone.

We plan to file a New Drug Application, or NDA, with the U.S. Food and Drug Administration, or FDA, in

mid-2020 and, if the NDA is approved, to commercialize avacopan in the United States on our own and
internationally through our kidney health alliance with Vifor Fresenius Medical Care Renal Pharma Ltd. and its
affiliates and sublicensees, or collectively, Vifor. We are also developing avacopan in other indications, including
complement 3 glomerulopathy, or C3G, and hidradenitis suppurativa, or HS.

Our next most advanced drug candidate is CCX140, an orally-administered inhibitor of the C-C chemokine

receptor known as CCR2. CCX140 is being developed for focal segmental glomerulosclerosis, or FSGS, a rare renal
disease characterized by progressive proteinuria (excess protein in the urine) and impaired renal function. We have
two ongoing Phase II clinical trials to evaluate CCX140 for the treatment of primary or genetic FSGS, the LUMINA
trials, with the LUMINA-1 trial for patients with sub-nephrotic proteinuria, and the LUMINA-2 trial for patients
with nephrotic syndrome, for which there are currently no FDA-approved treatments. We expect to report topline
data from the LUMINA-1 trial in the second quarter of 2020 and the LUMINA-2 trial in the second half of 2020.

Our Strategy

The key elements to our commercial and scientific strategy are to:

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•

Obtain regulatory approval of avacopan for the treatment of ANCA vasculitis. In the United States, we
are currently preparing an NDA for avacopan, which we plan to file with the FDA in mid-2020. We will
also support our international commercialization partner Vifor and its Japanese sublicensee Kissei
Pharmaceutical, Co., Ltd. in their regulatory approval applications;

Commercialize avacopan in the United States on our own, where we believe a company of our size can
effectively compete in rare disease markets. If our avacopan NDA is approved by the FDA, we plan to
deploy a specialty sales force primarily targeting that subset of nephrologists and rheumatologists treating
ANCA vasculitis patients;

Develop and commercialize avacopan for possible additional indications, including C3G, HS, and
potentially other complement-mediated renal diseases;

Develop our other drug candidates and establish collaborations with pharmaceutical and biotechnology
companies to further develop and market our drug candidates; and

Discover and validate new drug candidates.

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Product Development Programs

Our product development portfolio features multiple novel, targeted drug candidates in the therapeutic areas of

immunology, oncology and immuno-oncology.

We have chosen to focus initially on orphan indications, where drug candidates tend to enjoy a faster path to

market and better reimbursement. Our leading drug candidates, avacopan and CCX140, address areas of clear unmet
need in kidney and dermatological disease, where the current SOC is insufficient to halt progression of the disease
and/or where today’s treatment options come with serious side effects, such as those which accompany the
prolonged use of steroids.

While we have focused initially on kidney and dermatological diseases, our target-specific and selective
approach designed to stop the spread of inflammatory disease-inducing cells shows promise in other disease areas.
Over time we plan to bring forward drug candidates to treat a range of inflammatory and autoimmune disorders, as
well as cancer. We expect that our ability to do so will grow as we increase our scale and to the extent that we start
to earn revenues and royalties from the commercialization of our late stage kidney disease franchise.

Our Drug Candidate Pipeline

THERAPEUTIC AREA

Complement
Inhibition in
Orphan Diseases

DRUG/
TARGET

Avacopan
(formerly
CCX168) /
C5aR

INDICATION

PRECLINICAL

PHASE I

PHASE II

PHASE III

NDA

ANCA‐ASSOCIATED VASCULITIS

C3 GLOMERULOPATHY

HIDRADENITIS SUPPURATIVA

Chronic and Orphan
Kidney Diseases

CCX140/CCR2

ORPHAN KIDNEY DISEASE ‐ FOCAL SEGMENTAL GLOMERULOSCLEROSIS

DIABETIC KIDNEY DISEASE, SUCCESSFULLY COMPLETED PHASE II

Other Inflammatory
and Autoimmune
Diseases

CCX507/CCR9

IBD: ULCERATIVE COLITIS

CCR6

TH17 DRIVEN DISEASE, e.g. PUSTUALAR PSORIASIS

Immuno‐Oncology

CCX872/ CCR2

ADVANCED PANCREATIC CANCER

OTHER ONCOLOGY INDICATIONS

Avacopan (CCX168) – Inhibition of Complement-Mediated Pathways in Orphan Diseases

The complement system is a group of proteins that work together to regulate aspects of host defense against
bacteria and viruses, trigger inflammation, and remove debris from cells and tissues. The complement system must
be carefully regulated so it targets only unwanted materials and does not attack the body’s healthy cells. In certain
autoimmune diseases (including those in which we are engaged in clinical trials), components of the complement
system have become dysregulated.

In our complement inhibition orphan disease program, our lead drug candidate is avacopan. Avacopan is a
potential first-in-class, orally-administered molecule that employs a novel, highly targeted mode of action in the
treatment of ANCA vasculitis and other complement-driven autoimmune and inflammatory diseases. Avacopan
precisely blocks a specific receptor (C5aR) for the pro-inflammatory complement system fragment known as C5a on
destructive inflammatory cells such as blood neutrophils. Avacopan thereby arrests the ability of those cells to do
damage in response to C5a activation, which is known to be the driver of ANCA vasculitis and other complement-
driven autoimmune and inflammatory diseases. Current therapies for such diseases typically include broad
immunosuppression with high doses of glucocorticoids (steroids) such as prednisone or methylprednisone, which
may cause significant illness and even death. Avacopan therapy was designed to prevent these outcomes. Avacopan
does not affect formation of the C5b-9 terminal complement complex, or MAC, unlike the anti-C5-antibody,
eculizumab (Soliris®). Therefore, we believe avacopan does not increase the susceptibility to infections for which

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MAC is important in host defense. Moreover, there are two distinct receptors for C5a: the pro-inflammatory C5a
receptor known as C5aR, the target of avacopan, and the anti-inflammatory C5a-like receptor, or C5L2, which plays
an important role in homeostasis. Accordingly, precisely inhibiting C5a at the level of C5aR is thought to block the
pro-inflammatory effects of C5a, while leaving the protective effects of C5L2 functional. Avacopan does not bind
into C5L2, thereby not interfering with the protective effects of C5L2.

We have successfully completed and reported positive clinical data from our pivotal Phase III clinical trial

known as ADVOCATE in ANCA vasculitis, and we are currently evaluating avacopan in Phase II clinical studies
for the treatment of C3G and HS.

ANCA Vasculitis

ANCA vasculitis is an orphan, severe, and often fatal autoimmune disease that is characterized by elevated

levels of autoantibodies called anti-neutrophil cytoplasmic autoantibodies and by inflammation that can affect many
different organ systems, and commonly involves the kidneys. ANCA vasculitis affects approximately 40,000 to
75,000 people in the United States, with approximately 4,000 new cases each year; similarly, ANCA vasculitis
affects approximately 50,000 to 100,000 people in Europe, with approximately 5,000 new cases each year.

ANCA vasculitis is currently treated with courses of immuno-suppressants (cyclophosphamide, or CYC, or

rituximab, or RTX) combined with high-dose prednisone administration. Complete remission is achieved in only 60-
80% of patients and relapse is common. Following initial treatment, up to 30% of patients relapse within six to 18
months, and up to 50% of patients relapse within three to five years.

The current SOC for ANCA vasculitis is associated with significant safety risks due to general

immunosuppression including increased infection rates and dose-related increases in hematological and solid organ
malignancies, as well as metabolic and other toxicities associated with glucocorticoids. First year mortality is
approximately 11% to 18%, with the single greatest cause of this premature mortality being not disease related, but
rather infection and other side effects that are thought largely to be a consequence of prednisone administration. The
multiple adverse effects of acute and chronic prednisone treatment often required in the treatment plan are major
causes of both short-term and long-term morbidity including the increased infection risk. Glucocorticoid therapy-
related adverse events contribute significantly to patient care costs, as well as to the diminution of quality of life for
patients.

Role of C5a and C5aR in ANCA Vasculitis

Complement 5a, or C5a, acting through its receptor C5aR, sometimes called C5aR1 or CD88, is thought to
play a pro-inflammatory role in ANCA vasculitis. Autoantibodies against neutrophil enzymes lead to the priming
and activation of neutrophils and activation of the complement cascade. Activation of the complement cascade leads
to production of C5a, one of the most potent pro-inflammatory mediators of the complement system. C5a, through
binding to its receptor C5aR, induces expression of adhesion molecules and chemotactic migration of neutrophils
and other white blood cells. These accumulating adhering neutrophils initiate an inflammatory cascade in the small
blood vessels by secreting pro-inflammatory cytokines and chemoattractants that lead to necrotizing vasculitis.

Avacopan Phase III Clinical Trial in ANCA Vasculitis

We have successfully completed and reported positive topline clinical data from our pivotal Phase III clinical

trial of avacopan for the treatment of ANCA vasculitis, known as the ADVOCATE trial. ADVOCATE was a
randomized, double-blind, active-controlled worldwide clinical trial which enrolled 331 patients with newly
diagnosed or relapsing ANCA vasculitis at over 200 sites in the United States, Canada, Europe, Australia, New
Zealand and Japan. The aim of the trial was to assess the safety and efficacy of avacopan in inducing and sustaining
remission in patients with ANCA vasculitis. The study included two treatment arms: the test arm contained 30 mg
twice-daily oral doses of avacopan and eliminated prednisone, and the prednisone active comparator control arm
contained an avacopan-matching placebo and maintained a standard regimen of high-dose chronic prednisone. All
patients also received a standard background immunosuppressant, either CYC followed by azathioprine or RTX.

The ADVOCATE study met both of its primary endpoints, disease remission at 26 weeks and sustained
remission at 52 weeks, as assessed by BVAS. Remission was defined as a BVAS score of zero and being off
prednisone treatment for ANCA vasculitis for at least the preceding four weeks.

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The pre-specified primary endpoints were remission of acute vasculitis activity at week 26 and sustained

remission at week 52, where avacopan therapy was at least statistically non-inferior to the prednisone active
comparator SOC. The two primary endpoints were tested sequentially using a gatekeeping procedure to preserve the
Type I error.

BVAS remission at week 26 was achieved in 72.3% of the avacopan treated subjects vs. 70.1% of subjects in

the prednisone active comparator SOC control group (p<0.0001 for non-inferiority). Sustained remission at 52
weeks was observed in 65.7% of the avacopan treated subjects vs. 54.9% in the prednisone active comparator SOC
control group, achieving both non-inferiority and superiority to prednisone active comparator SOC (p=0.0066 for
superiority of avacopan).

Subjects who received avacopan experienced additional benefits compared to those in the prednisone active

comparator SOC control group. These benefits, assessed as pre-specified secondary endpoints, include:

1. Significant reduction in glucocorticoid-related toxicity

•

•

In the Glucocorticoid Toxicity Index (GTI version 2), the avacopan therapy arm vs. the prednisone
active comparator SOC control group was statistically significantly improved for:

o The GTI Cumulative Worsening Score: avacopan therapy 39.7 vs. 56.6 for prednisone

active comparator SOC (p=0.0002 for avacopan superiority), and for

o The GTI Aggregate Improvement Score: avacopan therapy 11.2 vs. 23.4 for prednisone

active comparator SOC (p=0.0082 for avacopan superiority).

Other measures of glucocorticoid-related adverse event assessments (i.e., those based on European
League Against Rheumatism-recommended adverse event terms and those based on Investigator
Assessment of causality) also showed statistically significantly fewer events in the avacopan therapy
arm vs. the prednisone active comparator SOC control group.

2. Significant improvement in kidney function in patients with renal disease

•

The avacopan group exhibited a statistically significant improvement in estimated glomerular filtration
rate, or eGFR, from baseline to week 26 and to week 52 compared to the prednisone active comparator
SOC control group:

o Mean change from baseline to week 26 in eGFR: avacopan treated subjects had an increase

of 5.8 mL/min/1.732 vs. an increase of 2.8 mL/min/1.732 in the prednisone active
comparator SOC control group (p=0.0413).

o Mean change from baseline to week 52 in eGFR: avacopan treated subjects had an increase
of 7.3 mL/min/1.732 vs. an increase in eGFR of 4.0 mL/min/1.732 in the prednisone active
comparator SOC control group (p=0.0259).

o Marked improvement in kidney function particularly in patients with a baseline eGFR of <
30 mL/min/1.73 m2. Those patients showed a mean improvement of 14 units at week 52
which was highly statistically significant (p < 0.01).

3. Improvements in health-related quality of life metrics

•

•

The avacopan group demonstrated statistically significant improvements in the majority of domains
measured by the validated quality of life instrument SF-36 version 2 at week 26 and 52.

The avacopan group reported statistically significantly better outcomes on the EuroQOL-5D-5L
instrument (both Visual Analogue Scale and EQ Index).

The topline safety results revealed an acceptable safety profile in this serious and life-threatening disease, with

fewer subjects having serious adverse events, or SAEs, in the avacopan group than in the prednisone active
comparator SOC control group. A full analysis of the data is underway and expanded results are expected be
presented at upcoming medical meetings and in a future publication.

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Avacopan Regulatory Matters in ANCA Vasculitis

Based on the success of the avacopan clinical studies in ANCA vasculitis, we plan to file an NDA with the

FDA in mid-2020 and will support our alliance partner, Vifor, with their filing of applications for regulatory
approval internationally.

Avacopan has been granted orphan drug designation by the FDA for the treatment of ANCA-associated
vasculitides (granulomatosis with polyangiitis or Wegener’s granulomatosis), microscopic polyangiitis, and Churg-
Strauss syndrome, and by the European Medicines Agency, or EMA, for treatment of microscopic polyangiitis and
granulomatosis with polyangiitis, both forms of ANCA vasculitis.

Complement 3 Glomerulopathy (C3G)

C3G disease is an ultra-rare disease of the kidney that is characterized by deposition of the complement
fragment known as C3 in the glomeruli, or filtration units of the kidney, leading to inflammatory cell accumulation,
potentially leading to significant kidney damage and eventual renal failure. The prevalence of C3G is estimated at
two to three per million people or approximately 800 patients in the United States and approximately 2,000 in
Europe.

There is currently no approved effective standard therapy for C3G. Typically, patients receive one or more

non-specific immunosuppressants. Without treatment, C3G may lead to kidney failure, and the current array of
unapproved therapies at best only delays end stage renal disease, or ESRD. Kidney transplant is frequently the only
option, and even after transplantation, the disease returns in a significant number of affected individuals.

Role of C5a and C5aR in C3G

While the disease name refers to complement 3, it is well known that the C5a receptor pathway, which is

further downstream of C3 in the complement cascade and the target of avacopan, is an essential part of the disease
causing pathology. Hence, C3 is a marker of more general complement activation.

Avacopan Phase II Clinical Trial in C3G

We launched a registration-supporting clinical trial to study avacopan for the treatment of patients with C3G,

the so-called ACCOLADE trial. The clinical trial is expected to enroll up to 88 patients with C3G, including both
C3 Glomerulonephritis and Dense Deposit Disease. The primary objective is to evaluate the efficacy of avacopan
compared to placebo based on histologic changes in kidney biopsies taken at baseline and after 26 weeks of
treatment. The primary endpoint will be based on the percent change from baseline in the C3G Histologic Index for
disease activity.

The secondary objectives of this trial include evaluation of: (i) the safety of avacopan compared to placebo

based on the incidence of adverse events, changes in clinical laboratory measurements, and vital signs; (ii) changes
in laboratory parameters of renal disease including eGFR, proteinuria, and urinary excretion of MCP-1 with
avacopan compared to placebo; (iii) health-related quality-of-life changes based on Short Form-36 version 2, or SF-
36 v2, and EuroQOL-5D-5L, or EQ-5D-5L, with avacopan compared to placebo; and (iv) the PK profile of
avacopan in patients with C3G.

Patients meeting inclusion criteria start study drug treatment on Day 1. Patients receive avacopan 30 mg or

matching placebo orally twice-daily. The placebo-controlled treatment period is 26 weeks (182 days). This will be
followed by 26 weeks study period during which time all patients will receive avacopan. Thereafter, all patients will
be followed for eight weeks (56 days) without study drug treatment. We expect to report topline data from the
ACCOLADE trial in the second half of 2020.

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Hidradenitis Suppurativa (HS)

HS is a chronic, inflammatory, debilitating skin disease characterized by recurrent, painful, nodules and

abscesses, ultimately leading to the formation of draining fistulas (also known as sinus tracts) as well as scarring.
The disease originates from inflammation and occlusion of the hair follicle. Apart from pain, the nodules may
rupture, and often extrude a purulent, foul-smelling discharge leading to substantial social embarrassment for these
patients. Due to its chronic nature and frequently occurring relapses of the skin lesions, HS has a great impact on the
patient’s quality of life, deeply affecting social, working, and psychological aspects.

In the United States, the estimated prevalence of moderate-to-severe HS is up to 200,000 patients. In Europe,

the number of affected patients is believed to be greater, with higher prevalence.

Depending on the severity of disease, the current SOC for HS patients includes topical, oral or intravenous

antibiotic treatment, as well as surgery. Adalimumab, an anti-TNF-alpha monoclonal antibody, is the only drug
indicated for the treatment of patients with moderate-to-severe HS. Two pivotal adalimumab trials showed that
approximately 50% of the patients who were treated with adalimumab achieved an improvement in their skin lesion,
as measured by the widely accepted HiSCR (Hidradenitis Suppurativa Clinical Response) assessment instrument.
There remains a high unmet medical need, however, as a very large proportion of the patients with moderate-to-
severe HS do not adequately respond to adalimumab or other therapies used in the SOC.

Role of C5a and C5aR in HS

Neutrophils are believed to play an important disease-promoting role, as well as certain cytokines and
mediators commonly found in autoimmune diseases, such as TNF-alpha, IL-17, IL-1 and others such as C5a. C5a
promotes inflammatory mediators and is a strong activator of neutrophils. HS is a neutrophil-driven skin disease and
C5a has been found activated and significantly elevated in plasma of HS patients, as compared to healthy controls.

With the role of C5a in HS, our C5aR inhibitor avacopan could be effective in mediating the disease course of
HS. Avacopan is a small molecule that is conveniently administered as an oral medication and could present itself as
advantageous over intravenous or subcutaneous injections treatments for this condition.

Avacopan Phase IIb Clinical Trial in HS

Based on the role of neutrophils and complement activation in the pathogenesis of HS, we believe that there is
significant interest in the medical-scientific community to develop avacopan for the treatment of patients in HS. We
have an ongoing Phase IIb clinical trial, the AURORA trial, of avacopan in patients with moderate-to-severe HS.

The AURORA trial is a randomized, double-blind, placebo-controlled, three arm Phase IIb trial in

approximately 390 subjects with moderate-to-severe HS (Hurley stage II or III). Subjects will be randomized 1:1:1
to a treatment of 10 mg avacopan twice-daily, 30 mg avacopan twice-daily or placebo for 12 weeks. Subjects treated
with 10 mg or 30 mg twice-daily during the blinded, placebo-controlled 12-week treatment period will be followed
by an additional 24-week, active treatment period during which they will continue to receive the same dose regimen,
either 10 mg or 30 mg avacopan twice-daily. Subjects on placebo who complete the blinded, placebo-controlled 12-
week period will be re-randomized 1:1 to receive 10 mg or 30 mg avacopan twice-daily during the 24-week active
treatment period. Thereafter, all subjects will be followed without study drug for eight weeks before they exit the
study.

The primary efficacy objective is based on subjects achieving a HiSCR after 12 weeks of treatment. HiSCR is
defined as at least a 50% reduction in abscess and inflammatory nodule count and no increase in abscess count and
no increase in draining fistula count at Week 12 relative to baseline. The primary safety objective is to evaluate the
safety of avacopan compared to placebo based on the adverse event incidence, changes from baseline in laboratory
parameters, and vital signs. Secondary objectives include the evaluation of International Hidradenitis Suppurativa
Severity Score System, or IHS4, individual inflammatory lesion counts, the subject’s global assessment of skin pain
numeric rating scale, the Sartorius score, Hidradenitis Suppurativa-Physician’s Global Assessment, and the
proportion of subjects who experienced flare or who received rescue therapy, and the duration of flare. Other
secondary objectives include the assessment of subject reported outcomes including health-related quality-of-life
changes based on the SF-36 v2, the EQ-5D-5L, and the Hidradenitis Suppurativa Quality of Life Index as well as the
evaluation of the pharmacokinetic profile of avacopan in subjects with HS. We expect to report topline data from
AURORA trial in the third quarter of 2020.

8

Avacopan Commercialization Strategy

We plan on building a commercial infrastructure and deploying an appropriately sized specialty field force in

the United States to commercialize avacopan in ANCA vasculitis. We expect that our future field force will focus
primarily on a subset of rheumatologists and nephrologists who treat this disease. In territories outside of the United
States, our partner Vifor would be responsible for the commercialization of avacopan.

Kidney Health Alliance with Vifor

In May 2016, we entered into a collaboration and license agreement with Vifor, which we refer to as the
Avacopan Agreement, to commercialize avacopan for orphan renal diseases in Europe and certain other markets. In
connection with the Avacopan Agreement, we received a non-refundable upfront payment of $85.0 million,
comprising $60.0 million in cash and $25.0 million in the form of an equity investment to purchase 3,333,333 shares
of our common stock at a price of $7.50 per share. In February 2017, we and Vifor entered into the Avacopan
Amendment to expand the licensed territory to include all markets outside the United States and China and we
received an additional $20.0 million upfront cash commitment. Upon achievement of certain regulatory and sales
based milestones with avacopan, we will receive additional payments under this agreement. In addition, we will
receive royalties, with rates ranging from the teens to mid-twenties, on future potential net sales of avacopan by
Vifor in the licensed territories. In December 2017, we achieved the first regulatory milestone under the Avacopan
Agreement in the amount of $50.0 million, following the EMA’s validation of the conditional marketing
authorizatoin, or CMA, application for avacopan for the treatment of patients with ANCA vasculitis. In June 2018,
we and Vifor entered into the Avacopan Letter Agreement to further expand the Vifor territories under the
Avacopan Agreement to provide Vifor with exclusive commercialization rights in China and we received a $5.0
million payment for the expanded rights. We retain control of ongoing and future development of avacopan (other
than country-specific development in the licensed territories) and all commercialization rights to avacopan in the
United States.

Under a prior development and commercialization agreement with Glaxo Group Limited, or GSK, an affiliate

of GlaxoSmithKline, which ended in 2013, we are subject to reverse royalties to GSK of 3% on annual worldwide
net sales of avacopan, not to exceed $50.0 million in total royalties.

CCX140 - Chronic and Orphan Kidney Diseases

Our second drug candidate in the orphan disease space is CCX140, an inhibitor of the chemokine receptor

known as CCR2. CCX140 is an orally-administered small molecule that is a highly potent and selective inhibitor of
the chemokine receptor known as CCR2. CCX140 has an excellent preclinical and clinical profile, including good
safety and tolerability demonstrated in hundreds of healthy volunteers or patients with diabetes or diabetic
nephropathy, or DN, across seven clinical trials. These clinical trials include a successfully completed one-year
dosing of CCX140 in a Phase II trial in chronic kidney disease, or CKD, associated with diabetes. Preclinical data to
date suggest CCR2 inhibition involves a unique mechanism of action in the kidney including a novel element of
renal cellular protection at the level of the podocyte leading to rapid improvement in proteinuria. CCX140 has been
granted orphan drug designation by the FDA for the treatment of FSGS.

Focal Segmental Glomerulosclerosis (FSGS)

FSGS is a histologic lesion that is associated with the clinical presentation, in children or adults, of
proteinuria, nephrotic syndrome and progressive renal insufficiency. Nephrotic syndrome is the combination of
nephrotic-range proteinuria (loss of more than three grams of protein per day into the urine) with a low serum
albumin level and edema. Each kidney is made up of approximately one million tiny filters called “glomeruli.”
Glomeruli filter blood, taking out the water-like part that becomes urine and leaving protein in the blood. When
glomeruli or sections of the glomeruli become damaged or scarred (sclerosis), proteins leak into the urine
(proteinuria). FSGS is understood to start with damage to podocytes, cells that wrap around capillaries of the
glomerulus. Podocytes form part of the barrier that enable the glomerulus to filter the blood in a manner that retains
large molecules such as proteins, while smaller molecules such as water, salts, and sugars are filtered as the first step
in the formation of urine.

9

FSGS is classified as primary or idiopathic when the cause is not known, and secondary when it occurs in the
setting of recognized genetic mutations or associated disease. The distinction between primary and secondary FSGS
can be difficult, but it has been estimated that in 80% of the cases the etiology is unknown. Primary or idiopathic
FSGS often presents with the nephrotic syndrome. Secondary FSGS, which most often presents with non-nephrotic
proteinuria and some degree of renal insufficiency, can occur in the setting of genetic vulnerability, podocyte injury
due to toxins or infections, or as an adaptive response to glomerular hypertrophy or hyper-filtration.

Symptoms or signs of FSGS may not be noticeable early in the course of disease, presenting only when
sufficiently advanced to cause edema, or when physical examination and laboratory assessment reveal proteinuria,
low blood albumin levels, high cholesterol and/or high blood pressure. FSGS is a disease characterized by
progressive glomerular scarring and is life-threatening. In 20% of children and in 40% of adults, it is the underlying
cause of nephrotic syndrome. When accompanied by high levels of proteinuria at the time of presentation, 50% of
patients with FSGS will progress to ESRD within three to eight years. FSGS is causal for 4% of all ESRD cases.
Furthermore, after kidney transplantation for primary FSGS, the recurrence rate is 40%.

FSGS is a rare form of CKD that affects approximately 80,000 patients in the United States, with 5,500 to

9,500 new cases each year. FSGS attacks the glomeruli causing scarring which leads to permanent kidney damage.
Progressive FSGS can lead to ESRD, ultimately requiring kidney transplant or renal dialysis and total health
expenditures of hundreds of thousands of dollars each year per patient.

Current Treatment Approaches in FSGS

There are no approved drugs for the treatment of FSGS. Moreover, current treatment approaches are not very

effective in halting the disease. Usually, treatments for FSGS include renin-angiotensin-aldosterone, or RAAS,
system blockers, corticosteroids, immunosuppressive drugs, diuretics and diet change (reducing sodium and protein
intake).

RAAS blockade reduces proteinuria and slows progression in proteinuric kidney diseases, and is commonly
used for treatment of secondary FSGS. Whether or not this is effective in primary FSGS is unknown. Patients with
histologic evidence of primary FSGS who have nephrotic syndrome are usually offered disease-modifying therapy
with glucocorticoids and other immunosuppressive drugs. However, in the absence of nephrotic range proteinuria
(>3.5 g/day), administration of steroids or other immunosuppressive drugs is generally not recommended. In many
cases, an overall course of treatment of at least six months is required and complete remission may not be attained
for 12 months or longer. Shorter courses (two months or less) result in much lower remission rates (20% to 30%).

Patients with little or no reduction in protein excretion at 12 to 16 weeks are considered steroid resistant.

Initial therapy of steroid-dependent or steroid-resistant FSGS consists of a calcineurin inhibitor (cyclosporine or
tacrolimus) with or without low-dose prednisone. Among those unresponsive to this combination, or among those
with substantially reduced eGFR (<40 mL/min per 1.73 m2), mycophenolate mofetil in combination with
glucocorticoids is recommended. In addition, in patients at increased risk for glucocorticoid-associated toxicity (e.g.,
obese patients, diabetic patients, patients with severe osteoporosis, patients >70 years of age), cyclosporine or
tacrolimus with or without low-dose prednisone has been recommended, although data evaluating this strategy are
limited. Calcineurin inhibitors must be used with caution in patients with impaired renal function because of the
nephrotoxicity of these drugs, and some authors recommend avoiding these in subjects whose kidney function
approaches renal failure, i.e., subjects with an eGFR of <30 mL/min/1.73 m2.

Limitations of Current Therapies in FSGS

As described above, there are no effective therapies available for FSGS. Control of hypertension, particularly

with angiotensin inhibitors, is supportive but does not address the underlying pathology. Glucocorticoids and
immunosuppressants are also used, but the results have been inconsistent. The increased risk of infection associated
with these agents is a significant concern. Histologic recurrence in renal transplants is high, with high levels of
proteinuria portending a poor renal prognosis.

10

Role of CCR2 inhibition in FSGS

There is evidence that the C-C chemokine receptor known as CCR2 plays a role in the pathogenesis of FSGS.

CCR2 is a major driver of monocyte migration and activation, and has been shown to mediate renal interstitial
inflammation and tubular atrophy in a number of chronic renal diseases by recruiting monocytes to the renal
interstitium. Further, studies have shown that the degree of protein excretion correlates with urine MCP-1 levels, one
of the signature ligands of CCR2 and a biomarker of inflammation, and the infiltration of immune cells called
macrophages into the kidney in patients with CKD. Experiments performed in vitro have added to the mechanistic
rationale for the notion that CCR2 is an important driver of FSGS. Proteinuria is the hallmark characteristic of
FSGS, and in vitro experiments have found that tubular epithelial cells release MCP-1 when exposed to serum
proteins on the inside of the tubules. Clinically, in children with FSGS, urinary MCP-1 levels correlate with the
degree of proteinuria.

Blocking CCR2 provided significant and rapid renal protection in two distinct models of FSGS, as measured
both by reduction in proteinuria and improvement in multiple histological parameters, and it thus represents a novel
and mechanistically-distinct approach for the treatment of FSGS.

In the 5/6 remnant kidney model, mice had a rapid reduction in proteinuria when treated with a CCR2
inhibitor and a RAAS inhibitor. Combining a CCR2 inhibitor with a RAAS inhibitor reduced the proteinuria by
91%. The protective effects were evident within one week of treatment and were maintained for the duration of the
study (six weeks). The same renal protective effects of CCR2 blockade were seen in the adriamycin nephropathy
model. Administration of adriamycin caused significant proteinuria, which was significantly reduced by the
combination of a CCR2 inhibitor and a RAAS inhibitor after two weeks of treatment. Histological parameters also
improved with the combination of the CCR2 inhibitor and a RAAS inhibitor; these included reduced glomerular
hypertrophy, glomerular sclerosis, mesangial expansion and increased podocyte density. The data suggest CCR2
inhibition may provide a novel approach for the treatment of chronic kidney diseases.

CCX140 Clinical Development

Our clinical development strategy was to first assess the safety and tolerability of CCX140 in healthy subjects,
then in patients with type 2 diabetes and normal renal function, and finally to evaluate the drug in patients with DN.
As a precursor to our clinical trials in patients with DN, we completed a 159-patient randomized Phase II clinical
trial to assess the safety and tolerability of CCX140 in patients with type 2 diabetes, one of the most common causes
of nephropathy. We also subsequently completed a 332-patient randomized Phase II clinical trial to assess the
efficacy, safety, and tolerability of CCX140 in patients with DN.

Based on safety and encouraging efficacy signals related to reduction in proteinuria and

stabilization/improvement of renal function observed in the Phase II study in patients with DN, we launched our
clinical-development program of CCX140 for the treatment of patients with FSGS.

CCX140 Phase I Clinical Trials

We completed four Phase I clinical trials in 118 healthy volunteers. A CCX140 dose range of 0.05 to 15 mg

was studied. CCX140 was generally well-tolerated with no serious adverse events observed in these Phase I clinical
trials. The PK profile was supportive of once-daily oral dosing of CCX140 in the Phase II clinical trials in patients
with type 2 diabetes and in patients with DN.

CCX140 Phase II Clinical Trial in Type 2 Diabetes

Our Phase II clinical trial was designed to demonstrate safety of CCX140 in patients with type 2 diabetes and

normal renal function, and to examine the effect of CCX140 on glycemic indices. We conducted a randomized,
double-blind, placebo and active controlled clinical trial in 159 patients with type 2 diabetes on a stable dose of
metformin for at least eight weeks, with 32 patients receiving placebo, 32 receiving pioglitazone hydrochloride (an
approved therapeutic for type 2 diabetes serving as the active control), 63 receiving 5 mg of CCX140 and 32
receiving 10 mg of CCX140 orally once-daily for 28 days.

The clinical trial met its primary objective by demonstrating the safety and tolerability of CCX140 in these
patients. In addition, CCX140 showed encouraging signs of biological activity based on a statistically significant
decrease in HbA1c, a marker of glycemic control, for the 10 mg dose group.

11

CCX140 Phase II Clinical Trial in DN

We completed a Phase II clinical trial in patients with DN. A total of 332 patients were enrolled in a

randomized, double-blind, placebo-controlled clinical trial. The goals of this clinical trial were to evaluate the
efficacy, safety and tolerability of CCX140 in patients with DN. The primary efficacy objective was evaluation of
the effect of CCX140 on albuminuria. Secondary efficacy objectives were evaluation of the effect of CCX140 on
HbA1c and eGFR. The three treatment groups consisted of (i) SOC, (ii) a RAAS inhibitor, plus placebo (control
group), and (iii) 5 mg and 10 mg of CCX140 once-daily plus SOC. The treatment duration was up to 52 weeks, with
a four-week follow-up period. Patients with residual albuminuria, despite being on a stable therapeutic dose of a
RAAS inhibitor, were included in this clinical trial. The key efficacy endpoint was a change from baseline in first
morning UACR, a major indicator of renal health.

The Phase II trial met its primary endpoint by demonstrating that treatment with 5 mg of CCX140 given orally

once-daily added to a SOC regimen of RAAS inhibitor treatment resulted in a statistically significant (p=0.01)
improvement in UACR, beyond that achieved with SOC alone. The maximum treatment effect (24% reduction) was
reached at 12 weeks, and sustained reduction in albuminuria induced by CCX140 relative to SOC alone was
observed over the full year (UACR at each one of the ten time points over the 52-week treatment period in the
patients who received 5 mg CCX140 continuously for 52 weeks, were below those of the SOC alone group). A dose
of 10 mg CCX140 per day did not provide more improvement in albuminuria as compared to the 5 mg dose.
CCX140 did not affect systematic blood pressure, suggesting that the beneficial effect of CCX140 is mediated
locally in the kidney micro-environment, possibly through a beneficial reduction in renal inflammation. CCX140
was well-tolerated with a low overall dropout rate over the 52-week treatment period (10%). No safety issues were
observed that would prevent further clinical development of CCX140 in DN.

CCX140 Phase II Clinical Trials in Primary or Genetic FSGS

The successfully completed CCX140 Phase II clinical trial in DN, which demonstrated a statistically

significant reduction in proteinuria compared to SOC, showed the most pronounced effect in the highest proteinuric
patients. In addition, preclinical data to date suggest CCR2 inhibition involves a unique mechanism of action in the
kidney including a novel element of renal cellular protection at the level of the podocyte, leading to rapid
improvement in proteinuria. Building upon our orphan kidney disease franchise, we launched our clinical
development program of CCX140 in patients with primary or genetic FSGS. Our clinical development program will
comprise two populations of patients:

(i) Primary or genetic FSGS patients with sub-nephrotic proteinuria (>1 g/g) – LUMINA-1 trial; and

(ii) Primary or genetic FSGS patients with nephrotic syndrome (levels of proteinuria >3.5 g/g) – LUMINA-2

trial.

The LUMINA-1 trial is a randomized controlled, dose ranging study with the aim to evaluate the effect of

treatment with CCX140 in subjects with sub-nephrotic primary or genetic FSGS. The LUMINA-2 trial is an open
label, intra-subject dose escalation study in subjects with primary or genetic FSGS and nephrotic syndrome. The
primary efficacy objective of both trials is to evaluate the effect of CCX140 on proteinuria, as assessed by factors
including reduction in proteinuria through the 12-week treatment period. Other study objectives will include the
assessment of partial or complete remission and the time to, and proportion of subjects with, partial or complete
remission and other variables. Changes in quality-of-life changes (SF-36 v2, EQ-5D-5L) will also be assessed.

Patient enrollment of LUMINA-1 was completed in August 2019, and we expect to report topline data in the

second quarter of 2020. Topline data from the LUMINA-2 trial are expected in the second half of 2020.

CCX140 Commercialization Strategy

We plan to leverage the commercialization infrastructure and field force that we are building to commercialize

avacopan in the Unites States and to commercialize our orphan disease drug candidates such as CCX140, if
approved. FSGS patients are primarily being treated by nephrologists in so-called centers of excellence in renal
diseases. Similar to avacopan, we plan on establishing a commercial presence focused on the nephrology arena. In
territories outside of the United States, our partner Vifor will be responsible for the commercialization of CCX140.

12

Kidney Health Alliance with Vifor

In December 2016, we entered into a second collaboration and license agreement with Vifor, which we refer

to as the CCX140 Agreement, pursuant to which we granted Vifor exclusive rights to commercialize CCX140 in
rare renal diseases in markets outside the United States and China. We are responsible for the clinical development
of CCX140 in rare renal diseases, while sharing the cost of such development with Vifor. In connection with the
CCX140 Agreement, we received a non-refundable upfront commitment totaling $50.0 million and are eligible to
receive additional payments upon the achievement of certain regulatory and sales based milestones, as well as tiered
double-digit royalties on potential net sales of CCX140 in the licensed territories. Under the CCX140 Agreement,
Vifor retains an option to solely develop and commercialize CCX140 in more prevalent forms of CKD. Should
Vifor later exercise the CKD option, we would receive co-promotion rights in CKD in the United States. In June
2018, we and Vifor entered into the CCX140 Letter Agreement to further expand the Vifor territories under the
CCX140 Agreement to provide Vifor with exclusive commercialization rights in China and we received a non-
refundable $5.0 million payment for the expanded rights. Additionally, in June 2018, we and Vifor entered into an
amendment to the CCX140 Agreement, which we refer to as the CCX140 Amendment, to clarify the timing of
certain payments with respect to development funding of the CCX140 program by Vifor, and we received a non-
refundable payment of $11.5 million. We retain control of ongoing and future development of CCX140 (other than
country-specific development in the licensed territories) and all commercialization rights to CCX140 in the United
States.

Early Stage Drug Candidates

Immuno-Oncology and Other Therapeutic Areas

In oncologic disease, tumors can profoundly subvert inflammatory and effector immune responses. In the

tumor cellular microenvironment, CCR2 bearing cells are thought to largely have an immunosuppressive behavior.
These are the so-called myeloid derived suppressor cells, or MDSCs. These cells effectively help tumors hide from
the body’s cytotoxic immune response to tumor cells. Inhibiting CCR2, and thus the MDSCs controlled by CCR2,
could therefore lead to the liberation of the cytotoxic immune response against the tumor cells, tumor shrinkage, and
improved patient survival. We have an ongoing clinical development program for the treatment of patients with
advanced pancreatic cancer with our drug candidate CCX872, our second inhibitor of the chemokine receptor
known as CCR2.

Understanding Pancreatic Cancer

Pancreatic cancer is a rare but deadly cancer. It is the 15th most common cancer worldwide but the fourth

highest cause of cancer-related death. In the United States in 2019, approximately 56,770 people were expected to
develop pancreatic cancer, and within five years of diagnosis, about 80% of those patients are expected to succumb
to the disease. Primarily due to the aging of the population, the incidence of pancreatic cancer is predicted to
increase to 62,000 new cases per year by 2030. Pancreatic adenocarcinoma, which represents 85% of all pancreatic
cancers, is characterized by rapid progression and a dismal prognosis. Because of the deep location of the pancreas
in the abdomen and the lack of markers of early disease, most cancers remain asymptomatic until they obstruct the
biliary tract, which usually occurs with tumors of the pancreatic head, or until they become metastatic. Hence, less
than 15% of patients initially present with a resectable cancer (stage 1 or 2), while the majority of patients have
either a locally advanced, nonresectable, stage 3 cancer or a metastatic, stage 4 cancer at the time of diagnosis. Even
with the best current treatment, the median overall survival of these patients is less than one year, an outlook that has
remained largely unchanged over the last few decades.

The dismal prognosis of this cancer results from the combination of the late diagnosis, the early metastatic

dissemination, and resistance to most chemotherapies. The main factors explaining this resistance to treatment
include a very high rate of activation of the Kirsten rat sarcoma viral oncogene, mutations, a propensity for both
local extension and distal spreading, the presence of a dense stromal tissue surrounding the tumor that results in a
hypoxic, hypovascularized environment with high interstitial pressure, which may impede drug delivery, and
ultimately the loss of immune control. Therapeutic interventions that improve the prognosis of patients with
pancreatic cancer are urgently needed.

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Limitations of Current Therapies

Current SOC regimens are not only limited by modest efficacy but also by significant toxicity. For patients

with nonresectable cancer (stage 3 or 4), FOLFIRINOX (oxaliplatin, irinotecan, leucovorin, and 5-fluorouracil) or a
combination of gemcitabine and nanoparticle albumin-bound-, or nab-, paclitaxel are considered standard
treatments, but the median overall survival of patients remains less than one year. Further, these treatments often are
poorly tolerated. FOLFIRINOX is associated with a high rate of Grade 3-4 adverse events, can rarely be
administered for more than six months, and is mostly prescribed to patients with excellent performance status. Frail,
elderly patients usually receive palliative treatment. Extensive research is ongoing to identify novel agents with
improved efficacy and a reduced toxicity profile, including chemotherapies with improved formulations of currently
available agents, therapies targeted against specific oncogenic pathways, or cancer vaccines.

Role of CCR2 in Pancreatic Cancer

Human pancreatic tumors are characterized by a highly immunosuppressive microenvironment. In the tumor
cellular microenvironment, CCR2 bearing cells are thought to be largely of an immunosuppressive behavior; these
are the so-called MDSCs. These cells effectively help tumors hide from the body’s cytotoxic immune response to
tumor cells. Inhibiting CCR2, and thus the MDSCs controlled by CCR2, could therefore lead to the liberation of the
cytotoxic immune response against the tumor cells, and improved patient survival.

Clinical Development

CCX872 is a potent and selective inhibitor of CCR2. The objective of using a CCR2 inhibitor such as
CCX872 is to reduce the suppressive myeloid cell presence in the tumor and, in doing so, slow the progression of
disease in these patients. We believe that CCX872 may represent a promising novel immunotherapeutic approach.
Drugs that block CCR2 have shown evidence of activity in patients with pancreatic cancer as well as in a mouse
orthotopic pancreatic cancer model.

Phase I Clinical Trials

We completed a first-in-human Phase I clinical trial in healthy subjects. This clinical trial was a combined

single-and-multiple-ascending dose clinical trial in 40 subjects. The clinical trial was conducted in the Netherlands.
CCX872 doses of 3 mg, 10 mg, 30 mg, 100 mg and 300 mg were given as a single dose in the first study period and
once-daily doses for seven days in the second study period. Data showed that CCX872 was well-tolerated and
appeared to be safe in healthy volunteers at all dose levels studied. There were no serious adverse events or dropouts
due to adverse events in the trial. The most common adverse events reported by subjects receiving CCX872 in the
multi-dose period were dizziness, diarrhea, and headache. These events typically were mild in intensity and did not
result in dosing discontinuation. The results showed that CCX872 was safe and well-tolerated. CCX872 was able to
block CCR2 in the circulation, and it had a predictable dose-linear PK profile.

Our Phase Ib study for CCX872 explores a novel approach (CCR2 inhibition) for the treatment of patients

with stage 3 and 4 pancreatic cancer. Beyond the field of pancreatic cancer, the results of this study will also
advance our understanding of the role of chemokines in solid tumors and of the potential for chemokine receptor
inhibitors as therapeutic options in cancer patients when combined with SOC regimens. The primary aim of this
study is to evaluate the safety and efficacy of orally-administered CCX872 with respect to disease progression in
patients with nonresectable pancreatic cancer being treated with FOLFIRINOX, one of the current SOC treatments
for this disease. Enrollment in the trial occurred in two stages, Part A (single dose) and Part B (multiple dose). Part
A has been completed. Results showed that a single oral dose of 150-mg CCX872 was well-tolerated and safe in this
study. The PK profile in patients with pancreatic cancer was in line with the PK profile observed in healthy
volunteers in the previous clinical trial. CCX872 was effective in blocking CCR2 in circulating cells as measured by
CCR2 occupancy and internalization assays, as well as migration assays. Successful completion of Part A led to
initiation of Part B.

Enrollment of 50 patients in Part B was completed in 2016. In January 2017, we reported 24-week

progression-free survival, or PFS, data, 12-week objective response rate, or ORR, data, and initial overall survival
data. PFS rate was 57% at week 24 in the primary analysis population and median PFS was 179 days. ORR was
37% at week 12 in the primary analysis population. Overall survival rate was 52% at week 48 in the primary
analysis population and median survival time was 11.5 months. The longest ongoing CCX872 treatment period for a
patient in the study to date is 73 weeks (and continuing). CCX872 has been well-tolerated in the clinical trial. There
has been no apparent additional safety burden of combining CCX872 with FOLFIRINOX, as evidenced by an
incidence and rate of adverse events in the trial to date consistent with data reported historically for FOLFIRINOX
on its own.

14

In January 2018, we further reported overall survival data at 18 months of 29% for the primary analysis

population and 28% in patients with metastatic pancreatic disease. This compares favorably with previously
published data of overall survival of 18.6% at 18 months for FOLFIRINOX regimen alone in metastatic pancreatic
cancer. Overall, circulating monocytic myeloid derived cells likely including myeloid suppressor cells were reduced
by treatment.

Preclinical Development in Immuno-Oncology

One of the most exciting advances in oncology in decades is the observation that modifiers of the activity of

the patient’s own immune system can profoundly enhance their response to chemotherapy.

A critical cellular component of this response are the MDSCs, which inhibit the activity of the effector T cells,

and thus dampen the immune response of the body to the tumor. These MDSCs express chemokine and
chemoattractant receptors that they use to migrate to the tumor microenvironment. We believe that blocking these
chemokine receptors with small molecule antagonists could be effective either as stand-alone therapies for certain
cancers or by synergistic effect when given in combination with traditional chemotherapies or other
immunotherapies.

We have discovered small molecule inhibitors that target these chemoattractant receptors, and one or more of

them may be developed in certain oncology indications targeting both solid and liquid tumors.

In our preclinical research, we are conducting studies with various chemokine receptor inhibitors in

combination with check point inhibitors, such as those inhibiting the programmed cell death-1, or PD-1,
programmed death-ligand 1, or PD-L1, pathway, that we believe may result in a greater anti-tumor effect, than with
check-point inhibition alone.

A growing body of data suggests that a number of chemokine receptors, including, but not limited to, CCR1,

CCR2, CCR4, CCR5, CXCR7 and CXCR2, may play diverse roles in cancer growth, cancer metastasis, cancer
angiogenesis, or the composition of the tumor microenvironment. Given the potential role of chemokine receptors in
cancer cell survival, the combination of chemokine receptor antagonists with traditional chemotherapeutic agents or
with immunotherapy, such as PD-1 or PD-L1 inhibitors is an attractive strategy because it may result in greater
efficacy and/or allow dose reductions of the chemotherapeutic drugs and therefore limit systemic side effects.

In December 2019, we, together with our collaborators at University of Florida and Massachusetts General

Hospital, published results from a non-clinical study in which we evaluated the effectiveness of our CCR2
antagonist CCX872 in combination with anti-PD-1 in combatting glioblastoma brain cancer. Using two mouse
models of glioblastoma, we targeted chemokine receptors that are important for allowing MDSCs to infiltrate into
the region surrounding glioblastoma tumors. In mice that were bred to lack chemokine receptor 2 (CCR2) and to
develop glioblastoma, MDSCs could not carry out such infiltration. Treating these mice with an immune checkpoint
inhibitor stimulated a strong anti-cancer immune response and prolonged the animals’ survival. In mice with normal
CCR2, treatment with a molecule that blocks CCR2 had similar effects.

The CCR2 antagonist used in this study—called CCX872— has passed Phase Ib safety trials in patients with
pancreatic tumors, and clinical trials are ongoing to investigate the use of CCR2 inhibitors in several cancers. Thus,
we believe the results of this study support targeting CCR2-expressing MDSCs as a means to enhance
immunotherapies, and warrant investigation of this combination therapy in clinical trials for patients with
glioblastoma.

In another immune-oncology program, we have further optimized our unique class of human PD-L1 small

molecule inhibitors. The lead compounds possess high oral bioavailability and desirable safety profiles. They also
exhibited activity in blocking the PD-1/PD-L1 interaction in multiple biochemical and cell-based assays. Non-
clinical data suggest that the small molecules prevented the PD-1/PD-L1 interaction by inducing dimerization of the
PD-L1 protein. In animal tumor models, these compounds potently reduced tumor growth with the activity being
similar to a clinically-proven anti-human PD-L1 antibody. The tumor analyses demonstrated that these compounds
almost completely occupied human PD-L1 on the tumor cells, and thus potently blocked the interaction of PD-1/PD-
L1 and enhance the immune responses against tumor. We believe these novel small molecules could provide a
valuable orally dosed alternative to the current antibody-based PD-1/PD-L1 therapeutics.

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Other Inflammatory and Autoimmune Diseases

Inflammatory Bowel Disease, or IBD (Crohn’s Disease and Ulcerative Colitis)

IBD refers to two diseases – Crohn’s disease and ulcerative colitis – both characterized by inflammation of the

gastrointestinal tract. Crohn’s disease can cause inflammation in any part of the digestive tract but often affects the
tail end of the small intestine. Ulcerative colitis is inflammation of the large intestine. Both Crohn’s disease and
ulcerative colitis are chronic and recurring inflammatory conditions. Researchers believe that these conditions occur
when the body’s inflammatory cells become over-reactive and mount a destructive inflammatory response. Current
treatments for IBD include steroids, 5-aminosalicylic acids, immunosuppressive therapies, such as azathioprine or
biologic agents such as TNF-α inhibitors and integrin inhibitors, such as the anti-α4β7 antibody, vedolizumab, and
when all else fails, surgery.

Next Generation CCR9 Inhibitor CCX507

Also in the area of IBD, our drug candidate CCX507 builds on our expertise in the area of CCR9 inhibitors

and IBD. CCX507 is a second generation CCR9 inhibitor. CCX507 is selective for CCR9 relative to all other
chemokine receptors, orally bioavailable, and has an excellent preclinical safety profile. CCX507 has shown greater
potency towards CCR9 than vercirnon in non-clinical studies. We completed Phase I clinical development, which
demonstrated that CCX507 was safe and well-tolerated, and blocked CCR9 on circulating leukocytes. Additionally,
preclinical data of CCX507 in combination with an anti-α4β7 antibody or anti-TNFα antibody showed that
combined treatment reduced the severity of colitis better than monotherapy with either drug alone. We plan to move
CCX507 forward to Phase II clinical trials, either by ourselves or with a strategic partner.

Th17 Driven Diseases and CCR6

One of the most intriguing areas of current research in immunology involves a relatively recently discovered

type of helper T cells known as Th17 cells. There is a large amount of preclinical and clinical data that implicate
Th17 cells, as well as Interleukin 17, or IL-17, in the development of a large number of autoimmune diseases,
including psoriasis, rheumatoid arthritis, asthma, and multiple sclerosis.

Activated Th17 cells isolated from chronically inflamed human tissues produce high levels of TNF-α and

other cytokines. A hallmark of Th17 cells is that they express high levels of the chemokine receptor known as
CCR6, which is not found on Th1 and Th2 cells. High levels of the CCR6 chemokine ligand, CCL20, have been
found in psoriatic skin, in rheumatoid arthritis joint biopsies, and in asthmatic lungs.

We believe that these are potential therapeutic opportunities for a CCR6 inhibitor. We have produced several

unique CCR6 inhibitor leads, which are now being optimized through medicinal chemistry approaches and
undergoing further evaluation in preclinical pharmacology models.

We have shown in preclinical models that an orally bioavailable, small molecule inhibitor of the chemokine
receptor known as CCR6 confers protection against IL17-mediated inflammation. We have generated potent orally
bioavailable CCR6 inhibitors that inhibit CCL20-mediated chemotaxis of both human and mouse CCR6-positive
cells. The utility of CCR6 inhibition was tested in preclinical models of psoriasis, and demonstrated that animals
treated with our CCR6 inhibitor were protected against imiquimod induced skin thickening. Histological analysis of
the skin confirmed the protective effect of our CCR6 inhibitor compared to an aqueous vehicle control and
significantly reduced ear-thickening induced by intradermal injections of Interleukin 23, or IL-23, a cytokine that is
important for the terminal differentiation and pathogenicity of Th17 cells.

The mechanism of action for CCR6 inhibitors is different from other therapeutics targeting IL-17, because

inhibition of CCR6 disrupts the recruitment of infiltrating leukocytes into the epidermis upon skin damage, thereby
protecting against epidermal hyperplasia, or an abnormal increase in the number of cells on the skin. Thus,
pharmacological inhibition of CCR6 with an orally bioavailable small molecule inhibitor mitigates IL-17-driven
inflammation in psoriasis models, and its distinct mechanism of action suggests it may offer additional efficacy
when added to current SOC.

We presented data from in vivo models of psoriasis with a selective orally-administered CCR6 inhibitor.

Genetically modified mice demonstrate that psoriatic lesions do not progress in mice lacking chemokine receptor
CCR6. CCL20, the only known chemokine ligand for CCR6, is highly expressed in psoriatic plaques. Our potent,
orally bioavailable small-molecule inhibitor of CCR6 ameliorated skin inflammation in the IL-23 and imiquimod
induced models of psoriasis, and in the IL-36 induced model representative of rare form of psoriasis referred to as
generalized pustular psoriasis. Results from this work were published as a peer reviewed journal article in the
Journal of Immunology in January 2019. CCR6 antagonists present a novel therapeutic approach to treating multiple
forms of psoriasis.

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Intellectual Property

Our commercial success depends in part on our ability to obtain and maintain proprietary protection for our

drug candidates, novel biological discoveries, screening and drug development technology and other know-how, to
operate without infringing on the proprietary rights of others and to prevent others from infringing our proprietary
rights. Our policy is to seek to protect our proprietary position by, among other methods, filing U.S. and foreign
patent applications related to our proprietary technology, inventions and improvements that are important to the
development and implementation of our business. We also rely on trade secrets, know-how, continuing
technological innovation and potential in-licensing opportunities to develop and maintain our proprietary position.

As for the pharmaceutical products we develop and commercialize, as a normal course of business, we intend

to pursue composition-of-matter patents, where possible, manufacturing, salts and polymorphs, dosage,
combinations and formulation patents, as well as method of use patents on novel indications for known compounds.
We also seek patent protection with respect to novel biological discoveries, including new targets and applications
as well as adjuvant and vaccine candidates. We have also pursued patents with respect to our proprietary screening
and drug development processes and technology. We have sought patent protection, either alone or jointly with our
collaborators, as our collaboration agreements may dictate.

As of December 31, 2019, our patent estate, on a worldwide basis, included approximately 905 issued or

allowed patents and approximately 420 pending patent applications. As of December 31, 2019, there were
approximately 122 issued or allowed patents and 57 patent applications pending for avacopan, our lead drug
candidate in the C5aR program. As of December 31, 2019, with respect to our drug candidates in the CCR2
program, we had approximately 89 issued or allowed patents and 88 patent applications pending worldwide relating
to their chemical composition or use thereof. As of December 31, 2019, with respect to the CCR1 and CCR9
chemokine receptors, we had approximately 431 issued or allowed patents and 91 patent applications pending
worldwide relating to their chemical composition or use thereof. As of December 31, 2019, we had approximately
260 patents issued or pending for our other preclinical-stage compounds in the PD-L1, C5aR, CXCR7, CCR4,
CXCR2 and CCR6 programs.

Avacopan, our lead drug candidate in the C5aR program, is covered by an issued patent in the United States

for the composition-of-matter of avacopan and pharmaceutical compositions thereof, which will expire in 2031 (not
including patent term extension that may be available to extend the term of the patent). Avacopan is also covered by
an additional issued patent in the United States with an expiration date of 2029. Avacopan is covered by an issued
patent in Europe (covering avacopan’s composition-of-matter, compositions and certain methods of use) with an
expiration date of 2029 (not including a supplementary protection certificate that may be available to extend the
term of the patent). Additionally, avacopan is covered by issued patents in several jurisdictions including Australia,
Canada, China, Hong Kong, India, Israel, Japan, Mexico, Russia, Singapore, South Africa, South Korea and Taiwan.
These issued patents will expire in 2029 (not including patent term extensions or supplementary protection
certificates that may be available in some countries). Patent applications are pending in other countries including
Brazil which, if issued, are anticipated to expire in 2029 (not including patent term extensions or supplementary
protection certificates that may be available). We have patent applications pending covering certain synthetic
methods related to making avacopan, which, if issued, are anticipated to expire in 2035. More recent patent
application filings in the avacopan family are directed towards specific therapeutic indications, formulations, and
certain solid forms, which, if issued, are anticipated to expire between 2037 and 2039.

CCX140 is covered by three issued patents in the United States for the composition-of-matter of CCX140 and
pharmaceutical compositions thereof that will expire in 2026, 2028 and 2029, respectively (not including patent term
extension that may be available to extend the term of the granted patents). CCX140 is also covered by four
additional issued patents in the United States (covering certain methods of use) that will expire in 2026 (one patent)
and 2028 (three patents). One of the patents expiring in 2028 mentioned above includes claims directed to both
compositions and methods of use with CCX140. CCX140 is also covered by certain issued patents in Europe
(covering CCX140 composition-of-matter and certain methods of use) that will expire in 2026 and 2028,
respectively (not including a supplementary protection certificate that may be available to extend the term of the
patents). CCX140 is covered by certain issued patents in several jurisdictions including Australia, Brazil, Canada,
China, Hong Kong, India, Israel, Japan, Mexico, South Africa and South Korea, covering CCX140 composition-of-
matter. These issued patents will expire in 2028 (not including patent term extensions or supplementary protection
certificates that may be available in some countries). We have patent applications pending covering certain methods
of use, which, if issued, are anticipated to expire in 2037.

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CCX872 is covered by two issued patents in the United States for the composition-of-matter of CCX872 and
pharmaceutical compositions thereof that will expire in 2026, respectively (not including patent term extension that
may be available to extend the term of the granted patents). We have three granted patents in the United States
covering certain methods of use that will expire in 2037 (not including patent term extension that may be available
to extend the term of the granted patents). We have six pending application covering certain methods of use, which,
if issued, are anticipated to expire between 2037 and 2038.

Nonetheless, the actual protection afforded by a patent varies on a product by product basis, from country to
country and depends upon many factors, including the type of patent, the scope of its coverage, the availability of
regulatory related extensions, the availability of legal remedies in a particular country and the validity and
enforceability of the patent.

In addition to patents, we rely upon unpatented trade secrets and know-how and continuing technological
innovation to develop and maintain our competitive position. We seek to protect our proprietary information, in part,
using confidentiality agreements with our commercial partners, collaborators, employees and consultants and
invention assignment agreements with our employees. We also have confidentiality agreements or invention
assignment agreements with our commercial partners and selected consultants. These agreements are designed to
protect our proprietary information and, in the case of the invention assignment agreements, to grant us ownership of
technologies that are developed through a relationship with a third party.

Our commercial success will also depend in part on not infringing upon the proprietary rights of third parties.

It is uncertain whether the issuance of any third party patent would require us to alter our development or
commercial strategies, or our drugs or processes, obtain licenses or cease certain activities. Our breach of any
license agreements or failure to obtain a license to proprietary rights that we may require to develop or
commercialize our future drugs may have a material adverse impact on us. If third parties prepare and file patent
applications in the United States that also claim technology to which we have rights, we may have to participate in
interference proceedings in the U.S. Patent and Trademark Office, or USPTO, to determine priority of invention.

Competition

We compete in the pharmaceutical, biotechnology and other related markets that address ANCA vasculitis,

HS, C3G, FSGS and other renal diseases, rheumatoid arthritis, psoriasis, other autoimmune diseases and
inflammatory disorders, and cancer. We face significant competition from many pharmaceutical and biotechnology
companies that are also researching and selling products designed to address these markets. Many of our competitors
have materially greater financial, manufacturing, marketing, research, and drug development resources than we do.
Large pharmaceutical companies in particular have extensive expertise in preclinical and clinical testing and in
obtaining regulatory approvals for drugs. In addition, academic institutions, government agencies, and other public
and private organizations conducting research may seek patent protection with respect to potentially competitive
products or technologies. These organizations may also establish exclusive collaborative or licensing relationships
with our competitors.

It is possible that our competitors will develop and market drugs that are less expensive and more effective
than our drug candidates, or that will render our drug candidates obsolete. It is also possible that our competitors will
commercialize competing drugs before we or our partners can launch any drugs developed from our drug
candidates.

Avacopan, our C5aR inhibitor, if approved for marketing by the FDA or other regulatory agencies for the
treatment of ANCA vasculitis, might compete with current treatments, such as prednisone, CYC, RTX, azathioprine,
methotrexate, and mycophenolate mofetil. If avacopan is approved for marketing by the FDA or other regulatory
agencies for the treatment of C3G, avacopan might compete with treatments that are in development. If avacopan
were approved for the treatment of HS, it would potentially compete with adalimumab (Humira®) or other TNF-
alpha antibodies which physician sometimes prescribe off-label for the treatment of HS.

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CCX140, our lead CCR2 inhibitor, if approved for marketing by the FDA or other regulatory agencies for the

treatment of FSGS, might compete with treatments commonly used for type 2 diabetes and hypertension patients,
RAAS inhibitors, are commonly prescribed treatments used to reduce blood pressure and preserve kidney function,
reducing the progression of the disease. Other commercially available treatment options for FSGS include steroids,
RAAS inhibitors, cyclosporine, mycophenolate mofetil (Cellcept®, Myortic®), tacrolimus (Prograf®), CYC
(Cytoxan®), RTX, ACTHAR®, sirolimus (Rapamycin®, Rapamune®), and Liposorber® LA-15 System. If
CCX140 is approved for marketing by the FDA or other regulatory agencies for the treatment of FSGS, CCX140
might compete with treatments that are in development.

CCX872, our other CCR2 inhibitor, if approved by the FDA or other regulatory agencies for the treatment of

pancreatic cancer, might compete with treatments that are currently available, such as chemotherapeutic drugs
including gemcitabine and nab-paclitaxel, or new treatments in development.

Many of these currently approved treatments have notable and common adverse events including liver and

bone marrow toxicity, renal toxicity, pneumonitis, immunosuppression, allergic reactions, autoimmune diseases and
infections.

We expect that competition among any of our drugs approved for sale will be based on various factors,

including drug safety and efficacy, prevalence of negative side effects, reliability, ease of administration,
availability, price, insurance coverage and reimbursement status and patent position. We believe that our ability to
compete depends largely upon our ability to research, develop and commercialize our existing and future drug
candidates. Further, we need to continue to attract and retain qualified personnel, obtain patent protection, develop
proprietary technology or processes and secure sufficient capital resources for the substantial time period between
technological conception and commercial sales of drugs. Our ability to compete will also be affected by the speed at
which we are able to identify and develop, conduct clinical testing and obtain regulatory approvals of our drug
candidates. Potential competitors may develop treatments that are more effective and/or safer than our drug
candidates or that would make our technology and drug candidates obsolete or non-competitive.

Established pharmaceutical companies that currently sell or are developing drugs in our markets of interest

include, but are not limited to, AbbVie, Alexion, Amgen, AstraZeneca, Aurinia, Bayer, Biogen, Elan,
GlaxoSmithKline, Johnson & Johnson, Mallinckrodt, Merck, Merck Serono, Novartis, Pfizer, Retrophin,
Roche/Genentech, Sanofi, Sarfez, Takeda and Teva. In addition, in some instances we may face competition from
companies that sell generic versions of approved drugs that are part of the current SOC. Many or all of these
established competitors are also involved in research and drug development regarding various chemokine receptors.
Pharmaceutical and biotechnology companies which are known to be involved in chemokine and chemoattractant
research and related drug development include, but are not limited to, Pfizer, GlaxoSmithKline, Bristol-Myers
Squibb, Merck, Takeda, Sanofi, Incyte, Alexion, Allergan, Appellis, Omeros, InflaRx, Dimerix, X4
Pharmaceuticals, Mitsubishi Tanabe, Biolinerx, Akari Therapeutics and UCB Pharma, among others. These
companies and others also compete with us in recruiting and retaining qualified scientific and management
personnel, and in acquiring technologies complementary to, or necessary for, our programs.

Manufacturing

Our current drug candidates are manufactured using commonly used chemical synthetic and engineering
processes using readily available or made to order raw materials. We rely on contract manufacturing organizations
to produce our drug candidates in accordance with the FDA’s current good manufacturing practices, or cGMP, for
use in our clinical trials. We currently rely on a single source supplier for our active pharmaceutical ingredient, or
API, manufacturing requirements for each of our drug candidates and for the manufacturing of drug product. The
manufacture of pharmaceutical products is subject to extensive cGMP regulations, which impose various procedural
and documentation requirements and govern all areas of record keeping, production processes and controls,
personnel and quality control. We expect to continue to rely on contract manufacturers for the manufacture of
clinical and commercial supplies of our compounds.

For clinical supply, we purchase quantities of our drug candidates from our contract manufacturers pursuant to

purchase orders that we place with them. If we were unable to obtain sufficient quantities of drug supply or receive
raw materials in a timely manner, or secure the manufacturing and release of drug product by the contract
manufacturer, we could be required to delay our ongoing clinical trials as we seek, engage and enable alternative
manufacturers, which would be costly and time-consuming.

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Government Regulation

The FDA and comparable regulatory authorities in state and local jurisdictions and in other countries impose

substantial and burdensome requirements upon companies involved in the clinical development, manufacture,
marketing and distribution of drugs. These agencies and other federal, state and local entities regulate research and
development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, record
keeping, approval, advertising and promotion, export and import of our drug candidates.

In the United States, the FDA regulates drug products under the Federal Food, Drug, and Cosmetic Act and
the FDA’s implementing regulations. If we fail to comply with applicable FDA or other requirements at any time
during the drug development process, clinical testing, the approval process or after approval, we may become
subject to administrative or judicial sanctions. These sanctions could include the FDA’s refusal to approve pending
applications, license suspension or revocation, withdrawal of an approval, warning letters, product recalls, product
seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties or criminal
prosecution. Any FDA enforcement action could have a material adverse effect on us. The process required by the
FDA before our drug candidates may be marketed in the United States generally involves the following:

•

•

•

•

•

•

completion of extensive preclinical laboratory tests, preclinical animal studies and formulation studies all
performed in accordance with the FDA’s good laboratory practice, or GLP, regulations;

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

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

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

satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug
is produced to assess compliance with cGMP regulations, and of selected clinical investigation sites to
assess compliance with GCP; and

FDA review and approval of the NDA prior to any commercial marketing, sale or shipment of the drug.

The testing and approval process requires substantial time, effort and financial resources, and we cannot be

certain that any approvals for our drug candidates will be granted on a timely basis, if at all.

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

Preclinical studies include laboratory evaluations of drug chemistry, formulation and stability, as well as studies to
evaluate toxicity in animals. The results of the preclinical studies, together with manufacturing information and
analytical data, are submitted to the FDA as part of an IND application. The IND automatically becomes effective
30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about
the conduct of the clinical trial, including concerns that human research subjects will be exposed to unreasonable
health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical
trial can begin. Submission of an IND may result in the FDA not allowing the clinical trials to commence or not
allowing the clinical trials to commence on the terms originally specified in the IND. A separate submission to an
existing IND must also be made for each successive clinical trial conducted during drug development, and the FDA
must grant permission, either explicitly or implicitly by not objecting, before each clinical trial can begin.

Clinical trials involve the administration of the investigational drug to human subjects under the supervision

of qualified investigators. Clinical trials are conducted under protocols detailing, among other things, the objectives
of the clinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to be used. Each
protocol must be submitted to the FDA as part of the IND. An independent institutional review board, or IRB, for
each medical center proposing to conduct a clinical trial must also review and approve a plan for any clinical trial
before it can begin at that center and the IRB must monitor the clinical trial until it is completed. The FDA, the IRB,
or the sponsor may suspend or discontinue a clinical trial at any time on various grounds, including a finding that the
subjects are being exposed to an unacceptable health risk. Clinical testing also must satisfy extensive GCP
requirements, including the requirements for informed consent.

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All clinical research performed in the United States in support of an NDA must be authorized in advance by
the FDA under the IND regulations and procedures described above. However, a sponsor who wishes to conduct a
clinical trial outside the United States may, but need not, obtain FDA authorization to conduct the clinical trial under
an IND. If a foreign clinical trial is not conducted under an IND, the sponsor may submit data from the clinical trial
to the FDA in support of an NDA so long as the clinical trial is conducted in accordance with GCP, and so long as
the FDA is able to validate the data from the study through an onsite inspection if necessary. We have open INDs in
the United States for avacopan, CCX140, and CCX872. All of our clinical trials are designed to comply with FDA
regulatory requirements so that the data from all trials can be used to support a regulatory filing in the United States.
Other planned studies with avacopan and CCX140 will likely include the United States and Europe, and potentially
other geographies.

Clinical Trials

For purposes of NDA submission and approval, clinical trials are typically conducted in three sequential

phases, which may overlap or be combined.

•

•

•

Phase I clinical trials are initially conducted in a limited population of subjects to test the drug candidate
for safety, dose tolerance, absorption, metabolism, distribution and excretion in healthy humans or, on
occasion, in patients with severe problems or life-threatening diseases to gain an early indication of its
effectiveness.

Phase II clinical trials are generally conducted in a limited patient population to:

•

•

•

evaluate dosage tolerance and appropriate dosage;

identify possible adverse effects and safety risks; and

evaluate preliminarily the efficacy of the drug for specific targeted indications in patients with the
disease or condition under study.

Phase III clinical trials, commonly referred to as pivotal studies, are typically conducted when Phase II
clinical trials demonstrate that a dose range of the drug candidate is effective and has an acceptable safety
profile. Phase III clinical trials are generally undertaken with large numbers of patients, such as groups of
several hundred to several thousand, to further evaluate dosage, to provide substantial evidence of clinical
efficacy and to further test for safety in an expanded and diverse patient population at multiple,
geographically-dispersed clinical trial sites. An exception might be drugs developed for an orphan
indication, where smaller clinical trials might be acceptable to the FDA and the EMA.

In some cases, the FDA may condition approval of an NDA on the sponsor’s agreement to conduct additional

clinical trials to further assess the drug’s safety and effectiveness after NDA approval. Such post-approval clinical
trials are typically referred to as Phase IV clinical trials.

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 and finalize a process for
manufacturing the drug in commercial quantities in accordance with cGMP requirements. The manufacturing
process must be capable of consistently producing quality batches of the drug candidate and, among other things, the
manufacturer must develop methods for testing the identity, strength, quality and purity of the final drug product.
Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to
demonstrate that the drug candidate does not undergo unacceptable deterioration over its shelf life.

New Drug Applications

The results of preclinical studies and of the clinical trials, together with other detailed information, including
extensive manufacturing information and information on the composition of the drug, are submitted to the FDA in
the form of an NDA requesting approval to market the drug for one or more specified indications. The FDA reviews
an NDA to determine, among other things, whether a drug is safe and effective for its intended use. Under the
Prescription Drug User Fee Act, or PDUFA, guidelines that are currently in effect, the FDA has a goal of ten months
from the date of “filing” of a standard NDA for a new molecular entity to review and act on the submission. This
review typically takes twelve months from the date the NDA is submitted to FDA because the FDA has
approximately two months to make a “filing” decision.

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The FDA conducts a preliminary review of all NDAs within the first 60 days after submission, before
accepting them for filing, to determine whether they are sufficiently complete to permit substantive review. The
FDA may request additional information rather than accept an NDA for filing. In this event, the application must be
resubmitted with the additional information. The resubmitted application is also subject to review before the FDA
accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The
FDA reviews an NDA to determine, among other things, whether the drug is safe and effective and whether the
facility in which it is manufactured, processed, packaged or held meets standards designed to assure the product’s
continued safety, quality and purity.

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

The FDA may refer the application to an advisory committee for review, evaluation and recommendation as to

whether the application should be approved. The FDA is not bound by the recommendation of an advisory
committee, but it generally follows such recommendations. The FDA may deny approval of an NDA if the
applicable statutory and regulatory criteria are not satisfied, or it may require additional clinical data or an additional
Phase III clinical trial. Even if such data are submitted, the FDA may ultimately decide that the NDA does not
satisfy the criteria for approval. Data from clinical trials are not always conclusive and the FDA may interpret data
differently than we interpret data. Even if the FDA approves a product, it may limit the approved indications for use
of the product, require that contraindications, warnings or precautions be included in the product labeling, require
that post-approval studies, including Phase IV clinical trials, be conducted to further assess a drug’s safety after
approval, require testing and surveillance programs to monitor the product after commercialization, or impose other
conditions, including distribution and use restrictions or other risk management mechanisms under a risk evaluation
and mitigation strategy, or REMS, which can materially affect the potential market and profitability of the product.
The FDA may prevent or limit further marketing of a product based on the results of post-marketing studies or
surveillance programs. After approval, some types of changes to the approved product, such as adding new
indications, manufacturing changes, and additional labeling claims, are subject to further testing requirements and
FDA review and approval.

Once the FDA approves an NDA, or supplement thereto, the FDA may withdraw the approval if ongoing

regulatory requirements are not met or if safety problems are identified after the drug reaches the market. Where a
withdrawal may not be appropriate, the FDA still may seize existing inventory of such drug or request a recall of
any drug already on the market. In addition, the FDA may require testing, including Phase IV clinical trials and
surveillance programs to monitor the effect of approved drugs which have been commercialized. The FDA has the
authority to prevent or limit further marketing of a drug based on the results of these post-marketing programs.

Expedited Development and Review Programs

A sponsor may also seek approval of its drug candidates under programs designed to accelerate the FDA’s
review and approval of NDAs. For instance, a sponsor may seek FDA designation of a drug candidate as a “fast
track product.” Fast track products are those products intended for the treatment of a serious or life-threatening
disease or condition and which demonstrate the potential to address unmet medical needs for such disease or
condition. If fast track designation is obtained, the FDA may initiate review of sections of an NDA before the
application is complete. This “rolling review” is available if the applicant provides and the FDA approves a schedule
for submission to the FDA of the remaining information. In some cases, products studied for their safety and
effectiveness in treating serious or life-threatening illnesses and that are shown to provide a meaningful therapeutic
benefit over existing treatments may be approved on the basis of either a surrogate endpoint that is reasonably likely
to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or
mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit,
taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative
treatments. Approvals of this kind, referred to as accelerated approvals, typically include requirements for
appropriate post-approval Phase IV clinical trials to validate the surrogate endpoint or otherwise confirm the effect
of the clinical endpoint.

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In addition, the Food and Drug Administration Safety and Innovation Act, or FDASIA, which was enacted

and signed into law in 2012, established a category of drugs referred to as “breakthrough therapies.” A sponsor may
seek FDA designation of a drug candidate as a “breakthrough therapy” if the drug is intended, alone or in
combination with one or more other drugs, to treat a serious or life-threatening disease or condition and preliminary
clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or
more clinically significant endpoints, such as substantial treatment effects observed early in clinical development.
Breakthrough therapy designation provides all of the benefits of fast track designation, but provides for more
intensive FDA guidance on efficient drug development.

Drug candidates designed to prevent, diagnose, or treat serious diseases or conditions may also be eligible for

“priority review,” or review within a six-month timeframe from the date an NDA for a new molecular entity is
accepted for filing, if a sponsor shows that its drug candidate, if approved, would provide a significant improvement
in safety or effectiveness over existing therapies.

Fast track designation, breakthrough therapy designation and priority review do not change the standards for

approval, but may expedite the development or approval process. When appropriate, we intend to seek fast track
designation, accelerated approval, breakthrough therapy designation and priority review, as applicable, for our drug
candidates. Even if a product qualifies for one or more of these programs, the FDA may later decide that the product
no longer meets the conditions for qualification or decide that the time period for FDA review or approval will not
be shortened.

Orphan Drug Designation

In the United States, 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. Such diseases and conditions are those that affect
fewer than 200,000 individuals in the United States, or if they affect more than 200,000 individuals in the United
States, there is no reasonable expectation that the cost of developing and making a drug available in the United
States for these types of diseases or conditions will be recovered from sales of the drug. Orphan drug designation
must be requested before submitting an NDA. If the FDA grants orphan drug designation, the identity of the
therapeutic agent and its potential orphan use are disclosed publicly by that agency. Orphan drug designation does
not convey any advantage in or shorten the duration of the regulatory review and approval process, but it can lead to
financial incentives, such as opportunities for grant funding toward clinical trial costs, tax advantages and user-fee
waivers.

If a drug that has orphan designation subsequently receives the first FDA approval for the disease or condition

for which it has such designation, the drug is entitled to orphan drug marketing exclusivity for a period of seven
years. Orphan drug marketing exclusivity generally prevents the FDA from approving another application, including
a full NDA, to market the same drug or biological product for the same indication for seven years, except in limited
circumstances, including if the FDA concludes that the later drug is safer, more effective or makes a major
contribution to patient care. For purposes of small molecule drugs, the FDA defines “same drug” as a drug that
contains the same active chemical entity and is intended for the same use as the drug in question. A designated
orphan drug may not receive orphan drug marketing exclusivity if it is approved for a use that is broader than the
indication for which it received orphan designation. Orphan drug marketing exclusivity rights in the United States
may be lost if the FDA later determines that the request for designation was materially defective or if the
manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or
condition.

The criteria for designating an orphan medicinal product in the European Union, or EU, are similar in
principle to those in the United States. Under Article 3 of Regulation (EC) 141/2000, a medicinal product may be
designated as orphan if (i) it is intended for the diagnosis, prevention or treatment of a life-threatening or chronically
debilitating condition; (ii) either (a) such condition affects no more than five in 10,000 persons in the EU when the
application is made, or (b) the product, without the benefits derived from orphan status, would not generate
sufficient return in the EU to justify investment; and (iii) there exists no satisfactory method of diagnosis, prevention
or treatment of such condition authorized for marketing in the EU, or if such a method exists, the product will be of
significant benefit to those affected by the condition, as defined in Regulation (EC) 847/2000. Orphan medicinal
products are eligible for financial incentives such as reduction of fees or fee waivers and are, upon grant of a
marketing authorization, entitled to ten years of market exclusivity for the approved therapeutic indication. The
application for orphan designation must be submitted before the application for marketing authorization. The
applicant will receive a fee reduction for the marketing authorization application if the orphan designation has been
granted, but not if the designation is still pending at the time the marketing authorization is submitted.

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The ten-year market exclusivity in the EU may be reduced to six years if, at the end of the fifth year, it is

established that the product no longer meets the criteria for orphan designation, for example, if the product is
sufficiently profitable not to justify maintenance of market exclusivity. Additionally, marketing authorization may
be granted to a similar product for the same indication at any time if:

•

•

•

the second applicant can establish that its product, although similar, is safer, more effective or otherwise
clinically superior;

the applicant consents to a second orphan medicinal product application; or

the applicant cannot supply enough orphan medicinal product.

Post-Approval Requirements

Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing
regulation by the FDA, including, among other things, requirements relating to recordkeeping, periodic reporting,
product sampling and distribution, advertising and promotion and reporting of adverse experiences with the product.
After approval, most changes to the approved product, such as adding new indications or other labeling claims are
subject to prior FDA review and approval. There also are continuing, annual program user fee requirements for any
marketed products.

The FDA may impose a number of post-approval requirements as a condition of approval of an NDA. For

example, the FDA may require post-marketing testing, including Phase IV clinical trials, and surveillance to further
assess and monitor the product’s safety and effectiveness after commercialization.

In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved

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

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

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

•

•

•

•

•

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

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

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

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

injunctions or the imposition of civil or criminal penalties.

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The FDA closely regulates the post-approval marketing and promotion of drugs, including standards and

regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational
activities and promotional activities involving the Internet. A company can make only those claims relating to safety
and efficacy that are approved by the FDA. Failure to comply with these requirements can result in adverse
publicity, warning letters, corrective advertising and potential civil and criminal penalties. Physicians may prescribe
legally available drugs for uses that are not described in the product’s labeling and that differ from those tested by us
and approved by the FDA. Such off-label uses are common across medical specialties. Physicians may believe that
such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the
behavior of physicians in their choice of treatments. The FDA does, however, impose stringent restrictions on
manufacturers’ communications regarding off-label use.

Healthcare Reform

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education

Reconciliation Act, collectively known as the Affordable Care Act, was signed into law. The Affordable Care Act
substantially changes the way healthcare is financed by both governmental and private insurers, and significantly
impacts the pharmaceutical industry. The Affordable Care Act contained a number of provisions, including those
governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse, which have
impacted existing government healthcare programs and resulted in the development of new programs, including
Medicare payment for performance initiatives and improvements to the physician quality reporting system and
feedback program. Additionally, the Affordable Care Act:

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•

•

•

imposed a non-deductible annual fee on pharmaceutical manufacturers or importers who sell “branded
prescription drugs” to specified federal government programs;

increased the minimum level of Medicaid rebates payable by manufacturers of brand-name drugs from
15.1% to 23.1%;

required collection of rebates for drugs paid by Medicaid managed care organizations;

required manufacturers to participate in a coverage gap discount program, under which they must agree to
offer 70% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries
during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered
under Medicare Part D;

• mandated a further shift in the burden of Medicaid payments to the states;

•

•

created the Independent Payment Advisory Board, which, once empaneled, will have authority to
recommend certain changes to the Medicare program that could result in reduced payments for
prescription drugs; and

established a Center for Medicare Innovation at the Department of Health and Human Services Centers
for Medicare and Medicaid Services, or CMS, to test innovative payment and service delivery models to
lower Medicare and Medicaid spending.

Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable
Care Act. For example, the Tax Cuts and Jobs Act of 2017, or the Jobs Act, was enacted, which, among other things,
removed penalties for not complying with the individual mandate to carry health insurance. On December 14, 2018,
a U.S. District Court Judge in Texas ruled that the Affordable Care Act is unconstitutional in its entirety because the
“individual mandate” was repealed by Congress as part of the Jobs Act. On December 18, 2019, the U.S. Court of
Appeals for the 5th Circuit upheld the District Court’s decision that the individual mandate was unconstitutional but
remanded the case back to the District Court to determine whether the remaining provisions of the Affordable Care
Act are invalid as well. It is unclear how these decisions, subsequent appeals, if any, or other efforts to challenge,
repeal or replace the Affordable Care Act will impact the law or our business.

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Other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. These

changes include aggregate reductions to Medicare payments to providers of 2% per fiscal year, which went into
effect in April 2013 and, due to subsequent legislative amendments, will remain in effect through 2029 unless
additional Congressional action is taken. In January 2013, American Taxpayer Relief Act of 2012, or the ATRA,
was enacted, 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. Recently, there has also been heightened
governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has
resulted in several Congressional inquiries and proposed bills designed to, among other things, bring more
transparency to product pricing, review the relationship between pricing and manufacturer patient programs and
reform government program reimbursement methodologies for drug products. The full impact on our business of the
Affordable Care Act and other new laws is uncertain. Nor is it clear whether other legislative changes will be
adopted, if any, or how such changes would affect the demand for our drugs if commercialized.

Third-Party Payor Coverage and Reimbursement

Although none of our drug candidates has been commercialized for any indication, if they are approved for
marketing, commercial success of our drug candidates will depend, in part, upon the availability of coverage and
reimbursement from third-party payors at the federal, state, and private levels. Government payor programs,
including Medicare and Medicaid, private health care insurance companies, and managed-care plans have attempted
to control costs by limiting coverage and the amount of reimbursement for particular procedures or drug treatments.
The U.S. Congress and state legislatures from time to time propose and adopt initiatives aimed at cost-containment.
Ongoing federal and state government initiatives directed at lowering the total cost of health care will likely
continue to focus on health care reform, the cost of prescription pharmaceuticals and on the reform of the Medicare
and Medicaid payment systems. Examples of how limits on drug coverage and reimbursement in the United States
may cause reduced payments for drugs in the future include:

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•

•

•

changing Medicare reimbursement methodologies;

fluctuating decisions on which drugs to include in formularies;

revising drug rebate calculations under the Medicaid program; and

reforming drug importation laws.

Some third-party payors also require pre-approval of coverage for new or innovative devices or drug therapies

before they will reimburse health care providers who use such therapies. In order to secure coverage, a company
may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-
effectiveness of the drug product, in addition to the costs required to obtain FDA or other comparable marketing
approvals. Nonetheless, drug products may not be considered medically necessary or cost effective. A decision by a
third-party payor not to cover a drug product could reduce physician utilization and have a material adverse effect
on sales, results of operations and financial condition. Additionally, a payor’s decision to provide coverage for a
drug product does not imply that an adequate reimbursement rate will be approved. Further, one payor’s
determination to provide coverage for a drug product does not assure that other payors will also provide coverage
and reimbursement for the drug product, and the level of coverage and reimbursement can differ significantly from
payor to payor. Even if favorable coverage and reimbursement status is attained for a drug product, less favorable
coverage policies and reimbursement rates may be implemented in the future.

Outside the United States, reimbursement of drug products is subject to governmental control in many

countries. Pricing negotiations with governmental authorities can extend well beyond the receipt of regulatory
approval for a drug product and may require conduct a clinical trial that compares the cost effectiveness of our drug
products to other available therapies. The conduct of such a clinical trial could be expensive and result in delays in
commercialization efforts. Third-party payors are challenging the prices charged for drug products and services, and
many third-party payors limit reimbursement for newly-approved drug products. Recent budgetary pressures in
many EU countries are also causing governments to consider or implement various cost-containment measures, such
as price freezes, increased price cuts and rebates. If budget pressures continue, governments may implement
additional cost-containment measures. Cost-control initiatives could decrease the price we might establish for
products that we may develop or sell, which would result in lower product revenues or royalties payable to us. There
can be no assurance that any country that has price controls or reimbursement limitations for drug products will
allow favorable reimbursement and pricing arrangements for any of our drug products.

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While we cannot predict whether any proposed cost-containment measures will be adopted or otherwise
implemented in the future, the announcement or adoption of these proposals could have a material adverse effect on
our ability to obtain adequate prices for our drug candidates and operate profitably.

Other Healthcare Laws and Regulations

We are also subject to healthcare regulation and enforcement by the federal government and the states and
foreign governments in which we conduct our business. The laws that may affect our ability to operate include:

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•

•

•

the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and
willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to
induce either the referral of an individual for, or the purchase, order or recommendation of, any good or
service for which payment may be made under federal healthcare programs such as the Medicare and
Medicaid programs. 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. In addition, 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 False Claims Act. Violations of the federal Anti-
Kickback Statute may result in significant civil monetary penalties. Civil penalties for such conduct can
further be assessed under the federal False Claims Act. Violations can also result in criminal penalties,
including criminal fines and individual imprisonment. Similarly, violations can result in exclusion from
participation in government healthcare programs, including Medicare and Medicaid;

the federal False Claims Act, which prohibits, among other things, individuals or entities from knowingly
presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other federal
healthcare programs that are false or fraudulent. Private individuals can bring False Claims Act “qui tam”
actions, on behalf of the government and such individuals, commonly known as “whistleblowers,” may
share in amounts paid by the entity to the government in fines or settlement. When an entity is determined
to have violated the federal civil False Claims Act, the government may impose significant civil fines and
penalties, and exclude the entity from participation in Medicare, Medicaid and other federal healthcare
programs;

federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or
making false statements relating to healthcare matters. Similar to 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 federal Physician Sunshine Act, which requires certain applicable manufacturers of drugs, devices,
biologics and medical supplies for which payment is available under Medicare, Medicaid or the
Children’s Health Insurance Program, or CHIP, to report annually to CMS, information related to
payments and other transfers of value to physicians, which is defined broadly to include other healthcare
providers and teaching hospitals, and applicable manufacturers and group purchasing organizations, to
report annually ownership and investment interests held by physicians and their immediate family
members. Applicable manufacturers are required to submit annual reports to CMS. Failure to submit
required information may result in significant civil monetary penalties for all payments, transfers of value
or ownership or investment interests that are not timely, accurately, and completely reported in an annual
submission, and may result in liability under other federal laws or regulations;

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the
Health Information Technology for Economic and Clinical Health Act, and their respective implementing
regulations, which impose requirements on certain covered healthcare providers, health plans and
healthcare clearinghouses as well as their business associates that perform services for them that involve
individually identifiable health information, relating to the privacy, security and transmission of
individually identifiable health information without appropriate authorization, including mandatory
contractual terms as well as directly applicable privacy and security standards and requirements. Failure
to comply with the HIPAA privacy and security standards can result in significant civil monetary
penalties, criminal penalties and/or imprisonment. State attorneys general can also bring a civil action to
enjoin a HIPAA violation or to obtain statutory damages on behalf of residents of his or her state; and

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•

state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which
may apply to items or services reimbursed by any third-party payor, including commercial insurers; state
laws that require pharmaceutical companies to comply with the industry’s voluntary compliance
guidelines and the applicable compliance guidance promulgated by the federal government, or otherwise
restrict payments that may be made to healthcare providers and other potential referral sources; state 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 laws governing the privacy
and security of health information in certain circumstances, many of which differ from each other in
significant ways and may not have the same effect, thus complicating compliance efforts.

International Regulation

In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing
clinical trials and commercial sales and distribution of our future drugs. Whether or not we obtain FDA approval for
a drug, we must obtain approval of a drug by the comparable regulatory authorities of foreign countries before we
can commence clinical trials or marketing of the drug in those countries. The approval process varies from country
to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing
the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.

Under the European Economic Area, or EEA (which is comprised of the 28 member states of the European
Union plus Norway, Iceland and Liechtenstein), regulatory systems, marketing authorizations may be submitted
either under the Centralized, Mutual Recognition, Decentralized or national EEA member state procedures. The
Centralized Procedure provides for the grant of a single marking authorization that is valid for all member states of
the EEA. The Mutual Recognition Procedure provides for mutual recognition of national approval decisions. Under
this procedure, the holder of a national marking authorization may submit an application to the remaining Member
States. Under the Decentralized Procedure, if the product has not received a marketing authorization in any EEA
member state at the time of application, the applicant can file an application to various EEA member states
(choosing once as the so-called reference member states) of its choice which will be reviewed and approved
simultaneously by them.

In addition to regulations in Europe and the United States, we will be subject to a variety of foreign

regulations governing clinical trials and commercial distribution of our future drugs.

Employees

As of December 31, 2019, we had 82 full-time employees, 32 of whom hold Ph.D.s, M.D.s or both. Of our

total workforce, 61 employees are engaged in research and development, and 21 employees are engaged in business
development, finance, legal, human resources, facilities, information technology administration and general
management. We have no collective bargaining agreements with our employees and we have not experienced any
work stoppages. We believe that our relations with our employees are good.

About ChemoCentryx

We commenced operations in 1997. Our principal offices are located at 850 Maude Avenue, Mountain View,

California 94043, and our telephone number is (650) 210-2900. Our website address is www.chemocentryx.com.
The information contained in, or that can be accessed through, our website is not part of this Annual Report on Form
10-K. We have two wholly owned inactive subsidiaries, ChemoCentryx Limited, organized under the laws of the
United Kingdom and ChemoCentryx Ireland Limited, organized under the laws of Ireland.

Available Information

We file electronically with the Securities and Exchange Commission, or SEC, our annual reports on Form 10-

K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended. We make available on our website at www.chemocentryx.com, free
of charge, copies of these reports, as soon as reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. The SEC maintains a website that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC. The address of that website is
www.sec.gov. The information in or accessible through the SEC and our website are not incorporated into, and are
not considered part of, this filing. Further, our references to the URLs for these websites are intended to be inactive
textual references only.

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Item 1A. Risk Factors.

The following section includes the most significant factors that may adversely affect our business and

operations. You should carefully consider the risks and uncertainties described below and all information contained
in this Annual Report on Form 10-K before deciding to invest in our common stock. If any of the following risks
actually occur, our business, financial condition, results of operations and growth prospects would likely be
materially and adversely affected. In that event, the trading price of our common stock could decline, and you could
lose all or part of your investment.

Risks Related to Our Business

We anticipate that we will continue to incur significant losses for the foreseeable future, and if we are unable to
achieve and sustain profitability, the market value of our common stock will likely decline.

We are a clinical-stage biopharmaceutical company. We do not currently have any products approved for sale,

and we continue to incur significant research and development and general and administrative expenses related to
our operations. Our net (loss) income for the years ended December 31, 2019, 2018 and 2017 was $(55.5) million,
$(38.0) million and $17.9 million, respectively. As of December 31, 2019, we had an accumulated deficit of $430.0
million. We expect to continue to incur significant losses for the foreseeable future. We expect these losses and our
cash utilization to increase in the near term as we continue to conduct clinical trials for avacopan, CCX140, and
CCX872 and conduct research and development of our other drug candidates. To date, we have derived all of our
revenues from upfront fees and milestone payments, other payments pursuant to our collaboration agreements and
government grants and contracts for research and development. For example, in May 2016 and December 2016, we
entered into collaboration and license agreements with Vifor (International) Ltd. and/or its affiliates, or collectively,
Vifor, for the commercialization of avacopan and CCX140, respectively. In addition, if approved, we expect to incur
significant costs to commercialize our drug products and our drug products may never gain market acceptance. If
our drug candidates fail to demonstrate safety and efficacy in clinical trials, do not gain regulatory approval, or do
not achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future, we
may not be able to sustain profitability in subsequent periods. If we are unable to achieve and sustain profitability,
the market value of our common stock will likely decline. Because of the numerous risks and uncertainties
associated with developing pharmaceutical products, we are unable to predict the extent of any future losses or
whether we will become profitable.

If we are unable to obtain regulatory approval to market avacopan or other drug products in the United States
and foreign jurisdictions, we will not be permitted to commercialize such drug products.

We plan to seek regulatory approval for avacopan in ANCA vasculitis, including submission of a new drug
application, or NDA, to the FDA in mid-2020. Before receiving regulatory approval to market a drug product, we
must demonstrate with substantial clinical evidence to the satisfaction of the FDA or other regulatory authority that
the drug product is safe and effective in the patient population and the indication that will be treated. Data obtained
from preclinical and clinical activities are susceptible to varying interpretations that could delay, limit or prevent
regulatory approvals. In addition, delays or rejections may be encountered based upon additional government
regulation from future legislation or administrative action or changes in FDA policy during the period of product
development, clinical trials and FDA regulatory review. Failure to comply with applicable FDA or other applicable
regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure of products, total or
partial suspension of production or injunction, adverse publicity, as well as other regulatory action against our
potential drug products or us.

If regulatory approval of a drug product is granted, such approval will be limited to those indications or
disease states and conditions for which the drug product is demonstrated through clinical trials to be safe and
effective. We cannot assure you that any drug product developed by us, alone or with others, will be demonstrated to
be safe and efficacious in clinical trials and will meet all of the applicable regulatory requirements needed to receive
regulatory approval.

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Outside the United States, our ability, or that of our collaborative partners, to market a drug product is
contingent upon receiving a marketing authorization from the appropriate regulatory authorities. This foreign
regulatory approval process typically includes all of the risks and costs associated with FDA approval described
above and may also include additional risks and costs, such as the risk that such foreign regulatory authorities,
which often have different regulatory and clinical trial requirements, interpretations and guidance from the FDA,
may require additional clinical trials or results for approval of a drug candidate, any of which could result in delays,
significant additional costs or failure to obtain such regulatory approval. For example, there can be no assurance that
we or our collaborative partners will not have to provide additional information or analysis, or conduct additional
clinical trials, before receiving approval to market drug candidates.

Even if we obtain regulatory approval for avacopan in ANCA vasculitis, or for any of our other drug candidates
for other indications, we or our collaborative partners will still face extensive regulatory requirements and our
drug products may face future development and regulatory difficulties.

Even if we obtain regulatory approval for avacopan or any of our other drug candidates, our products and
manufacturing operations will remain subject to continual review by the FDA, the EMA and EU Member State
Competent Authorities, and/or non-U.S./non-EU regulatory authorities. Any regulatory approval that we receive for
our drug candidates may be subject to limitations on the indicated uses for which the product may be marketed or
contain requirements for potentially costly post-marketing follow-up studies to monitor the safety and efficacy of the
product. The FDA and the EMA also have authority to require a risk evaluation and mitigation strategy, or REMS,
or risk management plan, as part of an NDA, CMA, marketing authorization application, or MAA, or after approval,
which may impose further requirements or restrictions on the distribution or use of an approved drug, such as
limiting prescribing to certain physicians or medical centers that have undergone specialized training, limiting
treatment to patients who meet certain safe-use criteria or requiring treated patients to enroll in a registry. In
addition, if the FDA, the EMA, EU Member State Competent Authorities, and/or non-U.S./non-EU regulatory
authorities approve any of our drug candidates, we will be subject to extensive and ongoing regulatory requirements
by the FDA, the EMA, EU Member State Competent Authorities, and other regulatory authorities with regard to the
labeling, packaging, adverse event reporting, storage, advertising, promotion and recordkeeping for our products.
The FDA and the EMA, the European institutions and the EU Member State Competent Authorities, strictly regulate
the promotional claims that may be made about prescription products. In particular, a product may not be promoted
for uses that are not approved by the FDA or the European Commission as reflected in the product's approved
labeling. If we receive regulatory approval for any of our drug candidates, physicians may nevertheless prescribe our
products to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted
such unapproved uses, we may become subject to significant liability and government fines.

In addition, manufacturers of drug products are required to comply with current good manufacturing practice,

or cGMP, regulations, which include requirements related to quality control and quality assurance as well as the
corresponding maintenance of records and documentation. Further, regulatory authorities must authorize
manufacturing facilities before they can be used to manufacture our drug products, and such facilities will remain
subject to continual review and periodic inspections by the FDA, the EMA, EU Member State Competent
Authorities, and other regulatory authorities for compliance with cGMP regulations.

If we or a regulatory authority discovers previously unknown problems with a drug product, such as adverse

events of unanticipated severity or frequency, or problems with the facility where the drug product is manufactured,
a regulatory authority may impose restrictions on that drug product, the manufacturer or us, including imposition of
a REMS, or similar risk management measures, or requesting recall or withdrawal of the drug product from the
market or suspension of manufacturing. If we, our drug products or the manufacturing facilities for our drug
products fail to comply with regulatory requirements of the FDA, the EMA, the EU institutions, the EU Member
State Competent Authorities and/or other non-U.S./non-EU regulatory authorities, we could be subject to
administrative or judicially imposed sanctions, including:

• warning letters, untitled letters or other communications asserting that we are in violation of law;

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injunctions, civil or criminal penalties or monetary fines;

suspension or withdrawal of regulatory approvals;

suspension of ongoing clinical trials;

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restrictions on operations, including costly new manufacturing requirements;

refusal to approve pending applications seeking regulatory approval for new drugs or supplements to
approved applications submitted by us;

product recalls;

drug product detentions or seizures; or

refusal to allow us to enter into supply contracts, including government contracts.

Any government investigation of alleged violations of law could require us to expend significant time and
resources in response and could generate negative publicity. The occurrence of any event or penalty described above
may delay or inhibit our ability to successfully commercialize our products and generate revenues.

The regulatory requirements and policies may change and additional government regulations may be enacted
for which we may also be required to comply. 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 will not
be permitted to market our future products and our business will suffer.

We also cannot predict the likelihood, nature or extent of government regulation that may arise from future

legislation or administrative action, either in the United States, the EU or in other countries or jurisdictions. For
example, certain policies of President Trump’s administration may impact our business and industry. Namely, the
current 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, the FDA’s ability to engage in routine
regulatory and 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 changes 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 constraints on the FDA’s ability to engage in oversight and implementation activities in the normal course,
our business may be negatively impacted.

If any of our drug candidates receives regulatory approval and we or others later identify undesirable side effects
caused by the drug candidate, our ability to market and derive revenue from the drugs could be compromised.

If any of our drug candidates receives regulatory approval and we or others later identify undesirable side

effects caused by one of our drugs, any of the following adverse events could occur:

•

regulatory authorities may withdraw their approval of the drug or seize the drug;

• we may be required to recall the drug or change the way the drug is administered;

•

additional restrictions may be imposed on the marketing of the particular drug or the manufacturing
processes;

• we may be subject to fines, injunctions or the imposition of civil or criminal penalties;

•

regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a
contraindication;

• we may be required to create a Medication Guide outlining the risks of such side effects for distribution to

patients;

• we could be sued and held liable for harm caused to patients;

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•

the drug may become less competitive; and

our reputation may suffer.

Any of these could result in the loss of significant revenues, which would materially and adversely affect our

results of operations and business.

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Even if our drug candidates do obtain regulatory approval they may never achieve market acceptance or
commercial success.

Even if we obtain FDA or other regulatory approvals, our drug products may not achieve market acceptance

among physicians, patients and third-party payors and, ultimately, may not be commercially successful. Market
acceptance of our drug candidates for which we receive approval depends on a number of factors, including:

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the efficacy and safety as demonstrated in clinical trials;

the clinical indications for which the drug is approved;

acceptance by physicians, major operators of clinics and patients of the drug as a safe and effective
treatment;

the potential and perceived advantages of our drug products over alternative treatments;

the willingness of physicians and healthcare organizations to change their current treatment practices;

the price we charge for our drug products;

the cost of treatment in relation to alternative treatments;

the availability of adequate reimbursement and pricing by third parties and government authorities;

relative convenience and ease of administration;

the prevalence and severity of adverse side effects; and

the effectiveness of our sales and marketing efforts.

Any failure by our drug candidates that obtain regulatory approval to achieve market acceptance, or our drug

products, if any, to achieve commercial success, would adversely affect our financial results.

Forecasting potential sales for any of our drug candidates will be difficult, and if our projections are inaccurate,
our business may be harmed and our stock price may be adversely affected.

Our business planning requires us to forecast or make assumptions regarding product demand and revenues

for any of our drug candidates if they are approved, despite numerous uncertainties. These uncertainties may be
increased if we rely on our collaborators or other third parties to conduct commercial activities in certain
jurisdictions and provide us with accurate and timely information. Actual results may differ materially from
projected results for various reasons, including the following, as well as risks identified in other risk factors:

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the efficacy and safety of our drug products, if any, including as relative to marketed products and drug
candidates in development by third parties;

pricing (including discounting and other promotions), reimbursement, product returns or recalls,
competition, labeling, adverse events and other items that impact commercialization;

the rate of adoption in the particular market, including fluctuations in demand for various reasons;

potential market size;

lack of patient and physician familiarity with the drug product;

lack of patient use and physician prescribing history;

lack of commercialization experience with the drug product; and

uncertainty relating to when the drug may become commercially available to patients and rate of
adoption.

We expect that our revenues from sales of our drug products, if any, will be based in part on estimates,
judgment and accounting policies. Any incorrect estimates or disagreements with regulators or others regarding such
estimates, judgment or accounting policies may result in changes to our guidance, projections or previously reported
results. Expected and actual product sales and quarterly and other results may greatly fluctuate, including in the
near-term, and such fluctuations can adversely affect the price of our common stock, perceptions of our ability
to forecast demand and revenues, and our ability to maintain and fund our operations.

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We are in the early stages of developing our sales and marketing infrastructure in the United States. If we are
unable to develop a sales and marketing and distribution capability on our own or through collaborations with
marketing partners, we will not be successful in commercializing our future products.

We are in the early stages of developing our sales and marketing infrastructure in the United States and have

no history of selling, marketing or distributing therapeutic products. In order to market any products that may be
approved by the FDA, EMA or other comparable regulatory authorities, we must build our sales, marketing,
managerial and other non-technical capabilities, or make arrangements with third parties to perform these services.
We have entered into the Avacopan Agreement and the CCX140 Agreement with Vifor for development and
commercialization of avacopan and CCX140 outside of the United States. We retain commercialization rights to
avacopan and CCX140 in the United States. To the extent we rely on third parties such as Vifor for marketing and
distributing our approved products, any revenue we receive will depend upon the efforts of third parties, which may
not be successful and are only partially within our control and our product revenue is likely to be lower than if we
directly marketed or sold our products. Future collaborators may fail to develop or effectively commercialize our
drug candidates because they cannot obtain necessary regulatory approvals, development or commercialization is
not commercially reasonable, they elect to pursue competitive products outside of the collaboration, or for other
reasons. If we are unable to enter into arrangements with third parties to commercialize any approved products on
acceptable terms or at all, we may not be able to successfully commercialize our future products or we will have to
market these products ourselves, which will be expensive and require us to build our own commercial infrastructure,
which we do not have experience doing. We cannot assure you we will be successful in any of these initiatives. If
we are not successful in commercializing our future products, either on our own or through collaborations with third
parties, any future product revenue will be materially adversely affected.

The development of new drugs is a highly risky undertaking which involves a lengthy process, and our drug
discovery and development activities therefore may not result in products that are approved for marketing and
sale by the applicable regulatory authorities on the time schedule we have planned, or at all, or result in
substantial payments to us.

Many of our drug candidates are in the early stages of drug discovery or clinical trials and are prone to the

risks of failure inherent in drug development. We will need to conduct significant additional preclinical studies and
clinical trials for many of our drug candidates before we can demonstrate that such drug candidates are safe and
effective to the satisfaction of the FDA, the EMA and other regulatory authorities. Preclinical studies and clinical
trials are expensive and uncertain processes that take years to complete. For example, we incurred significant
expenses related to the IND filing and the completed single ascending dose Phase I clinical trial for CCX915, our
first generation CCR2 drug candidate, which did not advance into Phase II clinical trials because its
pharmacokinetic, or PK, properties in humans did not meet our expectations. Failure can occur at any stage of the
process, and we cannot assure you that any of our drug candidates will demonstrate safety and efficacy in clinical
trials or result in commercially successful products. While we intend to file integrated regulatory submissions in
2020 with the EMA and FDA for full (unconditional) regulatory approval of avacopan for the treatment of ANCA
vasculitis, we can provide no assurance that we will receive such approval.

We cannot assure you that our ongoing clinical trials or any future clinical trial of any of our other drug
candidates will be completed on schedule, or at all, or whether our planned clinical trials will start in a timely
manner. The commencement of our planned clinical trials could be substantially delayed or prevented by a number
of factors, including:

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delays or failures in obtaining sufficient quantities of the active pharmaceutical ingredient, or API, and/or
drug product;

delays or failures in reaching agreement on acceptable clinical trial agreement terms or clinical trial
protocols with prospective sites;

delays or failures in obtaining institutional review board, or IRB, or ethics committee approval to conduct
a clinical trial at a prospective site;

the need to successfully complete, on a timely basis, preclinical safety pharmacology or toxicology
studies;

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the limited number of, and competition for, suitable sites to conduct the clinical trials;

the limited number of, and competition for, suitable patients for enrollment in the clinical trials;

the FDA or comparable foreign regulatory authorities disagreeing as to the design or implementation of
our clinical studies; or

obtaining regulatory authorizations to commence a trial.

The completion of our clinical trials could also be substantially delayed or prevented by a number of factors,

including:

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changes to clinical trial protocols;

slower than expected rates of patient recruitment and enrollment;

failure of patients to complete the clinical trials;

failure of our third party vendors to timely or adequately perform their contractual obligations relating to
the clinical trials or in accordance with regulatory requirements;

inability or unwillingness of patients or medical investigators to follow our clinical trial protocols;

inability to monitor patients adequately during or after treatment;

termination of the clinical trials by one or more clinical trial sites;

unforeseen safety issues;

occurrence of serious adverse events in trials of the same class of agents conducted by other companies;

subjects choosing an alternative treatment for the indication for which we are developing our drug
candidates, or participating in competing clinical trials;

selection of clinical end points that require prolonged periods of clinical observation or analysis of the
resulting data;

lack of efficacy demonstrated during clinical trials;

lack of adequate funding to continue the clinical trials;

the need for unexpected discussions with the FDA, EMA or other foreign regulatory agencies regarding
the scope or design of our clinical trials or the need to conduct additional trials;

unforeseen delays by the FDA, EMA or other foreign regulatory agencies after submission of our results;

a facility manufacturing our drug candidates or any of their components being ordered by the FDA or
comparable foreign regulatory authorities to temporarily or permanently shut down; any changes to our
manufacturing process that may be necessary or desired; or

third-party contractors becoming debarred or suspended or otherwise penalized by the FDA or other
government or regulatory authorities for violations of regulatory requirements, in which case we may
need to find a substitute, and we may not be able to use some or all of the data produced by such
contractors in support of our marketing applications.

We could also encounter delays if a clinical trial is suspended or terminated by us, the IRBs or ethics

committees of the institutions in which such trials are being conducted, the Data Safety Monitoring Board, or
DSMB, for such trial or the FDA or other regulatory authorities. Such authorities may impose such a suspension or
termination 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 drug, changes in governmental regulations or administrative actions or
lack of adequate funding to continue the clinical trial.

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Any failure or significant delay in completing clinical trials for our drug candidates would harm the

commercial prospects for our drug candidates and adversely affect our financial results.

Additionally, changes in regulatory requirements and guidance may occur and we may need to amend clinical

trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to
regulatory agencies and ethics committees for reexamination, which may impact the costs, timing or successful
completion of a clinical trial. If we experience delays in completion of, or if we terminate, any of our clinical trials,
the commercial prospects for our drug candidates may be harmed and our ability to generate product revenues will
be delayed. 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 a drug candidate.

If we are required to suspend or discontinue clinical trials due to side effects or other safety risks, or if we are
required to conduct studies on the long-term effects associated with the use of our drug candidates, our efforts to
commercialize our products could be delayed or halted.

Our clinical trials may be suspended or terminated at any time for a number of safety-related reasons. For

example, we may voluntarily suspend or terminate our clinical trials if at any time we believe that our drug
candidates present an unacceptable safety risk to the clinical trial patients. In addition, IRBs or regulatory agencies
may order the temporary discontinuation or termination of our clinical trials at any time if they believe that the
clinical trials are not being conducted in accordance with applicable regulatory requirements, including if they
present an unacceptable safety risk to patients. Administering any drug candidate to humans may produce
undesirable side effects. The existence of undesirable side effects resulting from our drug candidates could cause us
or regulatory authorities, such as the FDA, to interrupt, delay or halt clinical trials of our drug candidates and could
result in the FDA or other regulatory agencies denying further development or approval of our drug candidates for
any or all targeted indications.

Further, chemokine receptors and chemoattractant receptors are a novel class of targets. As a result, we may

experience unforeseen adverse side effects with our existing and future drug candidates, including avacopan and
CCX140. As of the date of this Annual Report on Form 10-K, nine of our drug candidates have been tested in
human beings. Although we have not observed material safety concerns in prior studies of our drug candidates, later
trials could reveal unforeseen adverse events. The safety PK results from preclinical studies may not be indicative of
results observed in subsequent clinical trials. For example, prior to commencing our preclinical studies of our
CCX140 drug candidate, we studied another drug candidate that targeted CCR2, which we abandoned after PK
results were not as favorable in humans as in earlier preclinical animal studies. We have not completed studies on
the long-term effects associated with the use of our drug candidates. Completion of studies of these long-term
effects may be required for regulatory approval and would delay our introduction of our drug candidates into the
market. These studies could also be required at any time after regulatory approval of any of our drug candidates.
Absence of long-term data may also limit the approved uses of our products, if any, to short-term use. Some or all of
our drug candidates may prove to be unsafe for human use.

Undesirable side effects caused by our drug candidates could cause us or regulatory authorities to interrupt,

delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by
the FDA, EMA or other comparable regulatory authorities. Drug-related side effects could affect patient recruitment
or the ability of enrolled patients to complete a trial or result in potential product liability claims. Any of these
occurrences may harm our business, financial condition and prospects significantly. Given the serious nature of the
conditions we are treating in our clinical trials, and the multiple concomitant medications including our active drug
candidates that our patients are treated with, side effects (such as nausea, diarrhea, infections, hepatic enzyme
elevations, and possible allergic reactions) have been reported in our clinical studies. While such disorders may be
found to be not related to our drug candidates, such events may create a negative safety perception. Even if any of
our drug candidates receives regulatory approval, as greater numbers of patients use a drug following its approval,
an increase in the incidence or severity of side effects or the incidence of other post-approval problems that were not
seen or anticipated during pre-approval clinical trials could result in a number of potentially significant negative
consequences, including that regulatory authorities may withdraw their approval of the product, regulatory
authorities may require the addition of labeling statements, such as “black box” warnings or contraindications, or
impose additional safety monitoring or reporting requirements, we may be required to change the way the product is
administered or conduct additional clinical trials, we may be required to implement a REMS or create a medication
guide outlining the risks of such side effects for distribution to patients, we could be sued and held liable for harm
caused to patients, and our reputation may suffer. Any of these events could substantially increase the costs and
expenses of developing, commercializing and marketing any such drug candidates or could harm or prevent sales of
any approved products.

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Interim, “top-line,” and preliminary data from our clinical trials that we announce or publish from time to time
may change as more patient data become available and are subject to audit and verification procedures that
could result in material changes in the final data.

From time to time, we may publicly disclose preliminary or topline data from our preclinical studies and

clinical trials, which is 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. For example, in November 2019, we announced positive topline data from our ADVOCATE study
and are currently conducting a more comprehensive review of the data.

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. As a result, the topline or
preliminary 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 our preclinical studies and 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, others, including regulatory agencies, 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 drug candidate
or product and our company in general. In addition, the information we choose to publicly disclose regarding a
particular study or clinical trial is based on what is typically extensive information, and you or others may not agree
with what we determine is material or otherwise appropriate information to include in our disclosure.

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 drug products may be harmed, which could harm our business, operating results, prospects or financial
condition.

We rely on third parties to conduct all our preclinical studies and clinical trials. If these third parties do not
successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory
approval for or commercialize any of our drug candidates.

We currently do not have the ability to independently conduct preclinical studies or clinical trials. We rely on
medical institutions, clinical investigators, contract laboratories, collaborative partners and other third parties, such
as clinical research organizations, or CROs, to conduct clinical trials on our drug candidates. The third parties with
which we contract for execution of our clinical trials play a significant role in the conduct of these trials and the
subsequent collection and analysis of data. These third parties are not our employees, and except for contractual
duties and obligations, we have limited ability to control the amount or timing of resources that they devote to our
programs. Although we rely on these third parties to conduct our preclinical studies and clinical trials, we remain
responsible for ensuring that each of our preclinical studies and clinical trials is conducted in accordance with its
investigational plan and protocol. Moreover, the FDA and foreign regulatory authorities require us to comply with
GCP requirements for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the
data and results are scientifically credible and accurate and that the trial subjects are adequately informed of the
potential risks of participating in clinical trials.

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In addition, the execution of preclinical studies and clinical trials, and the subsequent compilation and analysis

of the data produced, requires coordination among various parties. In order for these functions to be carried out
effectively and efficiently, it is imperative that these parties communicate and coordinate with one another.
Moreover, these third parties may also have relationships with other commercial entities, some of which may
compete with us. In most cases, these third parties may terminate their agreements with us upon 30 days’ prior
written notice of a material breach by us that is not cured within 30 days. Many of these agreements may also be
terminated by such third parties under certain other circumstances, including our insolvency or our failure to comply
with applicable laws. In general, these agreements require such third parties to reasonably cooperate with us at our
expense for an orderly winding down of services of such third parties under the agreements. If the third parties
conducting our clinical trials do not perform their contractual duties or obligations, experience work stoppages, do
not meet expected deadlines, terminate their agreements with us or 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 trial protocols or GCP, or
for any other reason, we may need to enter into new arrangements with alternative third parties, which could be
costly, and our clinical trials may be extended, delayed or terminated or may need to be repeated, and we may not be
able to obtain regulatory approval for or commercialize the drug candidate being tested in such trials.

We will need additional financing and may be unable to raise capital on acceptable terms, or at all, when needed,
which would force us to delay, reduce or eliminate our research and development programs and other operations
or commercialization efforts.

We are advancing multiple drug candidates through discovery and development and will require substantial

funds to conduct development, including preclinical studies and clinical trials, of our drug candidates.
Commercialization of any drug candidate will also require substantial expenditures. Our ability to develop and
commercialize our drug candidates will depend upon our ability to identify financing or collaboration arrangements
and there can be no assurance that we will be successful in identifying or implementing any such arrangement.

As of December 31, 2019, we had approximately $203.3 million in cash, cash equivalents, restricted cash and

investments, excluding the $100.0 million we may borrow under the Restated Credit Facility. We believe that our
available cash, cash equivalents and investments will be sufficient to fund our anticipated level of operations for at
least 12 months following our financial statement issuance date, March 10, 2020. Our future financing requirements
will depend on many factors, some of which are beyond our control, including:

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the rate of progress and cost of our clinical trials, preclinical studies and other discovery and research and
development activities;

the timing of, and costs involved in, seeking and obtaining FDA and other regulatory approvals;

the success of any strategic alliance with collaboration partners and potential future collaboration
partners;

the costs of preparing, filing, prosecuting, maintaining and enforcing any patent claims and other
intellectual property rights, including litigation costs and the results of such litigation;

our ability to enter into additional collaboration, licensing, government or other arrangements and the
terms and timing of such arrangements;

potential acquisition or in-licensing of other products or technologies; and

the emergence of competing technologies or other adverse market developments.

Future capital requirements will also depend on the extent to which we acquire or invest in additional

complementary businesses, products and technologies. We currently have no understandings, commitments or
agreements relating to any of these types of transactions.

Until we can generate a sufficient amount of product revenue to finance our cash requirements, which we may

never do, we expect to finance future cash needs primarily through public or private equity offerings, debt
financings, our credit facility, government grants and contracts and/or strategic collaborations. Additional financing
may not be available to us when we need it or it may not be available on favorable terms, if at all. If we are unable to
obtain adequate financing when needed, we may have to delay, reduce the scope of or eliminate one or more of our
clinical trials or research and development programs or our commercialization efforts. We may be required to enter
into collaborative partnerships for one or more of our drug candidate programs at an earlier stage of development or
on less favorable terms, which may require us to relinquish rights to some of our drug candidates that we would
otherwise have pursued on our own.

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The terms of our credit facility place restrictions on our operating and financial flexibility.

We have entered into an amended and restated loan and security agreement, or credit facility, with Hercules

Capital, Inc., or Hercules, which is secured by substantially all of our assets, excluding intellectual property,
pursuant to which we may borrow up to an aggregate principal amount of $120.0 million, subject to certain terms
and conditions. The outstanding principal balance under the credit facility was $20.0 million at December 31, 2019.

The credit facility also includes customary affirmative and negative covenants and events of default, the

occurrence and continuance of which provide Hercules with the right to demand immediate repayment of all
principal and unpaid interest under the credit facility, and to exercise remedies against us and the collateral securing
the credit facility. These events of default include, among other things: (i) insolvency, liquidation, bankruptcy or
similar events; (ii) failure to pay any debts due under the credit facility or other loan documents on a timely basis;
(iii) failure to observe any covenant or secured obligation under the credit facility, which failure, in most cases, is
not cured within 15 days; (iv) occurrence of an event that could reasonably be expected to have a material adverse
effect; (v) material misrepresentations; (vi) occurrence of any default under any other agreement involving
indebtedness in excess of $1,000,000 or the occurrence of a default under any agreement that could reasonably be
expected to have a material adverse effect on us; and (vii) certain money judgments being entered against us or any
portion of our assets are attached or seized.

Our ability to make scheduled payments on or to refinance our indebtedness depends on our future

performance and ability to raise additional sources of cash, which is subject to economic, financial, competitive and
other factors beyond our control. If we are unable to generate sufficient cash to service our debt, we may be required
to adopt one or more alternatives, such as selling assets, restructuring our debt or obtaining additional equity capital
on terms that may be onerous or highly dilutive. If we desire to refinance our indebtedness, our ability to do so will
depend on the capital and lending markets and our financial condition at such time. We may not be able to engage in
any of these activities or engage in these activities on desirable terms, which could result in a default on our debt
obligations.

Any orphan drug designations we receive may not confer marketing exclusivity or other benefits.

In the United States, 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. Such diseases and conditions are those that affect
fewer than 200,000 individuals in the United States, or if they affect more than 200,000 individuals in the United
States, there is no reasonable expectation that the cost of developing and making a drug available in the United
States for these types of diseases or conditions will be recovered from sales of the drug. Orphan drug designation
must be requested before submitting an NDA. If the FDA grants orphan drug designation, the identity of the
therapeutic agent and its potential orphan use are disclosed publicly by that agency. Orphan drug designation does
not convey any advantage in or shorten the duration of the regulatory review and approval process, but it can lead to
financial incentives, such as opportunities for grant funding toward clinical trial costs, tax advantages and user-fee
waivers.

If a drug that has orphan designation subsequently receives the first FDA approval for the disease or condition

for which it has such designation, the drug is entitled to orphan drug marketing exclusivity for a period of seven
years. Orphan drug marketing exclusivity generally prevents the FDA from approving another application, including
a full NDA, to market the same drug or biological product for the same indication for seven years, except in limited
circumstances, including if the FDA concludes that the later drug is safer, more effective or makes a major
contribution to patient care. For purposes of small molecule drugs, the FDA defines “same drug” as a drug that
contains the same active chemical entity and is intended for the same use as the drug in question. A designated
orphan drug may not receive orphan drug marketing exclusivity if it is approved for a use that is broader than the
indication for which it received orphan designation. Orphan drug marketing exclusivity rights in the United States
may be lost if the FDA later determines that the request for designation was materially defective or if the
manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or
condition.

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The criteria for designating an orphan medicinal product in the EU are similar in principle to those in the
United States. Under Article 3 of Regulation (EC) 141/2000, a medicinal product may be designated as orphan if (i)
it is intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition; (ii)
either (a) such condition affects no more than five in 10,000 persons in the EU when the application is made, or (b)
the product, without the benefits derived from orphan status, would not generate sufficient return in the EU to justify
investment; and (iii) there exists no satisfactory method of diagnosis, prevention or treatment of such condition
authorized for marketing in the EU, or if such a method exists, the product will be of significant benefit to those
affected by the condition, as defined in Regulation (EC) 847/2000. Orphan medicinal products are eligible for
financial incentives such as reduction of fees or fee waivers and are, upon grant of a marketing authorization,
entitled to ten years of market exclusivity for the approved therapeutic indication. The application for orphan
designation must be submitted before the application for marketing authorization. The applicant will receive a fee
reduction for the MAA if the orphan designation has been granted, but not if the designation is still pending at the
time the marketing authorization is submitted. Orphan designation does not convey any advantage in, or shorten the
duration of, the regulatory review and approval process.

The ten-year market exclusivity in the EU may be reduced to six years if, at the end of the fifth year, it is

established that the product no longer meets the criteria for orphan designation, for example, if the product is
sufficiently profitable not to justify maintenance of market exclusivity. Additionally, marketing authorization may
be granted to a similar product for the same indication at any time if:

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the second applicant can establish that its product, although similar, is safer, more effective or otherwise
clinically superior;

the applicant consents to a second orphan medicinal product application; or

the applicant cannot supply enough orphan medicinal product.

The FDA granted orphan drug designation for avacopan for the treatment of C3G and ANCA vasculitis,
including granulomatosis with polyangiitis or Wegener’s granulomatosis, microscopic polyangiitis, and Churg-
Strauss syndrome. In November 2014, the European Commission granted orphan drug designation for avacopan for
the treatment of granulomatosis with polyangiitis or Wegener’s granulomatosis and microscopic polyangiitis, and, in
June 2017, for the treatment of C3G. However, we cannot assure you that we will be able to obtain or maintain
orphan drug exclusivity for avacopan, if it is approved for the treatment of C3G and/or ANCA vasculitis in any
jurisdiction, in a timely manner or at all, or that a competitor will not obtain orphan drug exclusivity that could block
the regulatory approval of avacopan for several years. If we are unable to obtain or maintain orphan drug exclusivity
in the United States or the EU, our ability to generate sufficient revenues may be negatively affected. If a competitor
is able to obtain orphan drug exclusivity that would block avacopan’s regulatory approval, our ability to generate
revenues would be significantly reduced, which would harm our business prospects, financial condition and results
of operations.

We may form additional strategic alliances in the future with respect to our programs, and we may not realize the
benefits of such alliances.

We may form additional strategic alliances, create joint ventures or collaborations or enter into licensing
arrangements with third parties with respect to our programs that we believe will complement or augment our
existing business. For example, we entered into collaboration and license agreements with Vifor for the development
and commercialization of CCX140 and avacopan. We face significant competition in seeking appropriate strategic
partners or other alternative arrangements and the negotiation process is time-consuming and complex. Moreover,
we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for any
current or future drug candidates and programs because our research and development pipeline may be insufficient,
our drug candidates and programs may be deemed to be at too early of a stage of development for collaborative
effort and/or third parties may not view our drug candidates and programs as having the requisite potential to
demonstrate safety and efficacy. We cannot be certain that, following a strategic transaction or license, we will
achieve the revenues or specific net income that justifies such transaction. For example, Vifor has the right to
terminate the Avacopan Agreement and the CCX140 Agreement at its convenience, in which case we would not
receive payments under such agreements. Any delays in entering into new strategic partnership agreements related
to our drug candidates could also delay the development and commercialization of our drug candidates and reduce
their competitiveness even if they reach the market.

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Key elements of our proprietary suite of drug discovery technologies, known as EnabaLink, including our RAM
screening technology, are proprietary approaches to the discovery and development of new drug candidates and
may not result in the discovery of any small molecule compounds of commercial value.

We must continue to identify and develop compounds that target the chemokine network and expand our

portfolio of drug candidates. Research programs to identify new disease targets and drug candidates require
substantial technical, financial and human resources. We have limited resources to study the more than 50 known
chemokine ligands, as described in a February 2006 article in the New England Journal of Medicine, and
approximately 25 identified chemokine receptors as described in a January 2014 publication by the nomenclature
committee of the International Union of Pharmacology. Two structural biology papers published during 2016 in
Nature describe crystal structures of two different chemokine receptors in complex with small molecule inhibitors
and provides insight to the function and respective modulation through multiple binding pockets. We expect that this
pivotal work will assist in the development of novel small inhibitors of chemokine receptors. EnabaLink represents a
new approach to the development of new drug candidates and we cannot assure you that EnabaLink will result in the
discovery of new drug candidates. EnabaLink has only resulted in a limited number of clinical and preclinical-stage
programs to date, and we may not identify any therapeutic small molecule compounds of commercial value using
EnabaLink or other commercially available drug discovery technologies.

If our Reverse Activation of Migration, or RAM, screening technology or any other screening technologies

fail to identify highly specific “hits” that lead to the development of new drug candidates, our business may be
materially and adversely affected. Our scientists may be unable to optimize the chemical “hits” identified by our
RAM screening technology and develop the identified starting material into a candidate for further development that
meets the desired product criteria. Our research and development programs may initially show promise in
identifying chemokine receptors and their impact on the body’s immune system, yet fail to yield drug candidates
that are suitable for preclinical and clinical development. We cannot assure you that our current efforts will be
successful or that we will not abandon any of our efforts in the future related to a particular chemokine receptor or
small molecule program.

We rely on third party contract manufacturing organizations to manufacture and supply our drug candidates for
us. If one of our suppliers or manufacturers fails to perform adequately or fulfill our needs, we may be required
to incur significant costs and devote significant efforts to find new suppliers or manufacturers. We may also face
delays in the development and commercialization of our drug candidates.

We currently have limited experience in, and we do not own facilities for, manufacturing our drug candidates.
We rely upon third party contract manufacturing organizations to manufacture and supply larger quantities of these
other drug candidates. The manufacture of pharmaceutical products in compliance with cGMP requires significant
expertise and capital investment, including the development of advanced manufacturing techniques and process
controls. Manufacturers of pharmaceutical products often encounter difficulties in production, including difficulties
with production costs and yields, quality control, including stability of the drug candidate and quality assurance
testing, shortages of qualified personnel, as well as compliance with strictly enforced FDA cGMP requirements,
other federal and state regulatory requirements, and foreign regulations. Raw materials for the synthesis of our API
are sourced globally. If the manufacturers of our raw materials and pharmaceutical products were to encounter any
difficulties or otherwise fail to comply with their obligations to us or under applicable regulations, our ability to
provide study drugs in our preclinical studies and clinical trials would be jeopardized. Any delay or interruption in
the supply of preclinical study or clinical trial materials could delay the completion of our preclinical studies and
clinical trials, increase the costs associated with maintaining our preclinical study and clinical trial programs and,
depending upon the period of delay, require us to commence new trials at significant additional expense or terminate
the studies and trials completely.

All manufacturers of our drug candidates must comply with cGMP requirements enforced by the FDA
through its facilities inspection program. These requirements include, among other things, quality control, quality
assurance and the maintenance of records and documentation. Manufacturers of our component materials may be
unable to comply with these cGMP requirements and with other FDA, state and foreign regulatory requirements.
The FDA or similar foreign regulatory agencies at any time may also implement new standards, or change their
interpretation and enforcement of existing standards for manufacture, packaging or testing of products. We have
little control over our manufacturers’ compliance with these regulations and standards. A failure to comply with
these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product
approval, product seizure or recall, or withdrawal of product approval. If the safety of any product supplied is
compromised due to our manufacturers’ failure to adhere to applicable laws or for other reasons, we may not be able
to obtain regulatory approval for or successfully commercialize our products, and we may be held liable for any
injuries sustained as a result. Any of these factors could cause a delay of clinical trials, regulatory submissions,
approvals or commercialization of our drug candidates or entail higher costs or impair our reputation.

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We currently rely on a single source supplier for API and drug product for each of our drug candidates. In the
event that we and our suppliers cannot agree to the terms and conditions for them to provide some or all of our API
clinical and commercial supply needs, or if any single source supplier terminates the agreement in response to a
breach by us, or if a supplier is not able to timely provide us with API and drug product, we would not be able to
manufacture the API on a commercial scale until a qualified alternative supplier is identified, which could also delay
the development of, and impair our ability to commercialize, drug candidates. For example, public health epidemics,
such as the ongoing coronavirus outbreak, may impact the ability of our existing or future suppliers to provide us
with preclinical study or clinical trial materials.

Although alternative sources of supply exist, the number of third-party suppliers with the necessary
manufacturing and regulatory expertise and facilities is limited, and it could be expensive and take a significant
amount of time to arrange for alternative suppliers, which could have a material adverse effect on our business. New
suppliers of any API would be required to qualify under applicable regulatory requirements and would need to have
sufficient rights under applicable intellectual property laws to the method of manufacturing such ingredients.
Obtaining the necessary FDA approvals or other qualifications under applicable regulatory requirements and
ensuring non-infringement of third-party intellectual property rights could result in a significant interruption of
supply and could require the new manufacturer to bear significant additional costs which may be passed on to us.

We will need to increase the size of our organization, and we may experience difficulties in managing growth.

As of December 31, 2019, we had 82 full-time employees. We will need to continue to expand our
commercial, managerial, operational, financial and other resources in order to manage our operations and clinical
trials, continue our development activities and commercialize our drug candidates. Our management and personnel,
systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively
execute our growth strategy requires that we:

•

build our sales, marketing and distribution capabilities;

• manage our clinical trials effectively;

• manage our internal development efforts effectively while carrying out our contractual obligations to

licensors, contractors, collaborators, government agencies and other third parties;

•

•

continue to improve our operational, financial and management controls, reporting systems and
procedures; and

identify, recruit, maintain, motivate and integrate additional employees.

We face substantial competition and our competitors may discover, develop or commercialize products faster or
more successfully than us.

The biotechnology and pharmaceutical industries are highly competitive, and we face significant competition
from companies in the pharmaceutical, biotechnology and other related markets that are researching and marketing
products designed to address autoimmune diseases, inflammatory disorders, and cancer. Established pharmaceutical
companies that currently sell or are developing drugs in our markets of interest include, but are not limited to,
AbbVie, Alexion, Amgen, AstraZeneca, Aurinia, Bayer, Biogen, Elan, GlaxoSmithKline, Johnson & Johnson,
Mallinckrodt, Merck, Merck Serono, Novartis, Pfizer, Retrophin, Roche/Genentech, Sanofi, Takeda and Teva. In
addition, in some instances we may face competition from companies that sell generic versions of approved drugs
that are part of the current SOC. Many or all of these established competitors are also involved in research and drug
development regarding various chemokine receptors. Pharmaceutical and biotechnology companies which are
known to be involved in chemokine and chemoattractant research and related drug development include, but are not
limited to, Pfizer, GlaxoSmithKline, Bristol-Myers Squibb, Merck, Takeda, Sanofi, Incyte, Alexion, Allergan,
Appellis, Omeros, InflaRx, Dimerix, X4 Pharmaceuticals, Mitsubishi Tanabe, Biolinerx, Akari Therapeutics and
UCB Pharma, among others.

We are developing small molecule therapeutics that will compete with other drugs and alternative therapies

that are currently marketed or are being developed to treat ANCA vasculitis, C3G, HS, FSGS and other renal
disease, other autoimmune diseases, metabolic diseases, inflammatory disorders, and cancer. Similarly, other future
drug candidates we are pursuing would compete against numerous existing and established drugs and potentially
against other novel drugs and therapies that are currently in development. See “Item 1. Business—Competition.” We
also anticipate that we will face increased competition in the future as new companies enter into our target markets
and scientific developments surrounding the chemokine system continue to develop.

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Many of our competitors have materially greater name recognition and financial, manufacturing, marketing,

research and drug development resources than we do. Additional mergers and acquisitions in the biotechnology and
pharmaceutical industries may result in even more resources being concentrated in our competitors. Large
pharmaceutical companies in particular have extensive expertise in preclinical and clinical testing and in obtaining
regulatory approvals for drugs. In addition, academic institutions, government agencies, and other public and private
organizations conducting research may seek patent protection with respect to potentially competitive products or
technologies. These organizations may also establish exclusive collaborative or licensing relationships with our
competitors.

We may be subject to costly product liability claims related to our clinical trials and drug candidates and, if we
are unable to obtain adequate insurance or are required to pay for liabilities resulting from a claim excluded
from, or beyond the limits of, our insurance coverage, a material liability claim could adversely affect our
financial condition.

Because we conduct clinical trials with human patients, we face the risk that the use of our drug candidates

may result in adverse side effects to patients and to otherwise healthy volunteers in our clinical trials. We face even
greater risks upon any commercialization of our drug candidates. Although we have product liability insurance for
clinical trials for up to $10.0 million, our insurance may be insufficient to reimburse us for any expenses or losses
we may suffer, and we will be required to increase our product liability insurance coverage for our advanced clinical
trials that we plan to initiate. We do not know whether we will be able to continue to obtain product liability
coverage and obtain expanded coverage on acceptable terms, or at all. We may not have sufficient resources to pay
for any liabilities resulting from a claim excluded from, or beyond the limits of, our insurance coverage. There is
also a risk that third parties that we have agreed to indemnify could incur liability. An individual may bring a
product liability claim against us if one of our drug candidates or products causes, or is claimed to have caused, an
injury or is found to be unsuitable for consumer use. Any product liability claim brought against us, with or without
merit, could result in:

• withdrawal of clinical trial volunteers, investigators, patients or trial sites;

•

•

•

•

•

•

•

•

•

the inability to commercialize our drug candidates;

decreased demand for our drug candidates;

regulatory investigations that could require costly recalls or product modifications;

loss of revenues;

substantial costs of litigation;

liabilities that substantially exceed our product liability insurance, which we would then be required to
pay ourselves;

an increase in our product liability insurance rates or the inability to maintain insurance coverage in the
future on acceptable terms, if at all;

the diversion of management’s attention from our business; and

damage to our reputation and the reputation of our products.

Our business involves the use of hazardous materials and we and our third-party manufacturers must comply
with environmental laws and regulations, which may be expensive and restrict how we do business.

Our third-party manufacturers’ activities and our own activities involve the controlled storage, use, handling

and disposal of hazardous materials, including the components of our pharmaceutical products, test samples and
reagents, biological materials and other hazardous compounds. We and our manufacturers are subject to federal,
state and local and foreign laws and regulations governing the use, generation, manufacture, storage, handling and
disposal of these hazardous materials. We currently carry no insurance specifically covering environmental claims
relating to the use of hazardous materials. Although we believe that our safety procedures for handling and
disposing of these materials and waste products comply with the standards prescribed by these laws and regulations,
we cannot eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of
hazardous materials. In the event of an accident, state or federal or other applicable authorities may curtail our use of
these materials and/or interrupt our business operations. In addition, if an accident or environmental discharge
occurs, or if we discover contamination caused by prior operations, including by prior owners and operators of
properties we acquire, we could be liable for cleanup obligations, damages and fines. The substantial unexpected
costs we may incur could significantly harm our financial condition and results of operations.

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Future financings may adversely affect our stockholders or impose additional restrictions on our assets or
operations, which may harm our business.

If we raise additional capital by issuing equity securities or convertible debt securities, then our existing
stockholders’ ownership will be diluted and the terms of any new equity securities may have preferences over our
common stock. If we raise additional capital through the issuance of debt securities, the debt will have rights senior
to the holders of our common stock and may contain covenants that restrict our operational flexibility or impose
liens or other restrictions on our assets, in addition to the restrictions imposed by our credit facility with Hercules. In
addition, the terms of future financings may restrict our ability to raise additional capital, which would delay or
prevent the further development or commercialization of our drug candidates. If we raise additional funds through
collaboration, licensing or other similar arrangements, it may be necessary to relinquish potentially valuable rights to
our current drug candidates, potential products or proprietary technologies, or grant licenses on terms that are not
favorable to us. If adequate funds are not available, our ability to achieve profitability or to respond to competitive
pressures would be significantly limited and we may be required to delay, significantly curtail or eliminate the
development of one or more of our drug candidates.

We are highly dependent on the services of our founder, President and Chief Executive Officer, Dr. Thomas J.
Schall, and if we are not able to retain Dr. Schall or other members of our management or recruit additional
management, clinical and scientific personnel, our business will suffer.

We may not be able to attract or retain qualified management and scientific and clinical personnel in the future

due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses,
particularly in the San Francisco Bay area. Our industry has experienced a high rate of turnover of management
personnel in recent years. If we are not able to attract, retain and motivate necessary personnel to accomplish our
business objectives, we may experience constraints that will significantly impede the achievement of our
development objectives, our ability to raise additional capital and our ability to implement our business strategy.

We are highly dependent on the principal members of our management and scientific staff. The loss of service
of any of our management could harm our business. In addition, we are dependent on our continued ability to attract,
retain and motivate highly qualified additional management, clinical and scientific personnel. The competition for
qualified personnel in the pharmaceutical industry is intense. Due to our limited resources, we may not be able to
effectively attract and recruit additional qualified personnel. If we are not able to retain our management,
particularly our founder, President and Chief Executive Officer, Dr. Schall, and attract, on acceptable terms,
additional qualified personnel necessary for the continued development of our business, we may not be able to
sustain our operations or grow our business. Although we have executed employment agreements with each member
of our current executive management team, including Dr. Schall, these agreements are terminable at will with or
without notice and, therefore, we may not be able to retain their services as expected. In addition to the competition
for personnel, the San Francisco Bay area in particular is characterized by a high cost of living. As such, we could
have difficulty attracting experienced personnel to our company and may be required to expend significant financial
resources in our employee recruitment and retention efforts.

In addition, we have scientific and clinical advisors who assist us in formulating our product development and

clinical strategies. These advisors are not our employees and may have commitments to, or consulting or advisory
contracts with, other entities that may limit their availability to us, or may have arrangements with other companies
to assist in the development of products that may compete with ours.

We are required to maintain compliance with Section 404 of the Sarbanes-Oxley Act of 2002 or we may be
subject to sanctions by regulatory authorities.

Section 404(a) of the Sarbanes-Oxley Act of 2002 requires that we evaluate and determine the effectiveness of
our internal controls over financial reporting and provide a management report on the internal control over financial
reporting. We have performed the system and process evaluation and testing required to comply with the
management certification. We are also required to comply with auditor attestation requirements of Section 404(b) of
the Sarbanes-Oxley Act of 2002. If we do not properly implement the requirements of Section 404 with adequate
compliance, and maintain such compliance, we may be subject to sanctions or investigation by regulatory
authorities, such as the SEC or The Nasdaq Stock Market LLC, or Nasdaq. Any such action could adversely affect
our financial results or investors’ confidence in us and could cause our stock price to fall. If we have a material

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weakness in our internal controls over financial reporting, we may not detect errors on a timely basis and our
consolidated financial statements may be materially misstated. If we or our independent registered public accounting
firm identifies deficiencies in our internal controls that are deemed to be material weaknesses, we could be subject to
sanctions or investigations by Nasdaq, the SEC or other regulatory authorities, which would entail expenditure of
additional financial and management resources and could materially adversely affect our stock price.

We may be adversely affected by the economic environment.

Our ability to attract and retain collaboration partners or customers, invest in and grow our business and meet
our financial obligations depends on our operating and financial performance, which, in turn, is subject to numerous
factors, including the prevailing economic conditions and financial, business and other factors beyond our control,
such as the rate of unemployment, the number of uninsured persons in the United States and inflationary pressures.
We cannot anticipate all the ways in which the current economic climate and financial market conditions could
adversely impact our business.

We are exposed to risks associated with reduced profitability and the potential financial instability of our
collaboration partners or customers, many of which may be adversely affected by volatile conditions in the financial
markets. For example, unemployment and underemployment, and the resultant loss of insurance, may decrease the
demand for healthcare services and pharmaceuticals. If fewer patients are seeking medical care because they do not
have insurance coverage, our collaboration partners or customers may experience reductions in revenues,
profitability and/or cash flow that could lead them to reduce their support of our programs or financing activities. If
collaboration partners or customers are not successful in generating sufficient revenue or are precluded from
securing financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us.
This, in turn, could adversely affect our financial condition and liquidity. In addition, if economic challenges in the
United States result in fewer individuals pursuing or being able to afford our products once commercialized, our
business, results of operations, financial condition and cash flows could be adversely affected.

Our internal computer systems, or those of our CROs or other contractors or consultants, may fail or suffer
security breaches, which could result in a material disruption of our drug development programs.

Despite the implementation of security measures, our internal computer systems and those of our CROs and

other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural
disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any such
system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our
operations, it could result in a material disruption of our drug development programs, adverse publicity, and fines or
penalties. For example, the loss of clinical trial data from completed or ongoing clinical trials for any of our drug
candidates 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 of our drug candidates could be delayed.

Our employees, independent contractors, principal investigators, CROs, consultants, vendors and collaboration
partners may engage in misconduct or other improper activities, including noncompliance with regulatory
standards and requirements.

We are exposed to the risk that our employees, independent contractors, principal investigators, CROs,
consultants, vendors and collaboration partners may engage in fraudulent or other illegal activity. Misconduct by
these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to
us that violate: FDA regulations, including those that require the reporting of true, complete and accurate
information to the FDA; manufacturing standards we have established; federal and state healthcare fraud and abuse
laws and regulations; and laws that require the reporting of true, complete and accurate financial information or data.
In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and
regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and
regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales
commission, customer incentive programs and other business arrangements. These activities could also include the
improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and

44

serious harm to our reputation. It is not always possible to identify and deter misconduct by employees and other
third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling
unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or
lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted
against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a
significant impact on our business, including the imposition of significant civil, criminal and administrative
penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other U.S.
federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and
curtailment of our operations.

Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.

Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an
“ownership change” (generally defined as a greater than 50% change, by value, in its equity ownership over a three
year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax
attributes to offset its post-change taxable income and taxes may be limited. We previously determined that we had
ownership changes, which limit our ability to use our then existing tax attributes. Future changes in our stock
ownership, many of the causes of which are outside our control, could result in additional ownership changes. Any
such ownership changes could further limit our ability to use net operating loss carryforwards and other pre-change
tax attributes. Furthermore, under U.S. tax legislation enacted in 2017, the treatment of tax losses generated before
December 31, 2017 has generally not changed but tax losses generated in calendar year 2018 and beyond may be
used to offset only 80% of taxable income and carryforward indefinitely. This change may require us to pay federal
income taxes in future years despite generating a loss for federal income tax purposes in prior years.

Business disruptions could seriously harm our future revenues and financial condition and increase our costs
and expenses.

Our operations could be subject to earthquakes, power shortages, telecommunications failures, floods,
hurricanes, typhoons, fires, extreme weather conditions, medical epidemics, such as the onging coronavirus
outbreak, and other natural or manmade disasters or business interruptions. The occurrence of any of these business
disruptions could seriously harm our operations and financial condition and increase our costs and expenses. Our
corporate headquarters is located in California and certain clinical sites for our drug candidates, operations of our
existing and future partners and suppliers are or will be located in California near major earthquake faults and fire
zones. The ultimate impact on us, our significant partners, suppliers and our general infrastructure of being located
near major earthquake faults and fire zones and being consolidated in certain geographical areas is unknown, but our
operations and financial condition could suffer in the event of a major earthquake, fire or other natural or manmade
disaster.

Risks Related to Intellectual Property

Our proprietary rights may not adequately protect our technologies and drug candidates. If we are unable to
protect our drug candidates and our intellectual property rights, it may materially adversely affect our position in
the market.

Our commercial success will depend on our ability to obtain patents and maintain adequate protection for our
technologies, intellectual property and drug candidates in the United States and other countries. Our patent estate, on
a worldwide basis, includes approximately 905 issued or allowed patents and approximately 420 pending patent
applications. There are approximately 122 issued or allowed patents and 57 patent applications pending for
avacopan, our lead drug candidate in the C5aR program. With respect to our drug candidates in the CCR2 programs,
we have approximately 89 issued or allowed patents and 88 patent applications pending worldwide relating to their
chemical composition or use thereof. With respect to the CCR1 and CCR9 chemokine receptors, we have
approximately 431 issued or allowed patents and 91 patent applications pending worldwide relating to their
chemical composition or use thereof. We have approximately 260 patents issued or pending for our other
preclinical-stage compounds in the PD-L1, C5aR, CXCR7, CCR4, CXCR2 and CCR6 programs. We cannot assure
you that any of our patent applications will result in issued patents. We will be able to protect our proprietary rights
from unauthorized use by third parties only to the extent that our proprietary technologies and future products are

45

covered by valid and enforceable patents or are effectively maintained as trade secrets. If third parties disclose or
misappropriate our proprietary rights, it may materially and adversely impact our position in the market.

We apply for patents covering both our technologies and drug candidates, as we deem appropriate. However,

we may fail to apply for patents on important technologies or drug candidates in a timely fashion, or at all. Our
existing patents and any future patents we obtain may not be sufficiently broad to prevent others from using our
technologies or from developing competing products and technologies. Composition-of-matter patents on the
chemical active pharmaceutical ingredient are generally considered to be the strongest form of intellectual property
protection for pharmaceutical products, as such patents provide protection without regard to any method of use. We
cannot be certain that the claims in our patent applications covering composition-of-matter of our drug candidates
will be considered patentable by the USPTO and courts in the United States or by the patent offices and courts in
other countries, nor can we be certain that the claims in our issued composition-of-matter patents will not be found
invalid or unenforceable if challenged. Method-of-use patents protect the use of a product for the specified method.
This type of patent does not prevent a competitor from making and marketing a product that is identical to our
product for an indication that is outside the scope of the patented method. Moreover, even if competitors do not
actively promote their product for our targeted indications, physicians may prescribe these products “off-label.”
Although off-label prescriptions may infringe or contribute to the infringement of method-of-use patents, the
practice is common and such infringement is difficult to prevent or prosecute.

The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our
patents or the patent rights that we license from others, may be challenged in the courts or patent offices in the
United States and abroad. Once granted, patents may remain open to opposition, interference, re-examination, post-
grant review, inter partes review, nullification or derivation action or similar proceedings in court or before patent
offices in the United States or foreign jurisdictions for a given period after allowance or grant, during which time
third parties can raise objections against such patents. Such challenges may result in loss of exclusivity or in patent
claims being narrowed, invalidated or held unenforceable, all of which could limit our ability to stop others from
using or commercializing similar or identical drug products, or limit the duration of the patent protection of our drug
products and candidates.

Moreover, the patent positions of numerous biotechnology and pharmaceutical companies are highly uncertain
and involve complex legal and factual questions for which important legal principles remain unresolved. As a result,
the validity and enforceability of our patents cannot be predicted with certainty. In addition, we cannot assure you
that:

• we were the first to make the inventions covered by each of our issued patents and pending patent

applications;

• we were the first to file patent applications for these inventions;

•

•

•

•

others will not independently develop similar or alternative technologies or duplicate any of our
technologies by inventing around our claims;

any of our pending patent applications will result in issued patents;

a third party will not challenge our proprietary rights or that a court will hold that our patents are valid
and enforceable;

any patents issued to us or our collaboration partners will provide us with any competitive advantages, or
will not be challenged by third parties;

• we will develop additional proprietary technologies that are patentable; or

•

the patents of others will not have an adverse effect on our business.

Changes in patent law in the United States or in other countries could diminish the value of patents in general,
thereby impairing our ability to protect our drug products and candidates.

Our patent rights may be affected by developments or uncertainty in the United States’ or other jurisdictions’

patent statutes, patent case law, USPTO rules and regulations or the rules and regulations of other jurisdictions’
patent offices.

There are a number of recent changes to United States patent laws that may have a significant impact on our
ability to protect our technology and enforce our intellectual property rights. For example, on September 16, 2011,

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the Leahy-Smith America Invents Act, or Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a
number of significant changes to United States patent law, including provisions that affect the way patent
applications are prosecuted and may also affect patent litigation. In particular, under the Leahy-Smith Act, the
United States transitioned in March 2013 to a “first to file” system in which the first inventor to file a patent
application is typically entitled to the patent. Third parties are allowed to submit prior art before the issuance of a
patent by the USPTO, and may become involved in post-grant proceedings including opposition, derivation,
reexamination, inter partes review or interference proceedings challenging our patent rights or the patent rights of
others. An adverse determination in any such submission, proceeding or litigation could reduce the scope or
enforceability of, or invalidate, our patent rights, which could adversely affect our competitive position. In addition,
the United States Congress may pass additional patent reform legislation that is unfavorable to us.

The Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent

protection available in certain circumstances or weakening the rights of patent owners in certain situations. In
addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events
has created uncertainty with respect to the value of patents once obtained. Depending on decisions by the United
States Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in
unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and
patents we might obtain in the future. Similarly, statutory or judicial changes to the patent laws of other countries
may increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or
defense of issued patents.

We may become subject to third parties’ claims alleging infringement of patents and proprietary rights or seeking
to invalidate our patents or proprietary rights, which would be costly, time-consuming and, if successfully
asserted against us, delay or prevent the development and commercialization of our products.

Intellectual property litigation, and patent litigation in particular, is expensive, complex and lengthy and its

outcome is difficult to predict. There has been substantial litigation and other proceedings regarding patent and other
intellectual property rights in the pharmaceutical and biotechnology industries. We may be subject to third-party
claims in the future against us or our collaborators that would cause us to incur substantial expenses and, if
successful against us, could cause us to pay substantial damages, including treble damages and attorney’s fees if we
are found to be willfully infringing a third party’s patents. Further, if a patent infringement suit were brought against
us or our collaborators, we or they could be forced to stop or delay research, development, manufacturing or sales of
the product or drug candidate that is the subject of the suit. As a result of patent infringement claims, or in order to
avoid potential claims, we or our collaborators may choose to seek, or be required to seek, a license from the third
party and would most likely be required to pay license fees or royalties or both. These licenses may not be available
on acceptable terms, or at all. Even if we or our collaborators were able to obtain a license, the rights may be
nonexclusive, which would give our competitors access to the same intellectual property. Ultimately, we could be
prevented from commercializing a product, or forced to redesign it, or to cease some aspect of our business
operations if, as a result of actual or threatened patent infringement claims, we or our collaborators are unable to
enter into licenses on acceptable terms. This could harm our business significantly. For example, for hidradenitis
suppurativa, or HS, InflaRx GmbH holds patents regarding methods of use to treat HS with agents that inhibit C5a
activities. While we believe that these patents may not be enforceable, may be invalidated, or may be limited in
scope, such patents could potentially affect the use of avacopan to treat hidradenitis suppurativa. If we are unable to
invalidate or challenge such patents for hidradenitis suppurativa, we may need to obtain a license to commercialize
avacopan in that indication. Such a license, if necessary, could require us to make royalty or other material payments
to InflaRx GmbH.

Furthermore, the scope of a patent claim is determined by an interpretation of the law, the written disclosure in

a patent and the patent’s prosecution history and can involve other factors such as expert opinion. Our analysis of
these issues, including interpretation of the relevance or the scope of claims in a patent or a pending application,
determining applicability of such claims to our proprietary technologies or drug candidates, predicting whether a
third party’s pending patent application will issue with claims of relevant scope, and determining the expiration date
of any patent in the United States or abroad that we consider relevant may be incorrect, which may negatively
impact our ability to develop and market our drug candidates. We do not always conduct independent reviews of
pending patent applications and patents issued to third parties.

Additionally, patent applications in the United States and elsewhere are typically published approximately 18
months after the earliest filing for which priority is claimed, with such earliest filing date being commonly referred
to as the priority date. Certain United States applications that will not be filed outside the United States can remain

47

confidential until patents issue. In addition, patent applications in the United States and elsewhere can be pending
for many years before issuance, or unintentionally abandoned patents or applications can be revived. Furthermore,
pending patent applications that have been published can, subject to certain limitations, be later amended in a
manner that could cover our technologies, our drug candidates or the use of our drug candidates. These applications
may later result in issued patents, or the revival of previously abandoned patents, that will prevent, limit or otherwise
interfere with our ability to make, use or sell our products. As a result, we may be unaware of third-party patents that
may be infringed by commercialization of our drug candidates, and cannot be certain that we were the first to file a
patent application related to a drug candidate or proprietary technology. In addition, identification of third-party
patent rights that may be relevant to our technology is difficult because patent searching is imperfect due to
differences in terminology among patents, incomplete databases and the difficulty in assessing the meaning of patent
claims.

In addition to infringement claims against us, third parties may challenge or infringe upon our existing or
future patents. Proceedings involving our patents or patent applications or those of others could result in adverse
decisions regarding the patentability of our inventions relating to our drug candidates, and/or the enforceability,
validity or scope of protection offered by our patents relating to our drug candidates. Even if we are successful in
these proceedings, we may incur substantial costs and divert management time and attention in pursuing these
proceedings, which could have a material adverse effect on us. Or, if third parties prepare and file patent
applications in the United States that also claim technology to which we have rights, we may have to participate in
interference proceedings in the USPTO to determine the priority of invention. We may also become involved in
similar opposition proceedings in the European Patent Office regarding our intellectual property rights with respect
to our products and technology.

The cost to us of any intellectual property litigation or other proceedings could be substantial. Some of our

competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because
of their substantially greater financial resources. Discovery proceedings in the United States might lead to the
disclosure of some of our proprietary confidential information. Uncertainties resulting from the initiation and
continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete
in the marketplace. Intellectual property litigation and other proceedings may also absorb significant management
and technical staff’s time which may materially and adversely impact our financial position and results of
operations.

Restrictions on our patent rights relating to our drug candidates may limit our ability to prevent third parties
from competing against us.

Our success will depend, in part, on our ability to obtain and maintain patent protection for our drug
candidates, preserve our trade secrets, prevent third parties from infringing upon our proprietary rights and operate
without infringing upon the proprietary rights of others. Composition-of-matter patents on APIs are generally
considered to be the strongest form of intellectual property protection for pharmaceutical products as they apply
without regard to any method of use. Entirely new individual chemical compounds, often referred to as new
chemical entities, are typically entitled to composition-of-matter coverage. However, we cannot be certain that the
current law will remain the same, or that our drug candidates will be considered novel and non-obvious by the
USPTO and courts.

In addition to composition-of-matter patents and patent applications, we also have filed method-of-use patent
applications. This type of patent protects the use of the product only for the specified method. However, this type of
patent does not prevent a competitor from making and marketing a product that is identical to our product for an
indication that is outside the scope of the patented method. Moreover, even if these competitors do not actively
promote their product for our targeted indication, physicians may prescribe these products “off-label.” Although off-
label prescriptions may infringe or contribute to the infringement of method-of-use patents, the practice is common
and such infringement is difficult to prevent or prosecute.

Patent applications in the United States and most other countries are confidential for a period of time until
they are published, and publication of discoveries in scientific or patent literature typically lags actual discoveries by
several months or more. As a result, we cannot be certain that we and the inventors of the issued patents and
applications that we may in-license were the first to conceive of the inventions covered by such patents and pending
patent applications or that we and those inventors were the first to file patent applications covering such inventions.
Also, we have numerous issued patents and some patent applications pending before the USPTO and the patent

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protection may lapse before we manage to obtain commercial value from them, which might result in increased
competition and materially affect our position in the market.

We may be subject to claims that we or our employees or consultants have wrongfully used or disclosed alleged
trade secrets of our employees’ or consultants’ former employers or their clients. These claims may be costly to
defend and if we do not successfully do so, we may be required to pay monetary damages and may lose valuable
intellectual property rights or personnel.

Many of our employees were previously employed at universities or biotechnology or pharmaceutical
companies, including our competitors or potential competitors. Although no claims against us are currently pending,
we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade
secrets or other proprietary information of their former employers. Litigation may be necessary to defend against
these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable
intellectual property rights or personnel. A loss of key research personnel or their work product could hamper our
ability to commercialize, or prevent us from commercializing our drug candidates, which could severely harm our
business. Even if we are successful in defending against these claims, litigation could result in substantial costs and
be a distraction to management.

Some of our intellectual property which is discovered through government funded programs is subject to federal
regulation such as “march-in” rights, certain reporting requirements, and a preference for U.S. industry.
Compliance with such regulations may limit our exclusive rights, subject us to expenditure of resources with
respect to reporting requirements, and limit our ability to contract with foreign manufacturers.

Some of our existing drug candidates, including CCX140, and some of our research and development work

were funded, at least in part, by the U.S. government and are therefore subject to certain federal regulations. For
example, some of our research and development work on vaccine adjuvants and immunomodulation for biothreat
applications was funded by government research grants. In addition, as noted on several of our patents, including
U.S. Patent Nos. 7,884,110; 7,622,583; 7,776,877; 8,198,309 and 8.093,247, inventions covering various CCR9 and
CCR2 inhibitors were supported at least in part by National Institutes of Health funding (U19-AI056690-01). Under
the “march-in” provisions of the Bayh-Dole Act, the government may have the right under limited circumstances to
require us to grant exclusive, partially exclusive or non-exclusive rights to third parties for intellectual property
discovered through the government funded program. The government can exercise its march-in rights if it
determines that action is necessary because we fail to achieve practical application of the new invention or because
action is necessary to alleviate health or safety needs of the public. Intellectual property discovered under the
government funded program is also subject to certain reporting requirements, compliance with which may require us
to expend substantial resources. Such intellectual property is also subject to a preference for U.S. industry, which
may limit our ability to contract with foreign product manufacturers for products covered by such intellectual
property. We plan to apply for additional U.S. government funding, and it is possible that we may discover
compounds or drug candidates as a result of such funding. Intellectual property under such discoveries would be
subject to the applicable provisions of the Bayh-Dole Act.

Risks Related to Government Regulation

The regulatory approval process is expensive, time-consuming and uncertain and may prevent us from obtaining
approvals for the commercialization of some or all of our drug candidates.

The research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of

drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States,
the EMA, the EU institutions (e.g., the European Commission) and the EU Member State Competent Authorities, as
well as equivalent authorities and regulatory bodies in other countries, which regulations differ from country to
country. We are not permitted to market our drug candidates in the United States until we receive approval of an
NDA from the FDA and in the EU until we have received approval from the European Commission or EU Member
State Competent Authorities. We have not submitted an application for or received regulatory approval for any of
our drug candidates, except in the EU where we have applied to the EMA for a CMA, which we subsequently
withdrew, for avacopan in the treatment of patients with ANCA vasculitis. Obtaining approval of an NDA, MAA or
CMA can be an expensive, time-consuming and uncertain process. In addition, failure to comply with FDA, EMA

49

and other applicable U.S., EU and foreign regulatory requirements may subject us to administrative or judicially
imposed sanctions, including:

• warning letters;

•

•

civil and criminal penalties;

injunctions;

• withdrawal of approved products;

•

•

•

•

product seizure or detention;

product recalls;

total or partial suspension of production; and

refusal to approve pending NDAs or supplements to approved NDAs, pending CMA or MAAs.

Prior to receiving approval to commercialize any of our drug candidates in the United States, the EU, or in

other countries, we must demonstrate with substantial evidence from well controlled clinical trials, and to the
satisfaction of the FDA, the EMA, and other regulatory authorities abroad, that such drug candidates are safe and
effective for their intended uses. Results from preclinical studies and clinical trials can be interpreted in different
ways. Even if we believe the preclinical or clinical data for our drug candidates are promising, such data may not be
sufficient to support approval by the FDA, the EMA, and other regulatory authorities. Administering any of our drug
candidates to humans may produce undesirable side effects, which could interrupt, delay or halt clinical trials of our
drug candidates and result in the FDA, the EMA, or other regulatory authorities denying approval of our drug
candidates for any or all targeted indications.

Regulatory approval of an NDA or NDA supplement, or of a CMA, MAA, or of their respective extensions
and variations, is not guaranteed, and the approval process is expensive and may take several years. The FDA and
the EMA also have substantial discretion in the approval process. Despite the time and expense exerted, failure can
occur at any stage, and we could encounter problems that cause us to abandon or repeat clinical trials, or perform
additional preclinical studies and clinical trials. The number of preclinical studies and clinical trials that will be
required for FDA or EMA approval varies depending on the drug candidate, the disease or condition that the drug
candidate is designed to address, and the regulations applicable to any particular drug candidate. The FDA or EMA
can delay, limit or deny approval of a drug candidate for many reasons, including, but not limited to, the following:

•

•

•

•

a drug candidate may not be deemed safe or effective;

FDA or EMA officials may not find the data from preclinical studies and clinical trials sufficient;

the FDA or EMA might not approve our or our third-party manufacturer’s processes or facilities; or

the FDA or EMA may change its approval policies or adopt new regulations.

If any of our drug candidates fails to demonstrate safety and efficacy in clinical trials or does not gain

regulatory approval, our business and results of operations will be materially and adversely harmed.

Changes in funding for the FDA and other government agencies could hinder their ability to hire and retain key
leadership and other personnel, or otherwise prevent new products and services from being developed or
commercialized in a timely manner, which could negatively impact our business.

The ability of the FDA to review and approve new products can be affected by a variety of factors, including
government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees,
and statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as
a result. In addition, government funding of other government agencies that fund research and development
activities is subject to the political process, which is inherently fluid and unpredictable.

Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed

and/or approved by necessary government agencies, which would adversely affect our business. For example, over
the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down
several times and certain regulatory agencies, such as the FDA, have had to furlough critical employees and stop
critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to
timely review and process our regulatory submissions, which could have a material adverse effect on our business.

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The availability of adequate third-party coverage and reimbursement for newly approved drugs is uncertain, and
failure to obtain adequate coverage and reimbursement from third-party payors could impede our ability to
market any future products we may develop and could limit our ability to generate revenue.

There is significant uncertainty related to the third-party payor coverage and reimbursement of newly
approved drugs. The commercial success of our future products in both domestic and international markets depends
on whether such third-party coverage and reimbursement is available for our future products. Governmental payors,
including Medicare and Medicaid, health maintenance organizations and other third-party payors are increasingly
attempting to manage their healthcare expenditures by limiting both coverage and the level of reimbursement of new
drugs and, as a result, they may not cover or provide adequate reimbursement for our future products. These payors
may not view our future products as cost-effective, and coverage and reimbursement may not be available to our
customers or may not be sufficient to allow our future products to be marketed on a competitive basis. Third-party
payors are exerting increasing influence on decisions regarding the use of, and coverage and reimbursement levels
for, particular treatments. Such third-party payors, including Medicare, are challenging the prices charged for
medical products and services, and many third-party payors limit or delay coverage and reimbursement for newly
approved healthcare products. In particular, third-party payors may limit the covered indications. Cost-control
initiatives could cause us to decrease the price we might establish for products, which could result in lower than
anticipated product revenues. If the prices for our drug candidates decrease or if governmental and other third-party
payors do not provide adequate coverage or reimbursement, our prospects for revenue and profitability will suffer.

Failure to obtain regulatory approvals in foreign jurisdictions will prevent us from marketing our products
internationally.

We may market future products in international markets. In order to market our future products in the EEA
and many other foreign jurisdictions, we must obtain separate regulatory approvals. More concretely, in the EEA,
medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. There are two
types of marketing authorizations:

•

The Community MA, which is issued by the European Commission through the Centralized Procedure,
based on the opinion of the Committee for Medicinal Products for Human Use, or CHMP, of the EMA,
and which is valid throughout the entire territory of the EEA. The Centralized Procedure is mandatory for
certain types of products, such as biotechnology medicinal products, orphan medicinal products, and
medicines that contain a new active substance indicated for the treatment of AIDS, cancer,
neurodegenerative disorders, diabetes, and auto-immune and viral diseases. The Centralized Procedure is
optional for products containing a new active substance not yet authorized in the EEA, or for products
that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of
public health in the EU.

• National MAs, which are issued by the competent authorities of the Member States of the EEA and only

cover their respective territory, are available for products not falling within the mandatory scope of the
Centralized Procedure. Where a product has already been authorized for marketing in a Member State of
the EEA, this National MA can be recognized in another Member State through the Mutual Recognition
Procedure. If the product has not received a National MA in any Member State at the time of application,
it can be approved simultaneously in various Member States through the Decentralized Procedure.

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Under the above described procedures, before granting the MA, the EMA or the competent authorities of the
Member States of the EEA make an assessment of the risk-benefit balance of the product on the basis of scientific
criteria concerning its quality, safety and efficacy.

In the EEA, upon receiving marketing authorization, new chemical entities generally receive eight years of
data exclusivity and an additional two years of market exclusivity. If granted, data exclusivity prevents regulatory
authorities in the EU from referencing the innovator’s data to assess a generic application. During the additional
two-year period of market exclusivity, a generic marketing authorization can be submitted, and the innovator’s data
may be referenced, but no generic product can be marketed until the expiration of the market exclusivity. However,
there is no guarantee that a product will be considered by the EU’s regulatory authorities to be a new chemical entity
and qualify for data exclusivity.

To meet unmet medical needs of patients and in the interest of public health, the EMA may grant, subject to

certain specific obligations to be reviewed annually, a CMA, on the basis of less complete data than is normally
required. To be eligible for a CMA, a medicinal product must belong to at least one of these categories: (i) be aimed
at treating, preventing or diagnosing seriously debilitating or life-threatening diseases; (ii) be intended for use in
emergency situations; or (iii) be designated as an orphan medicine. Further, a CMA may only be granted if the EMA
finds that all the following requirements are met:

•

•

•

•

the benefit-risk balance of the product is positive;

it is likely that the applicant will be able to provide comprehensive data;

unmet medical needs will be fulfilled; and

the benefit to public health of the medicinal product's immediate availability on the market outweighs the
risks due to the need for further data.

In 2016, the EMA launched its Priority Medicines, or PRIME, scheme. PRIME is a voluntary scheme aimed
at enhancing the EMA’s support for the development of medicines that target unmet medical needs. It is based on
increased interaction and early dialogue with companies developing promising medicines, to optimize their product
development plans and speed up their evaluation to help them reach patients earlier. The scheme focuses on
medicines that may offer a major therapeutic advantage over existing treatments, or benefit patients without
treatment options. These medicines are considered priority medicines by the EMA. To be accepted for PRIME, a
medicine has to show its potential to benefit patients with unmet medical needs based on early clinical data. The
benefits of a PRIME designation include the appointment of a CHMP rapporteur, before submission of the MAA,
early dialogue and scientific advice at key development milestones, and the potential to qualify products for
accelerated review earlier in the application process. Obtaining access to PRIME may not result in a materially
faster development process, review or approval compared to conventional EMA procedures, nor does access to
PRIME assure or increase the likelihood of EMA’s grant of a marketing authorization.

We have had limited interactions with foreign regulatory authorities, and the approval procedures vary among

countries and can involve additional clinical testing, and the time required to obtain approval may differ from that
required to obtain FDA approval. Clinical trials conducted in one country may not be accepted by regulatory
authorities in other countries. Approval by the FDA does not ensure approval by regulatory authorities in other
countries, and approval by one or more foreign regulatory authorities does not ensure approval by regulatory
authorities in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatory approval in
one country may have a negative effect on the regulatory process in others. The foreign regulatory approval process
may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory
approvals on a timely basis, if at all. We may not be able to file for regulatory approvals and even if we file we may
not receive necessary approvals to commercialize our products in any market.

Healthcare reform measures could hinder or prevent our drug candidates’ commercial success.

In the United States, there have been and we expect there will continue to be a number of legislative and

regulatory changes to the healthcare system in ways that could affect our future revenues and profitability and the
future revenues and profitability of our potential customers. Federal and state lawmakers regularly propose and, at
times, enact legislation that would result in significant changes to the healthcare system, some of which are intended
to contain or reduce the costs of medical products and services. For example, in March 2010, the Affordable Care
Act was signed into law. It contained a number of provisions, including those governing enrollment in federal
healthcare programs, reimbursement changes and fraud and abuse measures, all of which impacted existing
government healthcare programs and resulted in the development of new programs. The Affordable Care Act,
among other things:

•

imposed a non-deductible annual fee on pharmaceutical manufacturers or importers who sell “branded
prescription drugs” to specified federal government programs;

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•

•

•

increased the minimum level of Medicaid rebates payable by manufacturers of brand-name drugs from
15.1% to 23.1%;

required collection of rebates for drugs paid by Medicaid managed care organizations;

required manufacturers to participate in a coverage gap discount program, under which they must agree to
offer 70% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries
during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered
under Medicare Part D; and

• mandated a further shift in the burden of Medicaid payments to the states.

Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA, and

we expect there will be additional challenges and amendments to the ACA in the future. By way of example, in
December 2017, the Tax Cuts and Jobs Act was enacted, which, among other things, removed penalties for not
complying with the individual mandate to carry health insurance. On December 14, 2018, a U.S. District Court
Judge in the Northern District of Texas, ruled that the individual mandate is a critical and inseverable feature of the
Affordable Care Act, and therefore, because it was repealed as part of the Tax Act, the remaining provisions of the
Affordable Care Act are invalid as well. On December 18, 2019, the U.S. Court of Appeals for the 5th Circuit ruled
that the individual mandate was unconstitutional and remanded the case back to the District Court to determine
whether the remaining provisions of the Affordable Care Act are invalid as well. It is unclear how these decisions,
subsequent appeals, if any, and other efforts to challenge, repeal or replace the Affordable Care Act will impact the
Affordable Care Act and our business.

Other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. These

changes include aggregate reductions to Medicare payments to providers of 2% per fiscal year, which went into
effect in April 2013 and, due to subsequent legislative amendments, will remain in effect through 2029 unless
additional Congressional action is taken. In January 2013, the ATRA was enacted, 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. Recently, there has also been heightened governmental scrutiny over the manner in which
manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and
proposed bills designed to, among other things, reform government program reimbursement methodologies. These
new laws may result in additional reductions in Medicare and other healthcare funding, which could have a material
adverse effect on our potential customers and accordingly, our financial operations.

There likely will continue to be legislative and regulatory proposals at the federal and state levels directed at
containing or lowering the cost of health care. We cannot predict the initiatives that may be adopted in the future or
their full impact, particularly in light of the current presidential administration and U.S. Congress. The continuing
efforts of the government, insurance companies, managed care organizations and other payors of healthcare services
to contain or reduce costs of health care may adversely affect:

•

•

•

our ability to set a price we believe is fair for our products;

our ability to generate revenues and achieve or maintain profitability; and

the availability of capital.

Further, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial

protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs for
reexamination, which may impact the costs, timing or successful completion of a clinical trial. In light of widely
publicized events concerning the safety risk of certain drug products, regulatory authorities, members of Congress,
the Governmental Accounting Office, medical professionals and the general public have raised concerns about
potential drug safety issues. These events have resulted in the recall and withdrawal of drug products, revisions to
drug labeling that further limit use of the drug products and establishment of risk management programs that may,
for instance, restrict distribution of drug products or require safety surveillance and/or patient education. The
increased attention to drug safety issues may result in a more cautious approach by the FDA to clinical trials and the
drug approval process. Data from clinical trials may receive greater scrutiny with respect to safety, which may make
the FDA or other regulatory authorities more likely to terminate or suspend clinical trials before completion, or
require longer or additional clinical trials that may result in substantial additional expense and a delay or failure in
obtaining approval or approval for a more limited indication than originally sought.

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Even if we are able to commercialize one or more of our drug candidates, the drugs may become subject to
unfavorable pricing regulations or third party reimbursement practices, which could harm our business.

Successful sales of our drug candidates, if approved, depend on the availability of adequate coverage and

reimbursement from third-party payors. Patients who are provided medical treatment for their conditions generally
rely on third-party payors to reimburse all or part of the costs associated with their treatment. Adequate coverage
and reimbursement from governmental healthcare programs, such as Medicare and Medicaid in the United States,
and commercial payors are critical to new drug acceptance.

Our ability to commercialize any drugs successfully also will depend in part on the extent to which coverage
and reimbursement for these drugs and related treatments will be available from government health administration
authorities, private health insurers and other organizations. The regulations that govern regulatory approvals, pricing
and reimbursement for new therapeutic products vary widely from country to country. Some countries require
approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins
after marketing or licensing approval is granted. In some non-U.S. markets, prescription pharmaceutical pricing
remains subject to continuing governmental control even after initial approval is granted. As a result, we might
obtain regulatory approval for a drug in a particular country, but be subject to price regulations that delay our
commercial launch of the drug and negatively impact the revenues we are able to generate from the sale of the drug
in that country. Adverse pricing limitations may hinder our ability to recover our investment in one or more drug
candidates, even if our drug candidates obtain regulatory approval. Government authorities and third-party payors,
such as private health insurers and health maintenance organizations, decide which medications they will pay for
and establish reimbursement levels. Coverage and reimbursement by a third-party payor may depend upon a number
of factors, including the third-party payor’s determination that use of a drug is:

•

•

•

•

•

a covered benefit under its health plan;

safe, effective and medically necessary;

appropriate for the specific patient;

cost-effective; and

neither experimental nor investigational.

We cannot be sure that reimbursement will be available for any drug that we commercialize and, if coverage
and reimbursement are available, what the level of reimbursement will be. Reimbursement may impact the demand
for, or the price of, any drug for which we obtain regulatory approval. Obtaining reimbursement for our drugs may
be difficult because of the higher prices often associated with branded drugs and drugs administered under the
supervision of a physician. If reimbursement is not available or is available only at limited levels, we may not be
able to successfully commercialize any drug candidate that we successfully develop.

In the United States, no uniform policy of coverage and reimbursement for drugs exists among third-party
payors. As a result, obtaining coverage and reimbursement approval of a drug from a government or other third-
party payor is a time-consuming and costly process that could require us to provide to each payor supporting
scientific, clinical and cost-effectiveness data for the use of our drugs on a payor-by-payor basis, with no assurance
that coverage and adequate reimbursement will be obtained. Even if we obtain coverage for a given drug, the
resulting reimbursement payment rates might not be adequate for us to achieve or sustain profitability or may
require co-payments that patients find unacceptably high. Additionally, third-party payors may not cover, or provide
adequate reimbursement for, long-term follow-up evaluations required following the use of our drugs.

If we obtain approval in one or more non-U.S. jurisdictions for our drug candidates, we will be subject to rules

and regulations in those jurisdictions. In some non-U.S. jurisdictions, the reimbursement of drugs and biologics is
subject to governmental control. In these countries, pricing negotiations with governmental authorities can take
considerable time after obtaining regulatory approval of a drug candidate. In addition, market acceptance and sales
of our drug candidates will depend significantly on the availability of adequate coverage and reimbursement from
third-party payors for our drug candidates and may be affected by existing and future health care reform measures.

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If we fail to comply with healthcare regulations, we could face substantial penalties and our business, operations
and financial condition could be adversely affected. Additionally, any challenge to or investigation into our
practices under these laws could cause adverse publicity and be costly to respond to, and thus could harm our
business.

Certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are

and will be applicable to our business. We could be subject to healthcare fraud and abuse regulation by both the
federal government and the states in which we conduct our business. The regulations that may affect our ability to
operate include, without limitation:

•

•

•

•

•

•

the federal Anti-Kickback Statute, which prohibits, among other things, any person from knowingly and
willfully offering, soliciting, receiving or providing remuneration, directly or indirectly, to induce either
the referral of an individual, for an item or service or the purchasing or ordering of a good or service, for
which payment may be made under federal healthcare programs such as the Medicare and Medicaid
programs. 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. In addition, 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 False Claims Act. Violations of the federal Anti-Kickback
Statute may result in significant civil monetary penalties. Civil penalties for such conduct can further be
assessed under the federal False Claims Act. Violations can also result in criminal penalties, including
significant criminal fines and imprisonment. Similarly, violations can result in exclusion from
participation in government healthcare programs, including Medicare and Medicaid;

the federal False Claims Act, which prohibits, among other things, individuals or entities from knowingly
presenting, or causing to be presented, false claims, or knowingly using false statements, to obtain
payment from the federal government including the Medicare and Medicaid or other federal healthcare
programs. Private individuals can bring False Claims Act “qui tam” actions, on behalf of the government
and such individuals, commonly known as “whistleblowers,” may share in amounts paid by the entity to
the government in fines or settlement. When an entity is determined to have violated the federal civil
False Claims Act, the government may impose significant civil fines and penalties, and exclude the entity
from participation in Medicare, Medicaid and other federal healthcare programs;

federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or
making false statements relating to healthcare matters. Similar to 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 federal Physician Sunshine Act, which requires certain applicable manufacturers of drugs, devices,
biologics and medical supplies for which payment is available under Medicare, Medicaid or the
Children’s Health Insurance Program, or CHIP, to report annually to CMS information related to
payments and other transfers of value to physicians (defined to include doctors, dentists, optometrists,
podiatrists and chiropractors), certain other health care professionals beginning in 2022, and teaching
hospitals, and applicable manufacturers and group purchasing organizations, to report annually ownership
and investment interests held by physicians and their immediate family members. Applicable
manufacturers are required to submit annual reports to CMS. Failure to submit required information may
result in significant civil monetary penalties, for all payments, transfers of value or ownership or
investment interests that are not timely, accurately, and completely reported in an annual submission, and
may result in liability under other federal laws or regulations;

federal consumer protection and unfair competition laws, which broadly regulate marketplace activities
and activities that potentially harm consumers; and

state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which
may apply to items or services reimbursed by any payor, including commercial insurers; state laws that
require pharmaceutical companies to comply with the industry’s voluntary compliance guidelines and the
applicable compliance guidance promulgated by the federal government, or otherwise restrict payments
that may be made to healthcare providers and other potential referral sources; and state 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 pricing information.

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In addition, certain states mandate that we comply with a state code of conduct, adopt a company code of
conduct under state criteria, disclose marketing payments made to physicians and other healthcare providers, and/or
report compliance information to the state authorities. The shifting compliance environment and the need to build
and maintain robust and expandable systems to comply in multiple jurisdictions with different compliance and
reporting requirements increases the possibility that a pharmaceutical company may run afoul of one or more of the
requirements.

If our operations are found to be in violation of any of the laws described above or any other governmental
regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines,
the exclusion from participation in U.S. federal or state health care programs and the curtailment or restructuring of
our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect
our ability to operate our business and our financial results. Any action against us for violation of these laws, even if
we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s
attention from the operation of our business.

Changes in and failures to comply with U.S. and foreign privacy and data protection laws, regulations and
standards may adversely affect our business, operations and financial performance.

We may be subject to U.S. federal and state and foreign health information privacy, security and data breach

notification laws, which may govern the collection, use, disclosure and protection of health-related and other
personal information. In the U.S., HIPAA imposes privacy, security and breach reporting obligations with respect to
individually identifiable health information upon “covered entities” (health plans, health care clearinghouses and
certain health care providers), and their respective business associates, individuals or entities that create, received,
maintain or transmit protected health information in connection with providing a service for or on behalf of a
covered entity. HIPAA mandates the reporting of certain breaches of health information to the United States
Department of Health and Human Services, or HHS, affected individuals and if the breach is large enough, the
media. Entities that are found to be in violation of HIPAA as the result of a breach of unsecured protected health
information, a complaint about privacy practices or an audit by HHS, may be subject to significant civil, criminal
and administrative fines and penalties and/or additional reporting and oversight obligations if required to enter into a
resolution agreement and corrective action plan with HHS to settle allegations of HIPAA non-compliance. Even
when HIPAA does not apply, according to the Federal Trade Commission, or FTC, failing to take appropriate steps
to keep consumers’ personal information secure constitutes unfair acts or practices in or affecting commerce in
violation of Section 5(a) of the Federal Trade Commission Act, 15 U.S.C. § 45(a). The FTC expects a company’s
data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer
information it holds, the size and complexity of its business, and the cost of available tools to improve security and
reduce vulnerabilities. Individually identifiable health information is considered sensitive data that merits stronger
safeguards. The FTC’s guidance for appropriately securing consumers’ personal information is similar to what is
required by the HIPAA Security Rule.

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/or criminal penalties and private litigation. For
example, California recently enacted legislation, the California Consumer Privacy Act, or CCPA, which went into
effect January 1, 2020. The CCPA, among other things, creates new data privacy obligations for covered companies
and provides new privacy rights to California residents, including the right to opt out of certain disclosures of their
information. The CCPA also creates a private right of action with statutory damages for certain data breaches,
thereby potentially increasing risks associated with a data breach. Although the law includes limited exceptions,
including for “protected health information” maintained by a covered entity or business associate, it may regulate or
impact our processing of personal information depending on the context.

In Europe, the European Union General Data Protection Regulation 2016/679, or GDPR, went into effect in

May 2018 and introduces strict requirements for processing the personal data of European Union data subjects.
Companies that must comply with the GDPR face increased compliance obligations and risk, including more robust
regulatory enforcement of data protection requirements. We are also subject to evolving EU laws on data export, as
we may transfer personal data from the EU to other jurisdictions. Following Brexit, we will have to comply with the
GDPR and the UK GDPR, each regime having the ability to fine up to the greater of €20 million/ £17 million or 4%
of global turnover. The relationship between the UK and the EU in relation to certain aspects of data protection law
remains unclear, e.g. how data transfers between EU member states. These changes will lead to additional costs and
increase our overall risk. Achieving and sustaining compliance with applicable federal, state and foreign privacy and
security laws may prove costly.

56

Risks Related to the Securities Markets and an Investment in Our Stock

There may not be a viable market for our common stock or the price of our common stock may be volatile, and
stockholders may not be able to sell their shares at prices that are attractive to them.

There was no public market for our common stock prior to our initial public offering in February 2012, the

trading volume of our common stock on the Nasdaq Global Select Market has been limited and there can be no
assurance that an active and liquid trading market for our common stock will develop or be sustained. We cannot
predict the extent to which investor interest in our company will lead to the development or maintenance of an active
trading market on the Nasdaq Global Select Market or otherwise or how liquid that market might become. If an
active public market does not develop or is not sustained, it may be difficult for stockholders to sell their shares of
common stock at prices that are attractive to them, or at all. Further, an inactive market may also impair our ability
to raise capital by selling shares of our common stock and may impair our ability to enter into strategic partnerships
or acquire companies or drugs, drug candidates or technologies by using our shares of common stock as
consideration.

Stockholders may also be unable to sell their shares of common stock at prices that are attractive to them due

to fluctuations in the market price of our common stock. The market prices for securities of biotechnology and
pharmaceutical companies have historically been highly volatile. Since the commencement of trading in connection
with our initial public offering in February 2012, the publicly traded shares of our common stock have themselves
experienced significant price and volume fluctuations. During the year ended December 31, 2019, the price per
share for our common stock on the Nasdaq Global Select Market ranged from a low sale price of $6.16 to a high sale
price of $39.75. This market volatility is likely to continue. These and other factors could reduce the market price of
our common stock, regardless of our operating performance. In addition, the trading price of our common stock
could change significantly, both over short periods of time and the longer term, due to many factors, including, but
not limited to, those described elsewhere in this “Risk Factors” section and the following:

•

•

•

•

•

•

•

results from, and any delays in, clinical trial programs relating to our drug candidates, including the
ongoing and planned clinical trials for avacopan, CCX140, CCX872, and other drug candidates;

announcements of regulatory approvals or disapprovals of our drug candidates, including avacopan and
CCX140, or delays in any regulatory agency review or approval processes;

failure or discontinuation of any of our research programs;

announcements relating to future collaborations;

general economic conditions in the United States and abroad;

acquisitions and sales of new products, technologies or business;

delays in the commercialization of any of our drug candidates;

• market conditions in the pharmaceutical, biopharmaceutical and biotechnology sectors;

•

•

•

•

the issuance of new or changed securities analysts’ reports or recommendations regarding us, our
competitors or our industry in general;

actual and anticipated fluctuations in our quarterly operating results;

disputes concerning our intellectual property or other proprietary rights;

introduction of technological innovations or new products by us or our competitors;

• manufacturing issues related to our drug candidates for clinical trials or future products for

commercialization;

• market acceptance of our future products;

•

•

•

deviations in our operating results from the estimates of analysts, or other analyst comments;

third-party payor coverage and reimbursement policies;

new legislation in the United States relating to the sale or pricing of pharmaceuticals;

57

•

•

•

•

•

•

•

FDA, EMA or other U.S. or foreign regulatory actions affecting us or our industry;

product liability claims or other litigation or public concern about the safety of our drug candidates or
future drugs;

our ability to obtain necessary intellectual property licenses;

the outcome of any future legal actions to which we are party;

sales of our common stock by our officers, directors or significant stockholders;

additions or departures of key personnel; and

other external factors, including natural disasters and other crises.

In addition, the stock markets in general, and the markets for pharmaceutical, biopharmaceutical and
biotechnology stocks in particular, have experienced extreme volatility that have been often unrelated to the
operating performance of the issuer. These broad market fluctuations may adversely affect the trading price or
liquidity of our common stock. In the past, when the market price of a stock has been volatile, holders of that stock
have sometimes instituted securities class action litigation against the issuer. If any of our stockholders were to bring
such a lawsuit against us, we could incur substantial costs defending the lawsuit and the attention of our
management would be diverted from the operation of our business.

The ownership of our common stock is highly concentrated, and these stockholders could delay or prevent a
change of control.

As of December 31, 2019, our officers and directors, together with holders of 5% or more of our outstanding

common stock and their respective affiliates, beneficially owned approximately 64% of our outstanding common
stock. Accordingly, these stockholders, acting as a group, have significant influence over the outcome of corporate
actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or
substantially all of our assets or any other significant corporate transaction. The interests of these stockholders may
not be the same as or may even conflict with the interests of our other stockholders. For example, these stockholders
could delay or prevent a change of control of our company, even if such a change of control would benefit our other
stockholders, which could deprive our stockholders of an opportunity to receive a premium for their common stock
as part of a sale of our company or our assets and might affect the prevailing market price of our common stock. The
significant concentration of stock ownership may adversely affect the trading price of our common stock due to
investors’ perception that conflicts of interest may exist or arise.

Future sales of our common stock or securities convertible or exchangeable for our common stock may depress
our stock price.

Persons who were our stockholders prior to the sale of shares in our initial public offering continue to hold a

substantial number of shares of our common stock that they are able to sell in the public market, subject in some
cases to certain legal restrictions. If our stockholders or holders of our options or warrants sell, or indicate an
intention to sell, substantial amounts of our common stock in the public market, the trading price of our common
stock could decline. The perception in the market that these sales may occur could also cause the trading price of our
common stock to decline. As of December 31, 2019, we had 60,234,784 shares of common stock outstanding. Of
these shares, approximately 37,800,624 are freely tradeable, without restriction, in the public market. In addition,
approximately 19,311,612 of the outstanding shares of common stock are eligible for sale in the public market,
subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act,
with respect to shares held by directors, executive officers and other affiliates. In addition, shares of common stock
that are either subject to outstanding options or reserved for future issuance under our employee benefit plans are
eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules and Rule
144 and Rule 701 under the Securities Act and, in any event, we have filed a registration statement permitting shares
of common stock issued on exercise of options to be freely sold in the public market. If additional shares of common
stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock
could decline.

58

Certain of our directors and executive officers have established, programmed selling plans under Rule 10b5-1

of the Exchange Act, for the purpose of effecting sales of our common stock. Any sales of securities by these
stockholders, or the perception that those sales may occur, including the entry into such programmed selling plans,
could have a material adverse effect on the trading price of our common stock.

If we sell shares of our common stock in future financings, common stockholders may experience immediate
dilution and, as a result, our stock price may decline.

We may from time to time issue additional shares of common stock at a discount from the current trading

price of our common stock. As a result, our common stockholders would experience immediate dilution upon the
purchase of any shares of our common stock sold at such discount. In addition, as opportunities present themselves,
we may enter into financing or similar arrangements in the future, including the issuance of debt securities, preferred
stock or common stock. For example, pursuant to our collaboration and license agreement with Vifor in May 2016
for the commercialization of avacopan, we entered into a stock purchase agreement with Vifor for the purchase of
3,333,333 unregistered shares of our common stock at a price of $7.50 per share. In 2019, we sold 6,491,196 shares
of our common stock pursuant to an equity distribution agreement for net proceeds of $73.3 million. If we issue
common stock or securities convertible into common stock, our common stockholders would experience additional
dilution and, as a result, our stock price may decline.

Our quarterly operating results may fluctuate significantly or may fall below the expectations of investors or
securities analysts, each of which may cause our stock price to fluctuate or decline.

We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results

will be affected by numerous factors, including:

•

•

•

•

•

•

•

variations in the level of expenses related to our drug candidates or future development programs;

if any of our drug candidates receives regulatory approval, the level of underlying demand for these drug
candidates and wholesalers’ buying patterns;

addition or termination of clinical trials or funding support;

our execution of any collaborative, licensing or similar arrangements, and the timing of payments we may
make or receive under such arrangements, or the termination of such arrangements;

any intellectual property infringement lawsuit in which we may become involved;

regulatory developments affecting our drug candidates or those of our competitors; and

our ability to secure new government contracts and allocation of our resources to or away from
performing work under government contracts.

If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our

common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in
turn, cause the price of our stock to fluctuate substantially. We believe that quarterly comparisons of our financial
results are not necessarily meaningful and should not be relied upon as an indication of our future performance.

We have broad discretion in the use of our cash and may not use it effectively.

Our management has broad discretion over the use of our cash. Because of the number and variability of
factors that will determine our use of cash, stockholders may not agree with how we allocate or spend our cash. We
may pursue collaborations or clinical trials that do not result in an increase in the market value of our common stock
and that may increase our losses, or we may place our cash in investments that do not produce significant investment
returns or that may lose value. Our failure to allocate and spend our cash effectively would have a material adverse
effect on our financial condition and business and could cause our stock price to decline.

59

Provisions of our charter documents or Delaware law could delay or prevent an acquisition of our company, even
if the acquisition would be beneficial to our stockholders, and could make it more difficult for our stockholders to
change management.

Provisions of our amended and restated certificate of incorporation and amended and restated bylaws may

discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider
favorable, including transactions in which stockholders might otherwise receive a premium for their shares. In
addition, these provisions may frustrate or prevent any attempt by our stockholders to replace or remove our current
management by making it more difficult to replace or remove our board of directors. These provisions include:

•

•

•

•

•

•

a classified board of directors so that not all directors are elected at one time;

a prohibition on stockholder action through written consent;

a requirement that special meetings of stockholders be called only by the chairman of the board of
directors, the chief executive officer, the president or by the board of directors;

an advance notice requirement for stockholder proposals and nominations;

the authority of our board of directors to issue preferred stock with such terms as our board of directors
may determine; and

a requirement of approval of not less than 66 2/3% of all outstanding shares of our capital stock entitled to
vote to amend any bylaws by stockholder action, or to amend specific provisions of our certificate of
incorporation.

In addition, Delaware law prohibits a publicly held Delaware corporation from engaging in a business
combination with an interested stockholder, generally a person who, together with its affiliates, owns or within the
last three years has owned 15% of our voting stock, for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business combination is approved in a prescribed
manner. Accordingly, Delaware law may discourage, delay or prevent a change in control of our company.

Our employment agreements with certain of our executive officers may require us to pay severance benefits to
any of those persons who are terminated in connection with a change of control of us, which could harm our
financial condition or results.

Certain of our executive officers are parties to employment agreements providing for aggregate cash payments

of up to approximately $4.8 million for severance and other benefits and acceleration of vesting of stock awards
with an intrinsic value of $45.2 million as of December 31, 2019 in the event of a termination of employment in
connection with a change of control of us. The accelerated vesting of options could result in dilution to our
stockholders and harm the market price of our common stock. The payment of these severance benefits could harm
our financial condition and results. In addition, these potential severance payments may discourage or prevent third
parties from seeking a business combination with us.

We do not anticipate paying any cash dividends on our capital stock in the foreseeable future, therefore capital
appreciation, if any, of our common stock will be our stockholders’ sole source of gain for the foreseeable future.

We have never declared or paid cash dividends on our capital stock. We do not anticipate paying any cash

dividends on our capital stock in the foreseeable future. In addition, our ability to pay dividends is currently
restricted by the terms of our credit facility with Hercules. We currently intend to retain all available funds and any
future earnings to fund the development and growth of our business. Further, any future debt financing arrangement
may contain additional terms prohibiting or limiting the amount of dividends that may be declared or paid on our
common stock. As a result, capital appreciation, if any, of our common stock will be our stockholders’ sole source
of gain for the foreseeable future.

60

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. As of January 2020, we had research coverage by six securities
analysts. In the event one or more of the analysts who covers us downgrades our stock or publishes inaccurate or
unfavorable research about our business, our stock price would likely decline. In addition, if our operating results
fail to meet the forecast of analysts, our stock price would likely decline. If one or more of these analysts cease
coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which
might cause our stock price and trading volume to decline.

The United Kingdom’s withdrawal from the European Union may have a negative effect on global economic
conditions, financial markets and our business.

On January 31, 2020, the United Kingdom withdrew from the European Union, following its referendum in

June 2016. The terms of the United Kingdom’s withdrawal from the EU provide for a transitional period until
December 31, 2020, during which the status quo is maintained and the UK government will attempt to negotiate the
terms of its future relationship with the EU. Nevertheless, the withdrawal has created significant uncertainty about
the future relationship between the United Kingdom and the EU, including with respect to the laws and regulations
that will apply as the United Kingdom determines which EU laws to replace or replicate. The withdrawal has also
given rise to calls for the governments of other EU member states to consider withdrawal. These developments, or
the perception that any of them could occur, have had and may continue to have a material adverse effect on global
economic conditions and the stability of global financial markets, and may significantly reduce global market
liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these
factors could depress economic activity and restrict our access to capital, which could have a material adverse effect
on our business, financial condition and results of operations and reduce the price of our common stock.

Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

Our corporate headquarters are located in Mountain View, California, where we lease 35,755 square feet of
office and laboratory space. In May 2019, we entered into a third amendment to the lease agreement for the same
facility to extend the term of the lease through April 2021. We believe that our existing facilities are adequate for
our current needs, as the facility has sufficient laboratory space to house additional scientists to be hired as we
expand.

In July 2019, we entered into a ten-year operating lease for a 96,463 square foot facility in San Carlos,
California to replace our current headquarters located in Mountain View, California. Subject to landlord consent, we
have the right to sublease the facility. After the initial lease term, we also have the option to extend the lease for five
years.

Item 3. Legal Proceedings.

We are not currently a party to any legal proceedings.

Item 4. Mine Safety Disclosures.

Not Applicable.

61

PART II

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

Market Information

Our common stock is traded on the Nasdaq Global Select Market under the symbol “CCXI.”

Holders of Common Stock

As of February 28, 2020, there were approximately 36 holders of record of our common stock. Certain shares
are held in “street” name and accordingly, the number of beneficial owners of such shares is not known or included
in the foregoing number.

Dividend Policy

We have never declared or paid cash dividends on our capital stock. We intend to retain all available funds
and any future earnings, if any, to fund the development and expansion of our business and we do not anticipate
paying any cash dividends in the foreseeable future. Any future determination related to dividend policy will be
made at the discretion of our board of directors. In addition, our ability to pay dividends is currently restricted by the
terms of our credit facility with Hercules.

Equity Compensation Plan Information

The following table summarizes securities available under our equity compensation plans as of December 31,

2019:

Plan Category

Equity compensation plans approved by

security holders: (1)

Equity compensation plans not approved by

security holders:

Total

Shares Issuable
Upon Exercise
of Outstanding
Options,
Warrants
and Rights(2)

Weighted-
Average
Exercise Price of
Outstanding
Options,
Warrants
and Rights(3)

Number of
Securities
Available for
Future
Issuance(4)

9,656,828 $

—

9,656,828 $

9.44

—
9.44

2,815,443

—
2,815,443

(1) Consists of our Amended and Restated 1997 Stock Option/Stock Issuance Plan, our Amended and Restated

2002 Equity Incentive Plan and our 2012 Equity Incentive Award Plan, our Non-Employee Director
Compensation Policy and our Employee Stock Purchase Plan, or ESPP.

(2) Includes 9,287,901 shares subject to outstanding stock options and 368,927 shares subject to outstanding

restricted stock units as of December 31, 2019.

(3) Calculated exclusive of outstanding restricted stock unit awards.
(4) Of these shares, 2,192,545 shares were available for stock option awards, restricted stock units and restricted

stock awards, and 622,898 were available for the ESPP, in each case as of December 31, 2019.

62

Performance Graph

The information contained in this Performance Graph section shall not be deemed “soliciting material” or to
be “filed” with the SEC, for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated
by reference into any filing of ChemoCentryx, Inc. under the Securities Act of 1933, as amended, or the Exchange Act.

The following graph shows a comparison from December 31, 2014 (the date our common stock commenced

trading on the Nasdaq Global Select Market) through December 31, 2019 of cumulative total return for our common
stock, the Nasdaq Composite Index and the Nasdaq Biotechnology Index. Such returns are based on historical
results and are not intended to suggest future performance. Data for the Nasdaq Composite Index and the Nasdaq
Biotechnology Index assume reinvestment of dividends.

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

$700

$600

$500

$400

$300

$200

$100

$0

12/14

12/15

12/16

12/17

12/18

12/19

ChemoCentryx Inc.

Nasdaq Composite

Nasdaq Biotechnology

*$100 invested on 12/31/14 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.

ChemoCentryx Inc.
Nasdaq Composite
Nasdaq Biotechnology

12/14
100.00
100.00
100.00

12/15
118.59
106.96
111.77

12/16
108.35
116.45
87.91

12/17
87.12
150.96
106.92

12/18
159.74
146.67
97.45

12/19
579.06
200.49
121.92

63

Item 6. Selected Financial Data.

The following selected financial data have been derived from our audited financial statements. The
information set forth below is not necessarily indicative of future results and should be read in conjunction with
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8.
Financial Statements and Supplementary Data” included elsewhere in this Annual Report on Form 10-K.

2019

Consolidated Statements of Operations

Data:
Revenue:

Collaboration and license revenue from

Year Ended December 31,
2017
(in thousands, except share and per share data)

2016

2018

2015

related party
Grant revenue

Total revenue
Operating expenses:

Research and development
General and administrative
Total operating expenses
(Loss) income from operations
Interest income
Interest expense
Net (loss) income

Net (loss) income per share, basic (1)
Net (loss) income per share, diluted (1)
Shares used to compute net (loss) income

$

$

$
$

35,952 $
176
36,128

42,875 $
—
42,875

70,276
24,155
94,431
(58,303)
4,963
(2,149)
(55,489) $

62,736
20,409
83,145
(40,270)
3,528
(1,224)
(37,966) $

82,497 $
—
82,497

49,495
16,509
66,004
16,493
1,370
(4)

17,859 $

11,435 $
500
11,935

37,945
14,710
52,655
(40,720)
757
—
(39,963) $

—
—
—

33,183
14,506
47,689
(47,689)
384
—
(47,305)

(0.98) $
(0.98) $

(0.76) $
(0.76) $

0.37 $
0.36 $

(0.86) $
(0.86) $

(1.08)
(1.08)

per share, basic

56,898,478

49,814,162

48,412,531

46,431,501

43,889,677

Shares used to compute net (loss) income

per share, diluted

56,898,478

49,814,162

49,615,406

46,431,501

43,889,677

(1) See Note 2 within the notes to our audited consolidated financial statements appearing elsewhere in this Annual
Report on Form 10-K for a description of the method used to compute basic and diluted net (loss) income per
share.

2019

2018

As of December 31,
2017
(in thousands)

2016

2015

Consolidated Balance Sheets Data:
Cash, cash equivalents, restricted cash and

investments(2)

Accounts receivable from related party
Working capital
Total assets
Long-term debt, net
Accumulated deficit
Total stockholders’ equity

$ 203,320 $ 176,984 $ 135,220 $ 123,761 $ 76,289
—
66,541
78,155
—
(267,096)
72,507

2,058
116,988
183,310
19,689
(374,497)
14,738

30,205
110,356
155,872
—
(307,059)
49,889

51,090
146,893
189,328
4,676
(289,200)
79,267

—
115,282
209,083
19,786
(429,986)
66,000

(2) As of December 31, 2019, amount included restricted cash of $1.1 million which was held as collateral for

stand-by letters of credit issued to our landlord in connection with the lease of our new facility in San Carlos,
California. See “Note 8. Commitments” within the notes to our audited consolidated financial statements
appearing elsewhere in this Annual Report on Form 10-K for additional information of this lease.

64

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

You should read the following discussion and analysis of financial condition and results of operations
together with “Item 6. Selected Financial Data” and our financial statements and related notes included elsewhere
in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form 10-K contain
forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives,
expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking
statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed
in “Item 1A. Risk Factors” of this Annual Report on Form 10-K.

Overview

ChemoCentryx is a biopharmaceutical company focused on the development and commercialization of new

medications targeted at inflammatory disorders, autoimmune diseases and cancer. Each of our drug candidates is
designed to selectively block a specific chemoattractant receptor, leaving the rest of the immune system intact. Our
drug candidates are small molecules, which are orally administered, and, if approved, could address unmet medical
needs, including improved efficacy, and offer significant quality of life benefits, since patients swallow a capsule or
pill instead of having to visit a clinic for an infusion or undergo an injection.

In November 2019, we announced positive topline data from the pivotal Phase III ADVOCATE trial of
avacopan, our lead drug candidate that is an orally-administered selective complement 5a receptor inhibitor, for the
treatment of patients with anti-neutrophil cytoplasmic antibody-associated vasculitis, or ANCA vasculitis. The
ADVOCATE trial compared avacopan with the currently used glucocorticoid (most commonly prednisone) active
comparator containing standard of care, or SOC. Subjects in both study arms received background therapy with
rituximab or cyclophosphamide. The trial met both of its primary endpoints, showing that avacopan therapy without
the need for daily prednisone could achieve disease remission at 26 weeks and sustained remission at 52 weeks, as
assessed by the Birmingham Vasculitis Activity Score, or BVAS. BVAS remission at week 26 in the avacopan
treated subjects was numerically superior and statistically non-inferior to the prednisone active comparator SOC
control group, where BVAS remission was achieved in 72.3% of the avacopan treated subjects vs. 70.1% of subjects
in the prednisone active comparator SOC control group (p<0.0001 for non-inferiority). Sustained remission at 52
weeks was observed in 65.7% of the avacopan treated subjects vs. 54.9% in the prednisone active comparator SOC
control group, achieving both non-inferiority and superiority to prednisone active comparator SOC (p=0.0066 for
superiority of avacopan). Reduction in overall burden of disease management and improvement in quality of life
was also demonstrated through key secondary endpoints, including improved kidney function and reduction of
adverse events and illnesses associated with steroids, such as prednisone.

We plan to file a New Drug Application, or NDA, with the U.S. Food and Drug Administration, or FDA, in

mid-2020 and, if the NDA is approved, to commercialize avacopan in the United States on our own and
internationally through our kidney health alliance with Vifor Fresenius Medical Care Renal Pharma Ltd. and its
affiliates and sublicensees, or collectively, Vifor. We are also developing avacopan in other indications, including
complement 3 glomerulopathy, or C3G, and hidradenitis suppurativa, or HS.

Our next most advanced drug candidate is CCX140, an orally-administered inhibitor of the C-C chemokine

receptor known as CCR2. CCX140 is being developed for focal segmental glomerulosclerosis, or FSGS, a rare renal
disease characterized by progressive proteinuria (excess protein in the urine) and impaired renal function. We have
two ongoing Phase II clinical trials to evaluate CCX140 for the treatment of primary or genetic FSGS, the LUMINA
trials, with the LUMINA-1 trial for patients with sub-nephrotic proteinuria, and the LUMINA-2 trial for patients
with nephrotic syndrome, for which there are currently no FDA-approved treatments. We expect to report topline
data from the LUMINA-1 trial in the second quarter of 2020 and the LUMINA-2 trial in the second half of 2020.

65

Avacopan (CCX168) - Inhibition of Complement-Mediated Pathways in Orphan Diseases

Avacopan (formerly CCX168) is our lead drug candidate. It is a potential first-in-class, orally-administered

molecule that employs a novel, highly targeted mode of action in the treatment of ANCA vasculitis and other
complement-driven autoimmune and inflammatory diseases. ANCA vasculitis is an orphan, severe, and often fatal
autoimmune disease that is characterized by elevated levels of autoantibodies called anti-neutrophil cytoplasmic
autoantibodies and by inflammation that can affect many different organ systems, and commonly involves the
kidneys. ANCA vasculitis affects approximately 40,000 to 75,000 people in the United States, with approximately
4,000 new cases each year; similarly, ANCA vasculitis affects approximately 50,000 to 100,000 people in Europe,
with approximately 5,000 new cases each year.

We have successfully completed and reported positive topline clinical data from our pivotal Phase III clinical

trial of avacopan for the treatment of ANCA vasculitis, known as the ADVOCATE trial. ADVOCATE was a
randomized, double-blind, active-controlled worldwide clinical trial which enrolled 331 patients with newly
diagnosed or relapsing ANCA vasculitis at over 200 sites in the United States, Canada, Europe, Australia, New
Zealand and Japan. The aim of the trial was to assess the safety and efficacy of avacopan in inducing and sustaining
remission in patients with ANCA vasculitis.

Avacopan has been granted orphan drug designation by the FDA for the treatment of ANCA vasculitis and by

the European Medicines Agency, or EMA, for the treatment of microscopic polyangiitis and granulomatosis with
polyangiitis, both forms of ANCA vasculitis. Based on the success of the avacopan clinical studies in ANCA
vasculitis, we plan to file an NDA with the FDA in mid-2020 and will support our alliance partner, Vifor, with their
filing of applications for regulatory approval internationally.

We plan on building a commercial infrastructure and deploying an appropriately sized specialty field force in

the United States to commercialize avacopan in ANCA vasculitis. We expect that our future field force will focus
primarily on a subset of rheumatologists and nephrologists who treat this disease. In territories outside of the United
States, our partner Vifor would be responsible for the commercialization of avacopan.

Additionally, we launched a registration-supporting clinical trial, the ACCOLADE trial, to study avacopan for

the treatment of patients with C3G. C3G disease is an ultra-rare disease of the kidney that is characterized by
deposition of the complement fragment known as C3 in the glomeruli, or filtration units of the kidney, leading to
inflammatory cell accumulation, potentially leading to significant kidney damage and eventual renal failure. The
prevalence of C3G is estimated at two to three per million people or approximately 800 patients in the United States
and approximately 2,000 in Europe. We expect to report topline data from the ACCOLADE trial in the second half
of 2020.

We also initiated a large placebo-controlled Phase IIb clinical trial, the AURORA trial, for the treatment of

patients with moderate-to-severe HS. HS is a chronic, inflammatory, debilitating skin disease characterized by
recurrent, painful, nodules and abscesses, ultimately leading to the formation of draining fistulas (also known as
sinus tracts) as well as scarring. The disease originates from inflammation and occlusion of the hair follicle. Apart
from pain, the nodules may rupture, and often extrude a purulent, foul-smelling discharge leading to substantial
social embarrassment for these patients. Due to its chronic nature and frequently occurring relapses of the skin
lesions, HS has a great impact on the patient’s quality of life, deeply affecting social, working, and psychological
aspects. In the United States, the estimated prevalence of moderate-to-severe HS is up to 200,000 patients. In
Europe, the number of affected patients is believed to be greater, with higher prevalence. We expect to report topline
data from AURORA trial in the third quarter of 2020.

CCX140 - Chronic and Orphan Kidney Diseases

Our second drug candidate in the orphan disease space is CCX140, an inhibitor of the chemokine receptor

known as CCR2. CCX140 is an orally-administered small molecule that is highly potent and selective inhibitor of
the chemokine receptor known as CCR2. CCX140 has been granted orphan drug designation by the FDA for the
treatment of focal segmental glomerulosclerosis, or FSGS. FSGS is a histologic lesion that is associated with the
clinical presentation, in children or adults, of proteinuria, nephrotic syndrome and progressive renal insufficiency.
We have two ongoing Phase II clinical trials to evaluate the use of CCX140 for the treatment of primary or genetic
FSGS that are known as the LUMINA trials, with the LUMINA-1 trial for patients with sub-nephrotic range
proteinuria and the LUMINA-2 trial for patients with nephrotic syndrome, for which there are currently no FDA-
approved treatments. Patient enrollment of LUMINA-1 was completed in August 2019, and we expect to report
topline data in the first half of 2020.

66

Kidney Health Alliance with Vifor

In May 2016, we announced a partnership, which we refer to as the Avacopan Agreement, with Vifor. While

under this agreement we retained all rights to the United States and China, we granted Vifor exclusive
commercialization rights to avacopan in Europe and certain other international markets. In December 2016, we
entered into an additional agreement with Vifor, which we refer to as the CCX140 Agreement, relating to CCX140,
our other late stage drug candidate. Under the CCX140 Agreement, we again retained all rights to the United States
and China and we granted Vifor exclusive worldwide commercialization rights outside of the United States and
China. In February 2017, we announced a further agreement with Vifor that harmonized the geographic
commercialization rights underlying the agreements for both drug candidates, which we refer to as the Avacopan
Amendment. In June 2018, we entered into additional agreements with Vifor to further expand Vifor’s exclusive
commercialization rights to include China under the Avacopan Agreement (the Avacopan Letter Agreement) and the
CCX140 Agreement (the CCX140 Letter Agreement).

We have secured $215 million in upfront cash and milestone payments pursuant to our agreements with Vifor

and are eligible for additional substantial milestone payments. Through our alliance, we maintain the
commercialization rights to avacopan and CCX140 in the United States, and also retain control of the clinical
development programs for orphan renal disease. Vifor gained the exclusive commercialization rights for all other
international markets, and is obligated to pay us tiered royalties, with rates ranging from ten to the mid-twenties, on
potential net sales.

At a future time defined in the CCX140 Agreement, Vifor has an option to solely develop and commercialize

CCX140 in more prevalent forms of chronic kidney disease, or CKD. Should Vifor later exercise the CKD
option, we would receive co-promotion rights for CKD in the United States, and we estimate that the clinical
development and registration process for CKD would end at approximately the same time as Orphan Drug
exclusivity.

Early Stage Drug Candidates

While we have focused initially on kidney and dermatological diseases, our target-specific and selective
approach designed to stop the spread of inflammatory disease-inducing cells shows promise in other disease areas.
Over time we plan to bring forward drug candidates to treat a range of inflammatory and autoimmune disorders, as
well as cancer, where our drug candidate CCX872 has shown promise in a Phase Ib trial for advanced pancreatic
cancer. We expect that our ability to do so will grow as we increase our scale and to the extent that we start to earn
revenues and royalties from the commercialization of our late stage kidney disease franchise.

We have incurred significant losses since commencing our operations in 1997. We have funded our operations

primarily through the sale of convertible preferred and common stock, contract revenue under our collaborations,
government contracts and grants and borrowings under loan and equipment financing arrangements.

As of December 31, 2019, we had an accumulated deficit of $430.0 million. We expect to continue to incur

net losses as we develop our drug candidates, expand clinical trials for our drug candidates currently in clinical
development, expand our research and development activities, expand our systems and facilities, seek regulatory
approvals and engage in commercialization preparation activities in anticipation of FDA approval of our drug
candidates. In addition, if a product is approved for commercialization, we will need to expand our organization.
Significant capital is required to launch a product and many expenses are incurred before revenues are received. We
are unable to predict the extent of any future losses or when we will become profitable, if at all.

Critical Accounting Policies and Significant Judgments and Estimates

The preparation of our consolidated financial statements requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date
of our financial statements as well as the reported revenues and expenses during the reported periods. We base our
estimates on historical experience and on various other factors that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying value of assets and
liabilities that are not apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions.

67

While our significant accounting policies are described in the Notes to our consolidated financial statements

appearing elsewhere in this Annual Report on Form 10-K, we believe that the following critical accounting policies
relating to revenue recognition, clinical trial expenses and stock-based compensation are most important to
understanding and evaluating our reported financial results.

Revenue Recognition

Effective January 1, 2018, we adopted Accounting Standards Codification, or ASC, Topic 606, Revenue from
Contracts with Customers, or ASC 606, using the modified retrospective transition method. This standard applies to
all contracts with customers, except for contracts that are within the scope of other standards, such as leases,
insurance, collaboration arrangements and financial instruments. Under ASC 606, we recognize revenue when our
customer obtains control of promised goods or services, in an amount that reflects the consideration which we
expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that
we determine are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with
a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv)
allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as)
we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will
collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At
contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or
services promised within each contract and determine those that are performance obligations and assess whether
each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is
allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

We enter into corporate collaborations under which we may obtain upfront license fees, research and

development funding and development and regulatory and commercial milestone payments and royalty
payments. Our performance obligations under these arrangements may include licenses of intellectual property,
distribution rights, research and development services, delivery of manufactured product, and/or participation on
joint steering committees.

Licenses of intellectual property: If the license to our intellectual property is determined to be distinct from

the other performance obligations identified in the arrangement, we recognize revenue from upfront license fees
allocated to the license when the license is transferred to the customer and the customer is able to use and benefit
from the license. For licenses that are bundled with other promises, we utilize judgement to assess the nature of the
combined performance obligation to determine whether the combined performance obligation is satisfied over time
or at a point in time and, if over time, the appropriate method of measuring proportional performance for purposes of
recognizing revenue from non-refundable, up-front fees. We evaluate the measure of proportional performance each
reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

Milestone payments: At the inception of each arrangement that includes development, regulatory or

commercial milestone payments, we evaluate whether the milestones are considered probable of being reached and
estimate the amount to be included in the transaction price. ASC 606 suggests two alternatives to use when
estimating the amount of variable consideration: the expected value method and the most likely amount method.
Under the expected value method, an entity considers the sum of probability-weighted amounts in a range of
possible consideration amounts. Under the most likely amount method, an entity considers the single most likely
amount in a range of possible consideration amounts. Whichever method is used, it should be consistently applied
throughout the life of the contract; however, it is not necessary for us to use the same approach for all contracts. We
expect to use the most likely amount method for development and regulatory milestone payments. If it is probable
that a significant revenue reversal would not occur, the associated milestone value is included in the transaction
price. Milestone payments that are not within our or the licensee’s control, such as regulatory approvals, are not
considered probable of being achieved until those approvals are received. The transaction price is then allocated to
each performance obligation on a relative stand-alone selling price basis. We recognize revenue as or when the
performance obligations under the contract are satisfied. At the end of each subsequent reporting period, we re-
evaluate the probability of achievement of each such milestone and any related constraint, and if necessary, adjust
our estimates of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis,
which would affect revenues and earnings in the period of adjustment.

68

Commercial milestones and royalties: For arrangements that include sales-based royalties, including
milestone payments based on the level of sales, and in which the license is deemed to be the predominant item to
which the royalties relate, we recognize revenue when the related sales occur. To date, we have not recognized any
royalty revenue resulting from our collaboration arrangements.

Up-front payments and fees are recorded as deferred revenue upon receipt or when due, and may require

deferral of revenue recognition to a future period until we perform our obligations under these arrangements.
Amounts payable to us are recorded as accounts receivable when our right to consideration is unconditional.

Clinical Trial Accruals and Related Expenses

We accrue and recognize expenses for clinical trial activities performed by third parties, including clinical

research organizations, or CROs, and clinical investigators, based upon estimates made as of the reporting date of
the work completed over the life of the individual trial in accordance with agreements established with CROs and
clinical trial sites. Some CROs invoice us on a monthly basis, while others invoice upon milestones achieved and the
expense is recorded as services are rendered. We determine the estimates of clinical activities incurred at the end of
each reporting period through discussion with internal personnel and outside service providers as to the progress or
stage of completion of trials or services, as of the end of each reporting period, pursuant to contracts with numerous
clinical trial centers and CROs and the agreed upon fee to be paid for such services. The significant factors
considered in estimating accruals include the number of patients enrolled and the percentage of work completed to
date. Costs of setting up clinical trial sites for participation in the trials that are paid for in advance are expensed
over the estimated set-up period. While the set-up periods vary from one arrangement to another, such set-up periods
generally take from two to six months. Such set-up activities include clinical site identification, local ethics
committee submissions, regulatory submissions, clinical investigator kick-off meetings and pre-study site visits.
Clinical trial site costs related to patient enrollments are accrued as patients are entered into the trial. Due to the
nature of estimates, we cannot assure you that we will not make changes to our estimates in the future as we become
aware of additional information about the status or conduct of our clinical trials.

Stock-Based Compensation

Stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is
recognized as an expense over the employee’s requisite service period on a straight line basis. The fair value of the
stock options is estimated using the Black-Scholes valuation model. We recorded non-cash stock-based
compensation expense of $11.6 million, $10.8 million and $8.7 million for the years ended December 31, 2019,
2018 and 2017, respectively. At December 31, 2019 and 2018, we had $18.4 million and $15.0 million, respectively,
of total unrecognized stock-based compensation expense, net of estimated forfeitures, related to employee stock
options that will be recognized over a weighted-average period of 2.5 years for both years. We expect to continue to
grant stock options in the future, and to the extent that we do, our actual stock-based compensation expense
recognized in future periods will likely increase. Determining an estimate of the fair value of equity awards using
the Black-Scholes valuation model requires that use of subjective assumptions related to expected stock price
volatility, term, risk-free interest rate and dividend yield.

69

Results of Operations

Revenue

We have not generated any revenue from product sales. For the years ended December 31, 2019, 2018 and
2017, our revenues were derived from collaboration and license revenue related to the Avacopan Agreement and
CCX140 Agreement, in each case, as amended, and the related letter agreements. For the year ended December 31,
2019, we also have grant revenue derived from the FDA Orphan Products Development grant to support the clinical
development of avacopan for the treatment of patients with C3G.

Total revenues were as follows (in thousands):

Year Ended December 31,
2018

2017

2019

Collaboration and license revenue from

related party
Grant revenue

Total revenue
Dollar decrease
Percentage decrease

$

$
$

$

42,875
35,952
—
176
36,128
42,875
$
(6,747) $ (39,622)
-48%

-16%

$

$

82,497
—
82,497

On January 1, 2018, we adopted ASC 606 under the modified retrospective transition method and recognized
the cumulative effect of initially applying the new revenue standard of $47.3 million as an adjustment to the opening
balance of accumulated deficit and an increase in deferred revenue. Revenue recognized prior to January 1, 2018 has
not been restated and continues to be reported under the accounting standards in effect for 2017.

We use a cost-based input method to measure proportional performance and to calculate the corresponding

amount of revenue to recognize. In applying the cost-based input method of revenue recognition, we measure actual
costs incurred relative to budgeted costs to fulfill the combined performance obligation. These costs consist
primarily of third-party contract costs. Revenue is recognized based on actual costs incurred as a percentage of total
budgeted costs as we complete our performance obligations. The decrease in revenue from 2018 to 2019 was
primarily due to the full enrollment of the avacopan ADVOCATE Phase III pivotal trial in 2018. Revenue in 2019
also included $176,000 of grant revenue from the FDA to support the clinical development of avacopan in patients
with C3G.

Before the adoption of ASC 606, we recognized upfront fees on a straight-line basis under ASC 605 over the

estimated performance period and recognized milestones when earned under the milestone method of accounting. In
2017, revenue recognized represents amortization of the upfront license fee commitments from Vifor pursuant to the
Avacopan Agreement and CCX140 Agreement, in each case, as amended. Revenue in 2017 was comprised of: (i) a
milestone payment related to the Avacopan Agreement; (ii) amortization of the upfront license fee commitments
from Vifor pursuant to the Avacopan Agreement, Avacopan Amendment and CCX140 Agreement, as well as (iii)
collaboration revenue for development services under the CCX140 Agreement in 2017.

Research and development expenses

Research and development expenses represent costs incurred to conduct basic research, discovery and

development of novel small molecule therapeutics, development of our suite of proprietary drug discovery
technologies, preclinical studies and clinical trials of our drug candidates. We recognize all research and
development expenses as they are incurred. These expenses consist primarily of salaries and related benefits,
including stock-based compensation, third-party contract costs relating to research, formulation, manufacturing,
preclinical study and clinical trial activities, laboratory consumables, and allocated facility costs. Total research and
development expenses, as compared to the prior years, were as follows (in thousands):

Year Ended December 31,
2018
62,736
13,241

2019
70,276
7,540

$
$

$

12%

27%

2017
49,495

Research and development expenses

Dollar increase
Percentage increase

$
$

70

The increase in research and development expenses from 2018 to 2019 was primarily attributable to (i) an

increase in Phase II clinical study expense driven by patient enrollment of the avacopan AURORA trial in patients
with HS and the two CCX140 LUMINA trials in patients with FSGS, and (ii) an increase in Phase I clinical study
expense due to the initiation of the avacopan ancillary studies. These increases were partially offset by decreases in
2019 in research and drug discovery expenses and expenses for the avacopan ADVOCATE Phase III pivotal trial as
the study was fully enrolled in 2018.

The increase in research and development expenses from 2017 to 2018 was primarily due to the advancement
of the avacopan ADVOCATE Phase III pivotal trial which completed enrollment in July 2018, initiation and patient
enrollment of the avacopan ACCOLADE trial in patients with C3G and start-up, initiation and patient enrollment of
the avacopan AURORA trial in patients with HS and the CCX140 LUMINA trials in patients with FSGS.

The following table summarizes our research and development expenses by project (in thousands):

Phase I
Phase II
Phase III
Research and drug discovery

Total R&D

Year Ended December 31,
2018

2017

2019

$

$

2,515 $

24,777
29,495
13,489
70,276 $

1,168 $

13,895
32,876
14,797
62,736 $

785
8,854
26,198
13,658
49,495

We track development expenses that are directly attributable to our clinical development candidates by phase

of clinical development. Such development expenses include third-party contract costs relating to formulation,
manufacturing, preclinical studies and clinical trial activities. We allocate research and development salaries,
benefits or indirect costs to our development candidates and we have included such costs in research and
development expenses. All remaining research and development expenses are reflected in “Research and drug
discovery” which represents early stage drug discovery programs. Such expenses include allocated employee
salaries and related benefits, stock-based compensation, consulting and contracted services to supplement our in-
house laboratory activities, laboratory consumables and allocated facility costs associated with these earlier stage
programs.

At any given time, we typically have several active early stage research and drug discovery projects. Our

internal resources, employees and infrastructure are not directly tied to any individual research or drug discovery
project and are typically deployed across multiple projects. As such, we do not maintain information regarding these
costs incurred for our early stage research and drug discovery programs on a project specific basis. We expect our
research and development expenses to increase as we advance our development programs further and increase the
number and size of our clinical trials. The process of conducting preclinical studies and clinical trials necessary to
obtain regulatory approval is costly and time consuming. We or our partners may never succeed in achieving
marketing approval for any of our drug candidates. The probability of success for each drug candidate may be
affected by numerous factors, including preclinical data, clinical data, competition, manufacturing capability and
commercial viability. Our strategy includes entering into additional partnerships with third parties for the
development and commercialization of some of our independent drug candidates.

The successful development of our drug candidates is highly uncertain and may not result in approved
products. Completion dates and completion costs can vary significantly for each drug candidate and are difficult to
predict for each product. Given the uncertainty associated with clinical trial enrollments and the risks inherent in the
development process, we are unable to determine the duration and completion costs of the current or future clinical
trials of our drug candidates or if, or to what extent, we will generate revenues from the commercialization and sale
of any of our drug candidates. We anticipate we will make determinations as to which programs to pursue and how
much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each
drug candidate, as well as ongoing assessment as to each drug candidate’s commercial potential. We will need to
raise additional capital or may seek additional strategic alliances in the future in order to complete the development
and commercialization of our drug candidates, including avacopan, CCX140 and CCX872.

71

General and administrative expenses

Total general and administrative expenses were as follows (in thousands):

General and administrative expenses

Dollar increase
Percentage increase

$
$

Year Ended December 31,
2018
20,409
3,900

2019
24,155
3,746

$
$

$

18%

24%

2017
16,509

General and administrative expenses consist primarily of salaries and related benefits, including stock-based

compensation and travel expenses, in executive, finance, business and corporate development and other
administrative functions. Other general and administrative expenses include allocated facility-related costs not
otherwise included in research and development expenses, legal costs of pursuing patent protection of our
intellectual property, and professional fees for auditing, tax, and legal services.

The increases from 2018 to 2019 and from 2017 to 2018 were primarily due to higher employee-related

expenses, including those associated with our commercialization planning efforts, and higher professional fees.

We anticipate that our general and administrative expenses will increase substantially in the future primarily

due to pre-commercial activities and personnel costs to support the potential launch of avacopan for the treatment of
ANCA vasculitis in the United States.

Other income, net

Other income, net primarily consists of interest income earned on our marketable securities. Total other

income, net as compared to prior years was as follows (in thousands):

Interest income
Interest expense

Total other income, net

Dollar increase
Percentage increase

Year Ended December 31,
2018

2017

2019

$

$
$

4,963
(2,149)
2,814
510
22%

$

$
$

$

$

3,528
(1,224)
2,304
938

69%

1,370
(4)
1,366

The increases in total other income, net from 2018 to 2019 and from 2017 to 2018 were primarily due to

increased interest income resulting from higher cash and investment balances and rate of return on the investment
portfolio, partially offset by increased interest expense due to additional borrowings under the loan and security
agreement, or Credit Facility, with Hercules Capital, Inc., or Hercules. We expect interest expense to increase in the
future as we borrow additional amounts under the Restated Credit Facility with Hercules (as defined below).

Liquidity and Capital Resources

As of December 31, 2019, we had approximately $203.3 million in cash, cash equivalents, restricted cash and

investments, excluding the $100.0 million we may borrow under the Restated Credit Facility. The following table
shows a summary of our cash flows for each of the three years ended December 31, 2019, 2018 and 2017 (in
thousands):

Cash provided by (used in)

Operating activities
Investing activities
Financing activities

Year Ended December 31,
2018

2017

2019

$ (70,123) $
16,436 $
$ (12,526) $ (53,068) $
24,700 $
$

94,820 $

4,878
15,602
7,516

72

Operating activities. Net cash used in operating activities was $70.1 million for the year ended December 31,

2019, compared to $16.4 million provided by operating activities for the same period in 2018. This change was
primarily due to a higher net loss and changes in working capital items driven by the receipt of a $50.0 million
milestone payment in connection with the Avacopan Agreement, a $10.0 million upfront commitment under the
Avacopan Amendment, a $10.0 million of aggregate payments under the June 2018 Avacopan Letter Agreement and
the CCX140 Letter Agreement and a $11.5 million payment for CCX140 development funding by Vifor in the 2018
period. For the year ended December 31, 2017, net cash provided by operating activities included the receipt of
$60.0 million from collaboration agreements, of which $50.0 million was the upfront payment under the CCX140
Agreement and $10.0 million for the first installment of the upfront commitment under the Avacopan Amendment.

Investing activities. Net cash provided by or used in investing activities for periods presented primarily relate
to the purchase, sale and maturity of investments used to fund the day-to-day needs of our business. Following the
March 2019 issuance of common stock through our Equity Distribution Agreement, or EDA, with Piper Jaffray &
Co., we invested the majority of our net proceeds received in short and long-term investments. The use of cash in
investing activities in all periods presented also includes the investment of funds received under the Avacopan
Agreement and CCX140 Agreement, in each case, as amended, and the related letter agreements. We expect cash
used in investing activities in 2020 to increase substantially as we plan to build out our new headquarters in San
Carols, California. See “Note 8. Commitments” for a detailed discussion.

Financing activities. Net cash provided by financing activities was $94.8 million for the year ended December

31, 2019, compared to $24.7 million for the year ended December 31, 2018. Net cash provided by financing
activities for the year ended December 31, 2019 included net proceeds of $73.3 million from the issuance of
common stock under our EDA. For the years ended December 31, 2018 and 2017, net cash provided by financing
activities included $15.0 million and $5.0 million received under the Credit Facility, respectively. Net cash provided
by financing activities for the years presented included proceeds from the exercise of stock options and stock
purchases from contributions to our 2012 Employee Stock Purchase Plan and cash used for tendered ChemoCentryx,
Inc. common stock to satisfy employee tax withholding requirements upon vesting of restricted stock units.

As of December 31, 2019, we borrowed $20.0 million under the Credit Facility with Hercules. In January
2020, we amended and restated the original Credit Facility with Hercules, or the Restated Credit Facility, which
provided for borrowings of up to an additional $100.0 million in three tranches, subject to certain terms and
conditions. See “Note 7. Long-term Debt” and “Note 15. Subsequent Event” in the Notes to Consolidated Financial
Statements included in Item 8 of this Annual Report on Form 10-K for additional information regarding our
borrowings.

As of December 31, 2019, we had approximately $203.3 million in cash, cash equivalents, restricted cash and

investments, excluding the $100.0 million we may borrow under the Restated Credit Facility. We believe that our
available cash, cash equivalents, restricted cash and investments will be sufficient to fund our anticipated level of
operations for at least 12 months following our financial statement issuance date, March 10, 2020. However, our
forecast of the period of time through which our financial resources will be adequate to support our operations is a
forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

Our future capital requirements are difficult to forecast and will depend on many factors, including:

•

•

•

•

•

•

•

•

the terms and timing of any other collaborative, licensing and other arrangements that we may establish;

the initiation, progress, timing and completion of preclinical studies and clinical trials for our drug
candidates and potential drug candidates;

the number and characteristics of drug candidates that we pursue;

the progress, costs and results of our clinical trials;

the outcome, timing and cost of regulatory approvals;

delays that may be caused by changing regulatory approvals;

the cost and timing of hiring new employees to support continued growth;

the costs involved in filing and prosecuting patent applications and enforcing and defending patent
claims;

73

•

•

•

the cost and timing of procuring clinical and commercial supplies of our drug candidates;

the cost and timing of establishing sales, marketing and distribution capabilities; and

the extent to which we acquire or invest in businesses, products or technologies.

Contractual Obligations and Commitments

The following is a summary of our long-term contractual cash obligations as of December 31, 2019 (in

thousands):

Payments Due by Period

Long-term debt (1)
Aggregate interest obligation (2)
Operating lease (3)

Total contractual obligations

$ 20,000 $
5,021
2,238
$ 27,259 $

Total

Less than
One Year

1-3 Years
— $ 20,000 $

3-5 Years

1,637
1,659
3,296 $ 23,963 $

3,384
579

More than
5 Years

— $
—
—
— $

—
—
—
—

(1) These amounts represent the future principal payments, excluding the end of the term charge, of the Credit

Facility we entered into with Hercules. See “Note 7. Long-term Debt” in the Notes to Consolidated Financial
Statements included in Item 8 of this Annual Report on Form 10-K for additional information.

(2) These amounts represent the estimated interest for our outstanding debt obligations that are payable in cash and
the end of term charge, excluding non-cash amortization of debt discount. See “Note 7. Long-term Debt” in the
Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for
additional information.

(3) We lease our facility in Mountain View, California. The lease expires in 2021.

In July 2019, we entered into a new facility lease agreement in San Carlos, California to replace our current

headquarters located in Mountain View, California. See “Note 8. Commitments” in the Notes to Consolidated
Financial Statements included in Item 8 of this Annual Report on Form 10-K for details.

We enter into contracts in the normal course of business with CROs for clinical trials and clinical supply

manufacturing and with vendors for preclinical research studies, research supplies and other services and products
for operating purposes. These contracts generally provide for termination on notice, and therefore are cancelable
contracts and not included in the table of contractual obligations and commitments.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements (as defined by applicable SEC regulations) that are

reasonably likely to have a current or future material effect on our financial condition, results of operations,
liquidity, capital expenditures or capital resources, except warrants and stock options.

Recent Accounting Pronouncements

See “Note 2. Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements
of this Annual Report on Form 10-K for a full description of recently issued accounting pronouncements, including
the respective expected dates of adoption and effects on our consolidated financial position and results of operations.

74

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The primary objectives of our investment activities are to ensure liquidity and to preserve principal while at
the same time maximizing the income we receive from our marketable securities without significantly increasing
risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest
rates may cause the principal amount of the marketable securities to fluctuate. To minimize the risk in the future, we
intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including
commercial paper, money market funds, government and non-government debt securities and corporate obligations.
Because of the short-term maturities of our cash equivalents and marketable securities, we do not believe that an
increase or decrease in interest rates would have any significant impact on the realized value of our marketable
securities.

We are affected by market risk exposure primarily through the effect of changes in interest rates on amounts
payable under the Credit Facility and Restated Credit Facility. At December 31, 2019, borrowings under the Credit
Facility totaled $20.0 million with an interest rate of 8.05%. Advances under the Credit Facility bear an interest rate
equal to the greater of (i) 8.05% plus the prime rate as reported from time to time in The Wall Street Journal minus
4.75%, and (ii) 8.05%. In addition, advances under the Restated Credit Facility will bear an interest rate equal to the
greater of (i) 8.50% plus the prime rate as reported from time to time in The Wall Street Journal minus 5.25%, and
(ii) 8.50%, which may be reduced upon the Company achieving certain cumulative net avacopan revenue levels. We
are obligated to make interest-only payments through July 1, 2021, at which point we will then be obligated to repay
the principal balance and interest on the advances in equal monthly installments after the interest-only period and
continuing through December 1, 2022. If the amount outstanding under the Credit Facility remained at this level for
an entire year and the interest rate increased by 1%, our annual interest expense would increase by an
additional $200,000. See “Note 7. Long-term Debt” and “Note 15. Subsequent Event” in the Notes to Consolidated
Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information regarding
our borrowings.

Item 8. Financial Statements and Supplementary Data.

Our consolidated financial statements and the reports of our independent registered public accounting firm are

included in this Annual Report on Form 10-K on pages F-1 through F-33 and are incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

As of December 31, 2019, management, with the participation of our Disclosure Committee, performed an
evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure
that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s
rules and forms, and that such information is accumulated and communicated to our management, including the
Chief Executive Officer and the Chief Financial and Administrative Officer, to allow timely decisions regarding
required disclosures.

Any controls and procedures, no matter how well designed and operated, can provide only reasonable

assurance of achieving the desired control objective. Based on this evaluation, our Chief Executive Officer and
Chief Financial and Administrative Officer concluded that, as of December 31, 2019, the design and operation of
our disclosure controls and procedures were effective.

75

Management’s Annual Report on Internal Control Over Financial Reporting

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

reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. 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 for external purposes in accordance with U.S. generally
accepted accounting principles, or GAAP. Our internal control over financial reporting includes those policies and
procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and
expenditures are being made only in accordance with authorizations of our management and directors, and (iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect

misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our Chief Executive Officer

and Chief Financial and Administrative Officer, we conducted an evaluation of the effectiveness of our internal
control over financial reporting as of December 31, 2019 based on the criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or
COSO (the 2013 Framework). Based on our evaluation under the criteria set forth in Internal Control - Integrated
Framework issued by the COSO, our management concluded our internal control over financial reporting was
effective as of December 31, 2019.

Our independent registered public accounting firm, Ernst & Young LLP, has audited our Consolidated
Financial Statements included in Item 8 of this Annual Report on Form 10-K and has issued an attestion report on
our internal control over financial reporting as of December 31, 2019, which appears below.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during the 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.

76

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Information required by this item will be contained in our Definitive Proxy Statement to be filed with the

Securities and Exchange Commission in connection with our 2020 Annual Meeting of Stockholders, or the
Definitive Proxy Statement, which is expected to be filed not later than 120 days after the end of our fiscal year
ended December 31, 2019, under the headings “Election of Directors,” “Corporate Governance,” “Our Executive
Officers,” and is incorporated herein by reference.

We have adopted a Code of Business Conduct and Ethics that applies to our officers, directors and employees

which is available on our website at www.chemocentryx.com. The Code of Business Conduct and Ethics contains
general guidelines for conducting the business of our company consistent with the highest standards of business
ethics, and is intended to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act
of 2002 and Item 406 of Regulation S-K. In addition, we intend to promptly disclose (1) the nature of any
amendment to our Code of Business Conduct and Ethics that applies to our principal executive officer, principal
financial officer, principal accounting officer or controller or persons performing similar functions and (2) the nature
of any waiver, including an implicit waiver, from a provision of our code of ethics that is granted to one of these
specified officers, the name of such person who is granted the waiver and the date of the waiver on our website in
the future.

Item 11. Executive Compensation.

Information required by this item will be contained in our Definitive Proxy Statement under the heading

“Executive Compensation and Other Information,” and is incorporated herein by reference.

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

The information under the heading “Equity Compensation Plan Information” in Part II, Item 5, “Market for

Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” is
incorporated herein by reference. Additional information required by this item will be contained in our Definitive
Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and Management” and is
incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Information required by this item will be contained in our Definitive Proxy Statement under the headings

“Certain Relationships and Related Party Transactions,” “Board Independence” and “Committees of the Board of
Directors” and is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services.

Information required by this item will be contained in our Definitive Proxy Statement under the heading

“Independent Registered Public Accountants’ Fees,” and is incorporated herein by reference.

77

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a) Documents filed as part of this Annual Report on Form 10-K:

1. Financial Statements.

The following consolidated financial statements of ChemoCentryx, Inc., together with the reports thereon of
Ernst & Young LLP, an independent registered public accounting firm, are included in this Annual Report on Form
10-K:

Reports of Independent Registered Public Accounting Firm
Audited Consolidated Financial Statements

Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

Page

F-2

F-4
F-5
F-6
F-7
F-8
F-9

2. Financial Statement Schedules.

All schedules are omitted because they are not applicable or the required information is shown in the financial

statements or notes thereto.

3. Exhibits.

A list of exhibits is set forth on the Exhibit Index immediately preceding the signature page of this Annual

Report on Form 10-K, and is incorporated herein by reference.

Item 16. Form 10-K Summary.

None.

78

ChemoCentryx, Inc.

Consolidated Financial Statements
As of December 31, 2019 and 2018
and for each of the three years in the period ended December 31, 2019

Contents

Reports of Independent Registered Public Accounting Firm
Audited Consolidated Financial Statements

Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

Page

F-2

F-4
F-5
F-6
F-7
F-8
F-9

F-1

Report of Independent Registered Public Accounting Firm

The Stockholders and Board of Directors of ChemoCentryx, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of ChemoCentryx, Inc. (the Company) as of

December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive (loss) income,
stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the
related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated
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 each of the three years in the period ended
December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based
on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 Framework) and our report dated March 10, 2020 expressed an
unqualified opinion thereon.

Adoption of New Accounting Standard

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of

accounting for the recognition of revenue in 2018.

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 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. 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 2000.

Redwood City, California
March 10, 2020

F-2

Report of Independent Registered Public Accounting Firm

The Stockholders and Board of Directors of ChemoCentryx, Inc.

Opinion on Internal Control over Financial Reporting

We have audited ChemoCentryx, Inc.’s internal control over financial reporting as of December 31, 2019,
based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, ChemoCentryx,
Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, and
the related consolidated statements of operations, comprehensive (loss) income, stockholders’ equity and cash flows
for each of the three years in the period ended December 31, 2019, and the related notes and our report dated March
10, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

The Company's management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting
firm registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan

and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect

misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Redwood City, California
March 10, 2020

F-3

CHEMOCENTRYX, INC.

Consolidated Balance Sheets

(In thousands, except share and par value data)

Current assets:

Assets

Cash and cash equivalents
Short-term investments
Accounts receivable, other
Accounts receivable from related party
Prepaid expenses and other current assets

Total current assets
Property and equipment, net
Long-term investments
Operating lease right-of-use assets
Other assets
Total assets

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable
Accrued liabilities
Deferred revenue from related party

Total current liabilities
Long-term debt, net
Non-current deferred revenue from related party
Other non-current liabilities
Total liabilities
Commitments (Note 8)
Stockholders’ equity:

Preferred stock, $0.001 par value, 10,000,000 shares authorized;

no shares issued and outstanding

Common stock, $0.001 par value, 200,000,000 shares authorized;

60,234,784 and 50,652,238 shares issued and outstanding
at December 31, 2019 and 2018, respectively

Additional paid-in capital
Note receivable
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity

See accompanying notes.

$

$

$

December 31,

2019

2018

39,179
133,607
176
—
1,400
174,362
2,154
29,454
1,704
1,409
209,083

1,532
19,806
37,742
59,080
19,786
63,095
1,122
143,083

$

$

$

28,088
148,896
—
2,058
2,342
181,384
1,536
—
—
390
183,310

966
12,969
50,461
64,396
19,689
84,100
387
168,572

—

—

60
495,624
(16)
318
(429,986)
66,000
209,083

51
389,398
(16)
(198)
(374,497)
14,738
183,310

$

$

F-4

CHEMOCENTRYX, INC.

Consolidated Statements of Operations

(In thousands, except per share data)

Revenue:

Collaboration and license revenue from related party
Grant revenue

Total revenue

Operating expenses:

Research and development
General and administrative

Total operating expenses

(Loss) income from operations
Other income (expense):

Interest income
Interest expense

Total other income, net

Net (loss) income
Net (loss) income per common share

Basic
Diluted

Shares used to compute net (loss) income per common share

Basic
Diluted

Year Ended December 31,
2018

2017

2019

$

$

$
$

$

35,952
176
36,128

$

42,875
—
42,875

70,276
24,155
94,431
(58,303)

62,736
20,409
83,145
(40,270)

4,963
(2,149)
2,814
(55,489) $

3,528
(1,224)
2,304
(37,966) $

(0.98) $
(0.98) $

(0.76) $
(0.76) $

56,898
56,898

49,814
49,814

82,497
—
82,497

49,495
16,509
66,004
16,493

1,370
(4)
1,366
17,859

0.37
0.36

48,413
49,615

See accompanying notes.

F-5

CHEMOCENTRYX, INC.

Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

Net (loss) income

Unrealized gain (loss) on available-for-sale

securities

Comprehensive (loss) income

Year Ended December 31,
2018
(37,966) $

2019
(55,489) $

2017

17,859

516
(54,973) $

(79)
(38,045) $

(69)
17,790

$

$

See accompanying notes.

F-6

CHEMOCENTRYX, INC.

Consolidated Statements of Stockholders’ Equity

(In thousands, except share data)

Accumulated
Other

Note
Receivable
$

Comprehensive Accumulated
Income (Loss)

Deficit
(50) $ (307,059) $
—
(69)

17,859
—

(16) $
—
—

Total
Stockholders'
Equity

Common Stock

Balance as of December 31, 2016
Net income
Unrealized loss on investments
Issuance of common stock under
equity incentive and employee
stock purchase plans

Repurchased shares upon vesting of

restricted stock units for tax
withholdings

Employee stock-based

compensation

Compensation expense related to
options granted to consultants
Balance as of December 31, 2017
Net loss
Adoption of accounting standards

(Note 2)

Unrealized loss on investments
Issuance of common stock under
equity incentive and employee
stock purchase plans

Repurchased shares upon vesting of

restricted stock units for tax
withholdings

Employee stock-based

compensation

Compensation expense related to
options granted to consultants
Balance as of December 31, 2018
Net loss
Unrealized gain on investments
Issuance of common stock through
Equity Distribution Agreement,
net of issuance costs (Note 11)
Issuance of common stock under
equity incentive and employee
stock purchase plans

Repurchased shares upon vesting of

restricted stock units for tax
withholdings

Employee stock-based

compensation

Compensation expense related to
options granted to consultants
Balance as of December 31, 2019

Shares
48,057,920
—
—

$

838,107

(58,967)

—

—
48,837,060
—

—
—

1,912,703

(97,525)

—

—
50,652,238
—
—

6,491,196

3,216,876

(125,526)

—

—
60,234,784

$

Amount

48
—
—

1

—

—

—
49
—

—
—

2

—

—

—
51
—
—

6

3

—

—

—
60

Additional
Paid-In
Capital

$

356,966
—
—

3,268

(429)

8,119

629
368,553
—

—
—

10,690

(678)

9,971

862
389,398
—
—

73,270

22,631

(1,313)

11,349

—

—

—

—
(16)
—

—
—

—

—

—

—
(16)
—
—

—

—

—

—

49,889
17,859
(69)

3,269

(429)

8,119

629
79,267
(37,966)

(47,331)
(79)

10,692

(678)

9,971

862
14,738
(55,489)
516

73,276

22,634

(1,313)

11,349

289
66,000

—

—

—

—
(119)
—

—
(79)

—

—

—

—

—

—

—
(289,200)
(37,966)

(47,331)
—

—

—

—

—
(198)
—
516

—
(374,497)
(55,489)
—

—

—

—

—

—
318

—

—

—

—

—

$ (429,986) $

289
495,624

$

$

—
(16) $

See accompanying notes.

F-7

CHEMOCENTRYX, INC.

Consolidated Statements of Cash Flows

(In thousands)

Operating activities

Net (loss) income
Adjustments to reconcile net (loss) income to net cash

(used in) provided by operating activities:

Stock-based compensation
Depreciation of property and equipment
Amortization of right-of-use assets
Noncash interest (income) expense, net
Changes in assets and liabilities:

Accounts receivable, other
Accounts receivable from related party
Prepaids and other current assets
Other assets
Accounts payable
Other liabilities
Deferred revenue from related party
Net cash (used in) provided by operating activities

Investing activities

Purchases of property and equipment, net
Purchases of investments
Sales of investments
Maturities of investments
Net cash (used in) provided by investing activities

Financing activities

Proceeds from issuance of common stock
Proceeds from exercise of stock options and employee

stock purchase plan

Employees' tax withheld and paid for restricted stock units
Borrowings under credit facility agreement, net of issuance

costs

Net cash provided by financing activities
Net increase (decrease) in cash, cash equivalents and

restricted cash

Cash, cash equivalents and restricted cash at beginning of

period

Cash, cash equivalents and restricted cash at end of period

Supplemental disclosures of cash flow information

Cash paid for interest
Right-of-use assets obtained in exchange for lease

obligations (1)

Purchases of property and equipment, net recorded in

accounts payable

Year Ended December 31,
2018

2017

2019

$

(55,489) $

(37,966) $

17,859

11,638
550
1,092
(1,499)

(176)
2,058
719
61
188
4,459
(33,724)
(70,123)

(790)
(211,973)
4,967
195,270
(12,526)

73,276

22,857
(1,313)

—
94,820

12,171

28,088
40,259

1,735

2,796

378

$

$

$

$

$

$

$

$

10,833
512
—
(1,071)

—
49,032
(668)
(31)
(434)
4,158
(7,929)
16,436

(838)
(192,480)
—
140,250
(53,068)

—

10,467
(678)

14,911
24,700

(11,932)

40,020
28,088

748

$

$

— $

— $

8,748
418
—
143

—
(20,885)
(727)
(80)
729
80
(1,407)
4,878

(723)
(133,845)
—
150,170
15,602

—

3,269
(429)

4,676
7,516

27,996

12,024
40,020

—

—

—

(1) Amounts for the year ended December 31, 2019 include the transition adjustment of $1,301 for the adoption of

Topic 842.

See accompanying notes.

F-8

CHEMOCENTRYX, INC.

Notes to Consolidated Financial Statements
December 31, 2019

1.

Description of Business

ChemoCentryx, Inc. (the Company) commenced operations in 1997. The Company is a biopharmaceutical

company focused on the development and commercialization of new medications targeted at inflammatory
disorders, autoimmune diseases and cancer. The Company’s principal operations are in the United States and it
operates in one segment.

2.

Summary of Significant Accounting Policies

Consolidation

The consolidated financial statements include the Company’s accounts and those of its wholly owned
subsidiaries, ChemoCentryx Ireland Limited and ChemoCentryx Limited. The operations of ChemoCentryx Ireland
Limited and ChemoCentryx Limited have been immaterial to date. All intercompany amounts have been eliminated
in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the

United States (GAAP) requires management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

Basis of Presentation

The financial statements are prepared in conformity with GAAP. The Company has made estimates and

assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.

Cash Equivalents and Investments

The Company considers all highly liquid investments with an original maturity at the date of purchase of three

months or less to be cash equivalents. The Company limits its concentration of risk by diversifying its investments
among a variety of issuers. All investments are classified as available for sale and are recorded at fair value based on
quoted prices in active markets or based upon other observable inputs, with unrealized gains and losses excluded
from earnings and reported in other comprehensive income (loss). Purchase premiums and discounts are recognized
in interest income using the interest method over the terms of the securities. Realized gains and losses and
unrealized declines in fair value that are deemed to be other than temporary are reflected in the statement of
operations. The cost of securities sold is based on the specific-identification method.

Fair Value of Financial Instruments

The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents,

short-term investments, accounts receivable and accounts payable, approximate their fair value due to their short
maturities.

Fair value is considered to be the price at which an asset could be exchanged or a liability transferred (an exit

price) in an orderly transaction between knowledgeable, willing parties in the principal or most advantageous market
for the asset or liability. Where available, fair value is based on or derived from observable market prices or other
observable inputs. Where observable prices or inputs are not available, valuation models are applied. The valuation
techniques involve management estimation and judgment, the degree of which is dependent on the price
transparency for the instruments or market and the instruments’ complexity.

F-9

2.

Summary of Significant Accounting Policies (continued)

Concentration of Credit Risk

The Company invests in a variety of financial instruments and, by its policy, limits the amount of credit

exposure with any one issuer, industry or geographic area.

For the years ended December 31, 2019, 2018 and 2017, 99.5%, 100% and 100%, respectively, of the
Company’s total revenue was derived from the Company’s collaboration with Vifor (International) Ltd., and/or its
affiliates, or collectively, Vifor. Accounts receivable are typically unsecured and are concentrated in the
pharmaceutical industry and government sector. Accordingly, the Company may be exposed to credit risk generally
associated with pharmaceutical companies and government funded entities. The Company has not historically
experienced any significant losses due to concentration of credit risk.

Accounts receivable consists of the following (in thousands):

Vifor
U.S. Food and Drug Administration

December 31,

2019

2018

$

$

— $

176
176 $

2,058
—
2,058

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the

straight-line method over the estimated useful lives of the assets, which range from five to seven years. Tenant
improvements are depreciated over the lesser of the estimated useful life or the remaining life of the lease at the time
the asset is placed into service.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including property and equipment, for impairment whenever events

or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable.
An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the
use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying
value of the impaired asset over its respective fair value. To date, the Company has not recorded any impairment
losses.

Leases

The Company determines if an arrangement includes a lease at inception. Operating leases are included in

operating lease right-of-use (ROU) assets, accrued and other current liabilities and other non-current liabilities on
the Company’s Condensed Consolidated Balance Sheets. Operating lease ROU assets and operating lease liabilities
are recognized based on the present value of the future minimum lease payments over the lease term at
commencement date. The Company uses the incremental borrowing rate based on the information available at lease
commencement date in determining the present value of future payments. The operating lease ROU asset also
excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it
is reasonably certain that the Company will exercise any such options. Lease expense for minimum lease payments
is recognized on a straight-line basis over the lease term. The Company has elected not to apply the recognition
requirements for short-term leases. For lease agreements with lease and non-lease components, the Company
generally accounts for them separately.

F-10

2.

Summary of Significant Accounting Policies (continued)

Revenue Recognition

Effective January 1, 2018, the Company adopted Accounting Standards Codification (ASC) Topic

606, Revenue from Contracts with Customers (ASC 606) using the modified retrospective transition method. This
standard applies to all contracts with customers, except for contracts that are within the scope of other standards,
such as leases, insurance, collaboration arrangements and financial instruments. Under ASC 606, the Company
recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the
consideration which the Company expects to receive in exchange for those goods or services. To determine revenue
recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs
the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the
contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the
contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company
only applies the five-step model to contracts when it is probable that Company will collect the consideration it is
entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract
is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each
contract and determines those that are performance obligations and assesses whether each promised good or service
is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the
respective performance obligation when (or as) the performance obligation is satisfied.

The Company enters into corporate collaborations under which it may obtain upfront license fees, research

and development funding and development and regulatory and commercial milestone payments and royalty
payments. The Company’s performance obligations under these arrangements may include licenses of intellectual
property, distribution rights, research and development services, delivery of manufactured product, and/or
participation on joint steering committees.

Licenses of intellectual property: If the license to the Company’s intellectual property is determined to be
distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from
upfront license fees allocated to the license when the license is transferred to the customer and the customer is able
to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes
judgement to assess the nature of the combined performance obligation to determine whether the combined
performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of
measuring proportional performance for purposes of recognizing revenue from non-refundable, up-front fees. The
Company evaluates the measure of proportional performance each reporting period and, if necessary, adjusts the
measure of performance and related revenue recognition.

Milestone payments: At the inception of each arrangement that includes development, regulatory or
commercial milestone payments, the Company evaluates whether the milestones are considered probable of being
reached and estimates the amount to be included in the transaction price. There are two alternatives to use when
estimating the amount of variable consideration: the expected value method and the most likely amount method.
Under the expected value method, an entity considers the sum of probability-weighted amounts in a range of
possible consideration amounts. Under the most likely amount method, an entity considers the single most likely
amount in a range of possible consideration amounts. Whichever method is used, it should be consistently applied
throughout the life of the contract; however, it is not necessary for the Company to use the same approach for all
contracts. The Company expects to use the most likely amount method for development and regulatory milestone
payments. If it is probable that a significant revenue reversal would not occur, the associated milestone value is
included in the transaction price. Milestone payments that are not within the Company’s or the licensee’s control,
such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The
transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis. The
Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of
each subsequent reporting period, the Company re-evaluates the probability of achievement of each such milestone
and any related constraint, and if necessary, adjusts its estimates of the overall transaction price. Any such
adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of
adjustment.

F-11

2.

Summary of Significant Accounting Policies (continued)

Commercial milestones and royalties: For arrangements that include sales-based royalties, including
milestone payments based on the level of sales, and in which the license is deemed to be the predominant item to
which the royalties relate, the Company recognizes revenue when the related sales occur. To date, the Company has
not recognized any royalty revenue resulting from its collaboration arrangements.

Up-front payments and fees are recorded as deferred revenue upon receipt or when due, and may require

deferral of revenue recognition to a future period until the Company performs its obligations under these
arrangements. Amounts payable to the Company are recorded as accounts receivable when the Company’s right to
consideration is unconditional.

Upon adoption of ASC 606 under the modified retrospective transition method, the Company recognized the

cumulative effect of initially applying the new revenue standard of $47.3 million as an adjustment to the opening
balance of accumulated deficit and an increase in deferred revenue. The comparative information has not been
restated and continues to be reported under the accounting standards in effect for those periods. Before the adoption
of ASC 606, the Company recognized upfront fees straight-line under ASC 605 over the estimated performance
period and recognized milestones when earned under the milestone method of accounting. See “Note 2. Summary of
Significant Accounting Policies – Revenue Recognition” in the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2017, filed with the SEC on March 12, 2018 for a detailed discussion.

Revenue from government and private agency grants is recognized as the related research and development

expenses are incurred and to the extent that funding is approved.

Research and Development Expenses

All research and development expenses are recognized as incurred. Research and development expenses
include, but are not limited to, salaries and related benefits, including stock-based compensation, third-party contract
costs relating to research, formulation, manufacturing, preclinical study and clinical trial activities, laboratory
consumables and allocated facility costs.

Clinical Trial Accruals

Clinical trial costs are a component of research and development expenses. The Company accrues and

expenses clinical trial activities performed by third parties based upon estimates of the percentage of work
completed over the life of the individual study in accordance with agreements established with clinical research
organizations and clinical trial sites. The Company determines the estimates through discussions with internal
clinical personnel and external service providers as to the progress or stage of completion of trials or services and
the agreed-upon fee to be paid for such services.

Nonrefundable advance payments for goods and services that will be used or rendered in future research and
development activities, are deferred and recognized as expense in the period that the related goods are delivered or
services are performed.

Stock-Based Compensation

The Company measures stock-based compensation cost at the grant date based on the fair value of the award,
and recognizes the expense over the award’s vesting periods on a straight-line basis. The fair value of a stock option
is estimated using the Black-Scholes valuation model, which requires that, at the date of grant, assumptions are
made with respect to the expected life of the option, the volatility of the fair value of the Company’s common stock,
the risk-free interest rate and the expected dividend yield of the Company’s common stock. The fair value of a
restricted stock unit (RSU) and restricted stock award (RSA) is valued at the closing price of the Company’s
common stock on the date of the grant. Because stock compensation expense is based on awards ultimately expected
to vest, it has been reduced by an estimate for future forfeitures. Forfeitures are estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

F-12

2.

Summary of Significant Accounting Policies (continued)

On January 1, 2019 the Company adopted Accounting Standards Update (ASU) No. 2018-07, Compensation
– Stock Compensation (Topic 718), which simplifies the accounting for share-based payments to nonemployees by
aligning it with the accounting for share-based payments to employees, with certain exceptions. For the year ended
December 31, 2019, the measurement of nonemployee stock-based compensation is fixed at the grant date. Prior to
the adoption of ASU No. 2018-07, the measurement of nonemployee stock-based compensation was subject to
periodic adjustment as the underlying equity instruments vested.

Comprehensive (Loss) Income

Comprehensive (loss) income is comprised of net (loss) income and other comprehensive income (loss). For
the periods presented, other comprehensive income (loss) consists of unrealized gains and losses on the Company’s
available-for-sale securities. For the year ended December 31, 2019, amounts reclassified from accumulated other
comprehensive income (loss) to net loss for unrealized gains (losses) on available-for-sale securities were not
significant, and were recorded as part of other income, net in the Condensed Consolidated Statements of Operations.
For the years ended December 31, 2018 and 2017, there were no sales of investments, and therefore there were no
reclassifications.

Income Taxes

The Company uses the liability method for income taxes, whereby deferred tax assets and liabilities are
determined based on the differences between the financial reporting and tax reporting bases of assets and liabilities
and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected
to reverse. Valuation allowances are provided when the expected realization for the deferred tax assets does not
meet the more-likely-than-not criteria.

The Company accounts for uncertain tax positions in the financial statements when it is not more likely than
not that the position will be sustained upon examination by the tax authorities. Such tax positions must initially and
subsequently be measured at the largest amount of tax benefit that has a greater than 50% likelihood of being
realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.
The Company’s policy is to recognize any interest and penalties related to unrecognized tax benefits in income tax
expense.

Net (Loss) Income Per Share

Basic net (loss) income per common share is computed by dividing net (loss) income attributable to common

stockholders by the weighted-average number of common shares outstanding during the period, without
consideration for common stock equivalents.

Diluted net (loss) income per share is computed by dividing net (loss) income attributable to common
stockholders by the sum of the weighted-average number of common shares outstanding and dilutive common stock
equivalent shares outstanding for the period. The Company’s potentially dilutive common stock equivalent shares,
which include incremental common shares issuable upon (i) the exercise of outstanding stock options and warrants,
(ii) vesting of RSUs and RSAs, and (iii) the purchase from contributions to the 2012 Employee Stock Purchase Plan
(the ESPP) (calculated based on the treasury stock method), are only included in the calculation of diluted net (loss)
income per share when their effect is dilutive.

F-13

2.

Summary of Significant Accounting Policies (continued)

The following table is a reconciliation of the numerator and denominator used in the calculation of basic and

diluted net (loss) income per share:

Numerator:

Net (loss) income

Denominator:

Weighted average shares outstanding - basic
Dilutive stock options, RSUs and RSAs
Weighted average shares outstanding -

diluted

Net (loss) income per common share

Basic
Diluted

Year Ended December 31,
2019
2017
2018
(in thousands, except per share data)

$ (55,489) $ (37,966) $

17,859

56,898
—

49,814
—

48,413
1,202

56,898

49,814

49,615

$
$

(0.98) $
(0.98) $

(0.76) $
(0.76) $

0.37
0.36

The following potentially dilutive securities were excluded from the calculation of diluted net (loss) income

per share due to their anti-dilutive effect:

Options to purchase common stock, including

purchases from contributions to ESPP

Restricted stock units
Restricted stock awards
Warrants to purchase common stock(1)

Year Ended December 31,
2018

2019

2017

9,304,018
368,927
30,896
150,000
9,853,841

10,731,164
440,354
27,278
150,000
11,348,796

6,320,038
—
—
150,000
6,470,038

(1) In 2012, the Company issued a warrant with a ten-year term to purchase 150,000 shares of its common stock at

an exercise price of $20.00 per share.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update

(ASU) No. 2016-02, Leases (Topic 842). The new standard requires the Company to recognize the assets and
liabilities that arise from leases on the balance sheet and disclose qualitative and quantitative information about its
leasing arrangements. On January 1, 2019, the Company adopted this new standard using the modified retrospective
approach in accordance with Leases – Targeted Improvements (ASU No. 2018-11). The Company elected the
package of practical expedients permitted under the transition guidance within ASU No. 2018-11, which among
other things, allowed the Company to carry forward the historical lease classification of those leases in place as of
January 1, 2019. Results for the year ended December 31, 2019 are presented under Topic 842. Prior period amounts
have not been adjusted and continue to be reported in accordance with the Company’s historical accounting under
previous lease guidance, ASC Topic 840, Leases (Topic 840).

F-14

2.

Summary of Significant Accounting Policies (continued)

The impact of the adoption of Topic 842 on the accompanying Consolidated Balance Sheet as of January 1,

2019 was as follows (in thousands):

December 31,
2018

Adjustments
Due to the
Adoption of
Topic 842

January 1,
2019

Balance Sheet
Assets:

Operating lease right-of-use assets

$

— $

1,301 $

1,301

Liabilities:
Operating lease liabilities:

Accrued and other current liabilities (1)
Other non-current liabilities (2)

12,969
387

955
346

13,924
733

(1) Includes deferred rent and current portion of operating lease liabilities.
(2) Includes deferred rent and non-current portion of operating lease liabilities.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit

Losses on Financial Instruments. The new standard replaces the incurred loss impairment methodology under the
current standard with a methodology that reflects expected credit losses and requires consideration of a broader
range of reasonable and supportable information to inform credit loss estimates. The Company is required to use a
forward-looking expected credit loss model for accounts receivable and other financial instruments. Credit losses
relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than
as a reduction in the amortized cost basis of the securities. The new standard was effective for the Company on
January 1, 2020. The Company’s adoption on January 1, 2020 did not have a material impact on the consolidated
financial statements.

The Company has reviewed other recent accounting pronouncements and concluded they are either not
applicable to the business or that no material effect is expected on the consolidated financial statements as a result of
future adoption.

3.

Cash Equivalents, Restricted Cash and Investments

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash shown in the

Condensed Consolidated Statements of Cash Flows (in thousands):

Cash and cash equivalents
Restricted cash included in Other assets
Total cash, cash equivalents and restricted cash

December 31,

2019
39,179 $
1,080
40,259 $

2018
28,088
—
28,088

$

$

Restricted cash as of December 31, 2019 was held as collateral for a stand-by letter of credit issued by the
Company to its landlord in connection with the lease of the Company’s facility in San Carlos, California. See “Note
8. Commitments” for additional information of this lease.

F-15

3.

Cash Equivalents, Restricted Cash and Investments (continued)

Cash Equivalents and Investments

The amortized cost and fair value of cash equivalents and investments at December 31, 2019 and 2018 were as

follows (in thousands):

Money market fund
U.S. treasury securities
Commercial paper
Asset-backed securities
Corporate debt securities
Total available-for-sale securities

Classified as:
Cash equivalents
Short-term investments
Long-term investments
Total available-for-sale securities

Money market fund
U.S. treasury securities
Commercial paper
Asset-backed securities
Corporate debt securities
Total available-for-sale securities

Classified as:
Cash equivalents
Short-term investments
Total available-for-sale securities

$

Amortized
Cost
30,353 $
40,245
12,429
25,436
84,605
$ 193,068 $

December 31, 2019
Gross Unrealized

Gains

Losses

— $
47
—
50
225
322 $

Fair
Value

30,353
— $
40,292
—
12,429
—
25,486
—
84,826
(4)
(4) $ 193,386

$

30,325
133,607
29,454
$ 193,386

$

Amortized
Cost
22,073 $
23,013
45,683
29,127
55,228
$ 175,124 $

December 31, 2018
Gross Unrealized

Gains

Losses

Fair
Value

— $
—
—
—
—
— $

22,073
— $
23,000
(13)
45,683
—
29,093
(34)
(151)
55,077
(198) $ 174,926

$

26,030
148,896
$ 174,926

Cash equivalents in the tables above exclude cash of $8.9 million and $2.1 million as of December 31, 2019
and 2018, respectively. All available-for-sale securities held as of December 31, 2019 had contractual maturities of
less than two years. There have been no significant realized gains or losses on available-for-sale securities for the
periods presented. The Company applies the specific identification method to determine the cost basis of the
securities sold. No available-for-sale securities held as of December 31, 2019 have been in a continuous unrealized
loss position for more than 12 months. As of December 31, 2019, unrealized losses on available-for-sale investments
are not attributed to credit risk and are considered to be temporary. The Company believes that it is more-likely-
than-not that investments in an unrealized loss position will be held until maturity or the recovery of the cost basis of
the investment. The Company believes it has no other-than-temporary impairments on its securities because it does
not intend to sell these securities and it believes it is not more likely than not that it will be required to sell these
securities before the recovery of their amortized cost basis. To date, the Company has not recorded any impairment
charges on marketable securities related to other-than-temporary declines in market value.

F-16

4.

Fair Value Measurements

The Company determines the fair value of financial assets and liabilities using three levels of inputs as

follows:

Level 1—Inputs which include quoted prices in active markets for identical assets and liabilities.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or liabilities.

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.

The Company’s financial assets subject to fair value measurements on a recurring basis and the level of inputs

used in such measurements were as follows as of December 31, 2019 and 2018 (in thousands):

Description
Money market fund
U.S. treasury securities
Commercial paper
Asset-backed securities
Corporate debt securities
Total assets

Description
Money market fund
U.S. treasury securities
Commercial paper
Asset-backed securities
Corporate debt securities
Total assets

Level 1

Level 2

Level 3

Total

December 31, 2019

$

30,353 $
—
—
—
—

— $

40,292
12,429
25,486
84,826

$

30,353 $ 163,033 $

30,353
— $
40,292
—
12,429
—
25,486
—
—
84,826
— $ 193,386

Level 1

Level 2

Level 3

Total

December 31, 2018

$

22,073 $
—
—
—
—

— $

23,000
45,683
29,093
55,077

$

22,073 $ 152,853 $

22,073
— $
23,000
—
45,683
—
29,093
—
55,077
—
— $ 174,926

During the year ended December 31, 2019 there were no transfers between Level 1 and Level 2 financial

assets. When the Company uses observable market prices for identical securities that are traded in less active
markets, the Company classifies its marketable debt instruments as Level 2. When observable market prices for
identical securities are not available, the Company prices its marketable debt instruments using non-binding market
consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or
pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with
observable market data. Non-binding market consensus prices are based on the proprietary valuation models of
pricing providers or brokers. These valuation models incorporate a number of inputs, including non-binding and
binding broker quotes; observable market prices for identical or similar securities; and the internal assumptions of
pricing providers or brokers that use observable market inputs and, to a lesser degree, unobservable market inputs.
The Company corroborates non-binding market consensus prices with observable market data using statistical
models when observable market data exists. The discounted cash flow model uses observable market inputs, such as
LIBOR-based yield curves, currency spot and forward rates, and credit ratings.

F-17

4.

Fair Value Measurements (continued)

Other Fair Value Measurements

The carrying amount and estimated fair value of financial instruments not recorded at fair value at December

31, 2019 and 2018 were as follows (in thousands):

Long-term debt, net (1)

December 31,
2019

December 31,
2018

Carrying
Amount

Estimated
Fair Value

Carrying
Amount

Estimated
Fair Value

$

19,786 $

20,253 $

19,689 $

19,847

(1) Carrying amounts of long-term debt were net of unamortized debt discounts of $214,000 and $311,000 as of

December 31, 2019 and 2018, respectively.

The fair value of the Company's long-term debt is estimated using the net present value of future debt
payments, discounted at an interest rate that is consistent with market interest rates, which is a Level 2 input.

5.

Property and Equipment

Property and equipment consist of the following (in thousands):

Lab equipment
Computer equipment and software
Furniture and fixtures
Tenant improvements

Less: accumulated depreciation

6.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

Research and development related
Compensation related
Consulting and professional services
Current portion of operating lease liability
Other

December 31,

2019

2018

6,747 $
1,865
552
1,607
10,771
(8,617)
2,154 $

6,263
1,809
554
1,030
9,656
(8,120)
1,536

December 31,

2019
13,100 $
3,608
1,094
1,503
501
19,806 $

2018

8,466
2,767
811
—
925
12,969

$

$

$

$

F-18

7.

Long-term Debt

On December 28, 2017 (the Closing Date), the Company entered into a Loan and Security Agreement with

Hercules Capital, Inc. (Hercules) which the Company amended in December 2018, pursuant to which term loans in
an aggregate principal amount of up to $50.0 million (the Credit Facility) were available to the Company in three
tranches, subject to certain terms and conditions. As of December 31, 2019, the Company had borrowed $20.0
million under the Credit Facility and the remaining available amount had expired.

Advances under the Credit Facility bear an interest rate equal to the greater of either (i) 8.05% plus the prime
rate as reported from time to time in The Wall Street Journal minus 4.75%, and (ii) 8.05%. At December 31, 2019,
the interest rate on the outstanding borrowings under the Credit Facility was 8.05%. For advances made under the
first and second tranches, the Company will make interest-only payments through July 1, 2021, and will then repay
the principal balance and interest on the advances in equal monthly installments after the interest-only period and
continuing through December 1, 2022.

The Company may prepay advances under the Credit Facility, in whole or in part, at any time, subject to a

prepayment charge equal to: (a) 1.5% of the amount so prepaid, if such prepayment occurs during the second year
following the Closing Date; and (b) 1.0% of the amount so prepaid, if such prepayment occurs after the second year
following the Closing Date. The Credit Facility is secured by substantially all of the Company’s assets, excluding
intellectual property.

In addition, Hercules has the right to participate, in an amount up to $2.0 million, in any subsequent equity
financing broadly marketed to multiple investors in an amount greater than $20.0 million. The Credit Facility also
includes customary affirmative restrictions on the payment of dividends and negative covenants, and events of
default, the occurrence and continuance of which provide Hercules with the right to demand immediate repayment
of all principal and unpaid interest under the Credit Facility, and to exercise remedies against the Company and the
collateral securing the Credit Facility. The Company was in compliance with all loan covenants for all periods
presented.

The Company will pay an end-of-term charge for each tranche it draws down, which will occur on the earliest

of (i) the applicable tranche maturity date; (ii) the date that the Company prepays all of the outstanding principal
under such tranche in full, or (iii) the date the loan payments are accelerated due to an event of default. For the first
and second tranches, the end of term charge will be $0.9 million and $0.3 million, respectively.

In addition, the Company paid a commitment charge of 1% of the advances made under the Credit Facility,
with a minimum charge of $162,500 paid on the Closing Date. Also, the Company reimbursed Hercules for costs
incurred related to the Credit Facility. These charges were recorded as discounts to the carrying value of the loan
and are amortized over the term of the loan using the effective interest method.

F-19

7.

Long-term Debt (continued)

As of December 31, 2019, the Company had outstanding borrowings under the Credit Facility of $19.8

million, net of discounts of $0.2 million.

Future minimum principal payments, which exclude the end of term charge, related to the Credit Facility as of

December 31, 2019 are as follows (in thousands):

Year ending December 31:

2020
2021
2022

Total minimum payments

Less: amount representing debt discount

Present value of remaining debt payments

Less: current portion
Non-current portion

Amounts

$

$

—
6,389
13,611
20,000
(214)
19,786
—
19,786

8.

Commitments

Operating Leases

As described further in “Note 2. Summary of Significant Accounting Policies”, the Company adopted Topic

842 as of January 1, 2019. The comparative information has not been restated and continues to be reported under the
accounting standards in effect for those periods.

In May 2004, the Company entered into a noncancelable operating lease for its current office and primary
research facility located in Mountain View, California. The Company received a discounted lease rate during the
first year of the agreement. In August 2012, the Company entered into an amendment to the lease agreement for the
same facility to extend the term through April 2019. In April 2017, the Company entered into a second amendment
to the lease agreement for the same facility to extend the term of the lease through April 2020. In May 2019, the
Company entered into a third amendment to the lease agreement for the same facility to extend the term of the lease
through April 2021.

The balance sheet classification of the Company’s operating lease liabilities was as follows (in thousands):

Accrued and other current liabilities (1)
Other non-current liabilities (2)

Total lease liabilities

December 31,

2019

2018

$

$

1,503 $
566
2,069 $

244
143
387

(1) Includes current portion of operating lease liabilities as of December 31, 2019 and deferred rent as of December

31, 2018.

(2) Includes non-current portion of operating lease liabilities as of December 31, 2019 and deferred rent as of

December 31, 2018.

F-20

8.

Commitments (continued)

The component of lease costs, which was included in operating expenses in the Company’s Consolidated

Statements of Operations, was as follows (in thousands):

Operating lease cost

Year Ended December 31,
2018

2017

2019

$

1,295 $

1,072 $

1,013

Cash paid for amounts included in the measurement of lease liabilities for the year ended December 31, 2019

was $1.3 million and was included in net cash used in operating activities in the Company’s Consolidated
Statements of Cash Flows.

Future minimum lease payments under all noncancelable operating leases as of December 31, 2019, are as

follows (in thousands):

Year ending December 31:

2020
2021

Total minimum payments

Less: interest

Present value of lease liabilities

Operating leases

$

$

1,659
579
2,238
(169)
2,069

As of December 31, 2019, the weighted-average remaining lease term was 1.3 years and the weighted-average

operating discount rate used to determine the operating lease liability was 11.0%.

In July 2019, the Company entered into a ten-year operating lease for a 96,463 square foot facility in San
Carlos, California to replace its current headquarters located in Mountain View, California, for which the lease
expires in April 2021. Upon execution of the lease agreement, the Company provided the landlord an approximately
$1.1 million security deposit in the form of a letter of credit. Subject to certain conditions pursuant to the lease, the
Company anticipates the lease commencement date to occur in the third quarter of 2020 and monthly rent payments
to begin in the second quarter of 2021. Following a six-month period of discounted rent, the Company will pay an
initial annual base rent at a rate of approximately $6.5 million, which is subject to scheduled 3% annual increases,
plus certain operating expenses. The Company has been provided a tenant improvement allowance of $15.4 million
plus an additional allowance of up to $4.8 million for the same. If the additional allowance is provided, such amount
will be repaid by the Company as additional rent in equal monthly payments at a rate of 7% per annum through the
initial term of the lease. The Company has the right to sublease the facility, subject to landlord consent. The
Company also has the option to extend the lease for five years.

9.

Related Party Transactions

Vifor

Vifor held 10,676,825 shares of the Company’s common stock as of December 31, 2019. The Company has
collaboration agreements with Vifor: the Avacopan Agreements and the CCX140 Agreements (each as described
below). See “Note 2. Summary of Significant Accounting Policies – Concentration of Credit Risk” for additional
information on accounts receivable balance due from Vifor.

F-21

9.

Related Party Transactions (continued)

Avacopan Agreements

In May 2016, the Company entered into an exclusive collaboration and license agreement with Vifor pursuant

to which the Company granted Vifor exclusive rights to commercialize avacopan in Europe and certain other
markets (the Avacopan Agreement). Avacopan is the Company’s lead drug candidate for the treatment of patients
with anti-neutrophil cytoplasmic auto-antibody associated vasculitis (ANCA vasculitis) and other rare diseases. The
Avacopan Agreement also provided Vifor with an exclusive option to negotiate during 2016 a worldwide license
agreement for one of the Company’s other drug candidates, CCX140, an orally-administered inhibitor of the
chemokine receptor known as CCR2. In connection with the Avacopan Agreement, the Company received a non-
refundable upfront payment of $85.0 million, comprising $60.0 million in cash and $25.0 million in the form of an
equity investment to purchase 3,333,333 shares of the Company’s common stock at a price of $7.50 per share.

In February 2017, Vifor and the Company expanded the Vifor territories under the Avacopan Agreement to

include all markets outside the United States and China (the Avacopan Amendment). In connection with this
February 2017 arrangement, the Company received a $20.0 million upfront payment for the expanded rights. In June
2018, Vifor and the Company further expanded the Vifor territories under the Avacopan Agreement to provide Vifor
with exclusive commercialization rights in China (the Avacopan Letter Agreement, and together with the Avacopan
Agreement and the Avacopan Amendment, the Avacopan Agreements). The Company retains control of ongoing
and future development of avacopan (other than country-specific development in the licensed territories) and all
commercialization rights to avacopan in the United States. In consideration for the Avacopan Letter Agreement, the
Company received a $5.0 million payment for the expanded rights.

Upon achievement of certain regulatory and commercial milestones with avacopan, the Company will receive
additional payments of up to $460.0 million under the Avacopan Agreement. In addition, the Company will receive
royalties, with rates ranging from the low teens to the mid-twenties, on future potential net sales of avacopan by
Vifor in the licensed territories. In December 2017, the Company achieved a $50.0 million regulatory milestone
when the European Medicines Agency (EMA) validated the Company’s conditional marketing authorization (CMA)
application for avacopan for the treatment of ANCA vasculitis.

The Company identified the following material promises under the Avacopan Agreements: (1) the license

related to avacopan; (2) the development and regulatory services for the submission of the marketing authorization
application (MAA); and (3) an exclusive option to negotiate a worldwide license agreement for CCX140, which
expired in 2016. The Company considered that the license has standalone functionality and is capable of being
distinct. However, the Company determined that the license is not distinct from the development and regulatory
services within the context of the agreement because Vifor is dependent on the Company to execute the
development and regulatory activities in order for Vifor to benefit from the license. As such, the license is combined
with the development and regulatory services into a single performance obligation. The exclusive option related to
CCX140 is a separate performance obligation and the Company determined that its transaction price is not material.
As such, the transaction price under this arrangement is allocated to the license and the development and regulatory
services.

As of December 31, 2019, the transaction price of $153.0 million consists of the following:

•

$78.0 million upfront payment under the May 2016 Avacopan Agreement. Of the total $85.0 million
upfront payment received under the May 2016 Avacopan Agreement, $7.0 million was allocated to the
issuance of 3,333,333 shares of the Company’s common stock valued at $2.10 per share, the closing stock
price on the effective date of the agreement, May 9, 2016. The remaining $78.0 million was allocated to
the transaction price under this arrangement;

•

$20.0 million upfront payment under the February 2017 Avacopan Amendment;

F-22

9.

Related Party Transactions (continued)

•

•

$50.0 million regulatory milestone payment achieved upon the validation of the Company’s CMA
application by the EMA, for avacopan for the treatment of ANCA vasculitis in December 2017; and

$5.0 million non-refundable upfront payment under the Avacopan Letter Agreement.

The Company will re-evaluate the transaction price in each reporting period and as uncertain events are

resolved or other changes in circumstances occur.

The Company determined that the combined performance obligation will be performed over the duration of

the contract, which began on the effective date of May 9, 2016 and ends upon completion of development and
regulatory services. The Company uses a cost-based input method to measure proportional performance and to
calculate the corresponding amount of revenue to recognize. The Company believes this is the best measure of
progress because other measures do not reflect how the Company transfers its performance obligation to Vifor. In
applying the cost-based input method of revenue recognition, the Company measures actual costs incurred relative
to budgeted costs to fulfill the combined performance obligation. These costs consist primarily of third-party
contract costs. Revenue is recognized based on actual costs incurred as a percentage of total budgeted costs as the
Company completes its performance obligations.

For the years ended December 31, 2019 and 2018, the Company recognized $29.5 million and $37.1 million

of collaboration and license revenue under the Avacopan Agreements, respectively. Prior to the adoption of ASC
606 on January 1, 2018, the Company accounted for its performance obligations under the Avacopan Agreements as
one combined unit of accounting with the upfront fees being recognized over the estimated period of performance.
See “Note 10. Collaboration and License Agreements – Avacopan Agreements” in the Company’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on March 12, 2018, for further
discussion. For the year ended December 31, 2017, the Company recognized $72.5 million of collaboration and
license revenue under the Avacopan Agreements under ASC 605.

CCX140 Agreements

In December 2016, the Company entered into a second collaboration and license agreement with Vifor
pursuant to which the Company granted Vifor exclusive rights to commercialize CCX140 (the CCX140 Agreement)
in markets outside the United States and China. CCX140 is an orally-administered inhibitor of the chemokine
receptor known as CCR2. The Company retains marketing rights in the United States and China, while Vifor has
commercialization rights in the rest of the world. Pursuant to the CCX140 Agreement, the Company is responsible
for the clinical development of CCX140 in rare renal diseases and is reimbursed for Vifor’s equal share of such
development cost. Vifor retains an option to solely develop and commercialize CCX140 in more prevalent forms of
chronic kidney disease (CKD). Should Vifor later exercise the CKD option, the Company would receive co-
promotion rights for CKD in the United States. Under the terms of the CCX140 Agreement, the Company received a
non-refundable upfront payment of $50.0 million in 2017.

In June 2018, the Company and Vifor entered into a letter agreement to expand Vifor’s rights to include the

right to exclusively commercialize CCX140 in China (the CCX140 Letter Agreement). In connection with the
CCX140 Letter Agreement, the Company received a non-refundable payment of $5.0 million. The Company and
Vifor also entered into an amendment to the CCX140 Agreement (the CCX140 Amendment, and together with the
CCX140 Agreement and the CCX140 Letter Agreement, the CCX140 Agreements) to clarify the timing of certain
payments with respect to development funding of the CCX140 program by Vifor, and the Company received a non-
refundable payment of $11.5 million. The Company retains control of ongoing and future development of CCX140
(other than country-specific development in the licensed territories), and all commercialization rights to CCX140 in
the United States.

Upon achievement of certain regulatory and commercial milestones with CCX140, the Company will receive
additional payments of up to $625.0 million under the CCX140 Agreements. In addition, the Company will receive
tiered royalties, with rates ranging from ten to the mid-twenties, on net sales of CCX140 in the licensed territories.

F-23

9.

Related Party Transactions (continued)

The Company identified the following material promises under the CCX140 Agreements: (1) the license
related to CCX140; and (2) the development and regulatory services for the submission of the MAA. The Company
considered that the license has standalone functionality and is capable of being distinct. However, the Company
determined that the license is not distinct from the development and regulatory services within the context of the
agreement because Vifor is dependent on the Company to execute the development and regulatory activities in order
for Vifor to benefit from the license. As such, the license is combined with the development and regulatory services
into a single performance obligation.

As of December 31, 2019, the transaction price of $113.7 million consists of the following:

•

•

•

$50.0 million upfront payment under the CCX140 Agreement;

$58.7 million of CCX140 development funding by Vifor; and

$5.0 million non-refundable upfront payment under the CCX140 Letter Agreement.

The Company will re-evaluate the transaction price in each reporting period and as uncertain events are

resolved or other changes in circumstances occur.

The Company determined that the combined performance obligation will be performed over the duration of
the contract, which began on the effective date of December 22, 2016 and ends upon completion of development
and regulatory services. The Company uses a cost-based input method to measure proportional performance and to
calculate the corresponding amount of revenue to recognize. The Company believes this is the best measure of
progress because other measures do not reflect how the Company transfers its performance obligation to Vifor. In
applying the cost-based input method of revenue recognition, the Company measures actual costs incurred relative
to budgeted costs to fulfill the combined performance obligation. These costs consist primarily of third-party
contract costs. Revenue is recognized based on actual costs incurred as a percentage of total budgeted costs as the
Company completes its performance obligations. For the years ended December 31, 2019 and 2018, the Company
recognized $6.4 million and $5.8 million of collaboration and license revenue under the CCX140 Agreements,
respectively.

Prior to the adoption of ASC 606 on January 1, 2018, the Company accounted for its performance obligations

under the CCX140 Agreements as one combined unit of accounting with the upfront fee of $50.0 million being
recognized over the estimated period of performance. See “Note 10. Collaboration and License Agreements –
CCX140 Agreement” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017,
filed with the SEC on March 12, 2018, for further discussion. For the year ended December 31, 2017, the Company
recognized $10.0 million of collaboration and license revenue under the CCX140 Agreement under ASC 605.

The following table presents the contract assets and liabilities for all of the Company’s revenue contracts as of

the following dates (in thousands):

Contract asset:

Accounts receivable

Contract liability:

Deferred revenue

December 31,

2019

2018

$

— $

2,058

(100,837)

(134,561)

F-24

9.

Related Party Transactions (continued)

During the year ended December 31, 2019, the Company recognized the following revenue as a result of

changes in the contract asset and the contract liability balances (in thousands):

Revenue recognized in the period from:

Amount included in contract liability at

the beginning of the period

Performance obligations satisfied (or

partially satisfied) in previous periods

$

$

Year Ended December 31,
2018
2019

35,781 $

39,815

(2,251) $

(3,357)

10. Government Grant

In September 2019, the Company was awarded a two-year $1.0 million grant from the orphan drug office of

the U.S. Food and Drug Administration to support the clinical development of avacopan in patients with the rare
kidney disease complement 3 glomerulopathy. The Company recognized $0.2 million of grant revenue in 2019. As
of December 31, 2019, $0.2 million was recorded as accounts receivable.

11.

Stockholders’ Equity

Equity Incentive Plans

In May 2002, the stockholders approved the Amended and Restated 1997 Stock Option/Stock Issuance Plan
(the 1997 Plan) and in September 2002, the stockholders approved the 2002 Equity Incentive Plan (the 2002 Plan).
In February 2012, the stockholders approved the 2012 Equity Incentive Award Plan (the 2012 Plan). As of
December 31, 2019, a total of 15,440,000 shares of the Company’s common stock were reserved for issuance under
the 2012 Plan. In addition, the number of shares available for issuance under the 2012 Plan will be annually
increased by an amount equal to the lesser of: 2,000,000 shares; 4% of the outstanding shares of the Company’s
common stock as of the last day of the Company’s immediately preceding fiscal year; or an amount determined by
the Company’s Board of Directors. In October 2019, the Board of Directors approved an increase to the number of
shares reserved for issuance under the 2012 Plan by 2,000,000 shares effective January 1, 2020. Collectively, the
1997 Plan, the 2002 Plan and the 2012 Plan are known as the Stock Plans.

Restricted Stock

Restricted Stock Awards (RSAs) and Restricted Stock Units (RSUs) are independent of stock option grants
and are not transferrable, and are subject to forfeiture if recipients terminate their service to the Company prior to
the release of the vesting restrictions. RSUs granted to employees generally vest over a period of three years. RSUs
and RSAs granted to its nonemployee directors vest over a one-year period, or over a three-year period in the case of
an initial grant pursuant to the Company’s Non-Employee Director Compensation Policy (Directors Plan). In the
case of a change in control, RSUs and RSAs granted to nonemployee directors will vest in full. RSUs and RSAs are
valued at the closing price of the Company’s common stock on the date of grant. During the years ended December
31, 2018 and 2017, the weighted-average grant date fair value for restricted stock granted was $11.32 and $6.72,
respectively. The total fair value of restricted stock vested during the years ended December 31, 2019, 2018 and
2017 was $3.1 million, $2.4 million and $1.7 million, respectively.

F-25

11.

Stockholders’ Equity (continued)

The activity for restricted stock is summarized as follows:

Balance at December 31, 2018

Granted
Vested
Canceled

Unvested at December 31, 2019

Weighted-
Average
Grant-Date
Fair Value

8.47
11.54
7.99
—
10.54

Shares
467,632
229,821
(290,963)
(6,667)
399,823

$

$

As of December 31, 2019, there was $2.0 million of unrecognized compensation expense associated with

unvested restricted stock, which is expected to be recognized over a weighted-average period of 1.5 years.

Stock Options

Under the Stock Plans, incentive stock options may be granted by the Board of Directors to employees at

exercise prices of not less than 100% of the fair value at the date of grant. Nonstatutory options may be granted by
the Board of Directors to employees, officers, and directors of the Company or consultants at exercise prices of not
less than 85% of the fair value of the common stock on the date of grant. The fair value at the date of grant is
determined by the Board of Directors. Under the Stock Plans, options may be granted with different vesting terms
from time to time, but not to exceed 10 years from the date of grant. Outstanding options generally vest over four
years, with 25% of the total grant vesting on the first anniversary of the option grant date and 1/36th of the
remaining grant vesting each month thereafter.

The following table summarizes stock option activity and related information under the Company’s Stock

Plans:

Balance at December 31, 2018

Shares authorized
Granted (1)
Exercised (2)
Forfeited and expired (3)

Outstanding at December 31, 2019
Vested and expected to vest, net of estimated

forfeiture at December 31, 2019
Exercisable at December 31, 2019

Shares

Available
for Grant
1,708,516 10,720,200 $
—
2,000,000
(2,531,063) 2,301,242
(2,850,642)
(882,899)
9,287,901 $

125,526
889,566
2,192,545

8,966,722 $

5,750,443 $

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term (in years)

Aggregate
Intrinsic Value

8.39

11.69
7.74
7.97
9.44

9.38

8.62

6.54 $279,636,183

6.45 $270,570,850

5.14 $177,869,577

(1) The difference between shares granted in the number of shares available for grant and outstanding options

represents the RSUs and RSAs granted for the period.

(2) Shares presented as available for grant represents shares repurchased for tax withholding upon vesting of RSUs.
(3) The difference between shares forfeited and expired in the number of shares available for grant and outstanding

options represents the RSUs canceled during the period.

F-26

11.

Stockholders’ Equity (continued)

The aggregate intrinsic value represents the value of the Company’s closing stock price on the last trading day

of the period in excess of the weighted-average exercise price multiplied by the number of options outstanding or
exercisable. Total intrinsic value of options exercised was $48.4 million, $9.8 million and $1.3 million during 2019,
2018 and 2017, respectively. As of December 31, 2019, there was $18.4 million of unrecognized compensation
expense, net of estimated forfeitures, associated with outstanding stock options, which is expected to be recognized
over an estimated weighted-average period of 2.5 years.

As of December 31, 2019, stock options outstanding were as follows:

Exercise Price Range
$2.10 - $3.57
$4.50 - $6.60
$6.62
$6.66 - $7.98
$8.19
$8.22 - $10.82
$10.86
$10.91 - $10.94
$11.02
$11.56 - $29.76

Options Outstanding

Weighted-
Average
Contractual Life
6.14
5.36
7.07
5.42
5.15
6.44
8.13
6.80
9.17
5.80
6.54

Shares

940,493
574,174
991,898
890,168
961,252
590,192
980,448
78,800
1,109,583
2,170,893
9,287,901

Employee Stock Purchase Plan

In February 2012, the stockholders approved the ESPP. As of December 31, 2019, a total of 1,400,000 shares

of the Company’s common stock were reserved for issuance under the ESPP. In addition, the number of shares
available for issuance under the ESPP may be annually increased on the first day of each fiscal year during the term
of the ESPP, beginning with the 2012 fiscal year, by an amount equal to the lesser of: 300,000 shares; 1% of
outstanding shares of the Company’s common stock; or an amount determined by the Company’s Board of
Directors. The ESPP provides for an aggregate limit of 3,000,000 shares of common stock that may be issued under
the ESPP during the term of the ESPP. In October 2019, the Board of Directors approved an increase to the number
of shares reserved for issuance under the ESPP by 300,000 shares effective January 1, 2020.

The Company issued 71,653, 88,784 and 93,221 shares under the ESPP in 2019, 2018 and 2017, respectively.

As of December 31, 2019, 622,898 shares were available for issuance under the ESPP. As of December 31, 2019,
there was $0.2 million of unrecognized compensation expense, net of estimated forfeitures, associated with the
ESPP, which is expected to be recognized over an estimated weighted-average period of 0.4 years.

Stock Awards Granted to Employees

Employee stock-based compensation expense recognized is calculated based on awards ultimately expected to
vest and reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates.

F-27

11.

Stockholders’ Equity (continued)

Total employee stock-based compensation expense recognized associated with restricted stock, stock options,

and the ESPP, was as follows (in thousands):

Research and development
General and administrative
Total

Valuation Assumptions

Year Ended December 31,
2018

2017

2019

$

$

4,530 $
6,819
11,349 $

3,632 $
6,339
9,971 $

3,154
4,965
8,119

Fair value of options granted under the Stock Plans and purchases under the Company’s ESPP were estimated

at grant or purchase dates using a Black-Scholes option valuation model. The Black-Scholes valuation model
requires that assumptions are made with respect to various factors, including the expected volatility of the fair value
of the Company’s common stock. The Company has based its expected volatility on the average historical
volatilities of public entities having similar characteristics including: industry, stage of life cycle, size, and financial
leverage. The weighted-average expected term of options was calculated using the simplified method as prescribed
by accounting guidance for stock-based compensation. This decision was based on the lack of relevant historical
data due to the Company’s limited historical experience.

The fair values of the employee stock options granted under the Company’s Stock Plans and the option
component of the shares purchased under the ESPP during 2019, 2018 and 2017 were estimated at the date of grant
using the Black-Scholes option-pricing model with the following assumptions:

Employee Stock Options
2018

2017

2019

Employee Stock Purchase Plan
2018

2017

2019

Dividend yield
Volatility
Weighted-average expected life (in

years)

Risk-free interest rate
Weighted-average grant date fair

0%
71.3%

6.0
2.28%

0%
67.8%

6.0
2.66%

0%
68.3%

6.0
2.04%

0%
56.4%

0.5
1.87%

0%
73.8%

0.5
2.33%

0%
52.9%

0.5
1.22%

value

$

7.54

$

6.22

$

4.30

$

4.10

$

3.73

$

2.16

Stock Options Granted to Nonemployees

During 2019, 2018 and 2017, the Company granted to consultants options to purchase 82,011, 28,534 and

239,266 shares of common stock, respectively.

In connection with grants of stock options to nonemployees, the Company recorded stock-based compensation

expense as follows (in thousands):

Research and development
General and administrative
Total

Year Ended December 31,
2018

2017

2019

$

$

186 $
103
289 $

862 $
—
862 $

629
—
629

F-28

11.

Stockholders’ Equity (continued)

Valuation Assumptions

Stock-based compensation expense associated with stock options granted to nonemployees is recognized as

the stock options vest.

The estimated fair values of the stock options granted are calculated at each reporting date using the Black-

Scholes option-pricing model, with the following assumptions:

Dividend yield
Volatility
Weighted-average expected life (in years)
Risk-free interest rate

Year Ended December 31,
2017
2018
2019
0%
0%
0%
69-70%
67-68%
68-87%
5.5-10.0
5.7-9.9
5.5-6.0
1.6-2.2% 2.7-3.0% 1.9-2.5%

Equity Distribution Agreement

In December 2018, the Company entered into an Equity Distribution Agreement (EDA), pursuant to which the
Company may offer and sell, from time to time, shares of the Company’s common stock, par value $0.001 per share,
having an aggregate offering price of up to $75.0 million. For the year ended December 31, 2019, the Company sold
6,491,196 shares of its common stock pursuant to its EDA for net proceeds of $73.3 million. These sales fully
exhausted the amount available under the EDA. Accordingly, no further sales will be made under the EDA.

12.

401(k) Plan

In October 1997, the Company established the ChemoCentryx 401(k) Plan and Trust (the 401(k) Plan).
Employees may contribute, up to the percentage limit imposed by the Internal Revenue Code of 1986, as amended,
an amount of their salary each calendar year until termination of their employment with the Company. The
Company may elect to make matching contributions, as per the Plan; however, no matching contributions were
made in the years ended December 31, 2019, 2018 and 2017.

F-29

13.

Income Taxes

The Company’s loss before tax is only attributable to U.S. operations. The components of the income tax

(benefit) expense are as follows (in thousands):

Current (benefit from) provision for income taxes:

Federal
State

Year Ended December 31,
2018

2017

2019

$

— $
—

— $
—

Total current (benefit from) provision for income

taxes

Deferred (benefit from) provision for income taxes:

Federal
State

Total deferred tax (benefit from) provision for

income taxes

—

—
—
—

—

—

—
—
—

—

(Benefit from) provision for income taxes

$

— $

— $

—
—

—

—
—
—

—

—

A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as

follows:

Federal statutory income tax rate
Permanent items
Excess tax benefit for stock-based compensation
Tax credits
Change in valuation allowance
Change in tax rate
Other
(Benefit from) provision for income taxes

Year Ended December 31,
2018

2017

2019

(21.0%)
1.3
(13.3)
(38.3)
70.3
—
1.0
—%

(21.0%)
1.6
(2.8)
(3.5)
24.5
—
1.2
—%

34.0%
5.5
(2.0)
(7.2)
(224.1)
193.8
—
—%

F-30

13.

Income Taxes (continued)

The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred

tax assets consist of the following (in thousands):

Deferred tax assets:

Net operating loss carryforwards
Tax credits
Amortization of deferred stock compensation - non-

$

76,033 $
39,625

62,405
11,794

December 31,

2019

2018

qualified

Reserves and accruals
Deferred revenue
Depreciation and amortization
Lease liability

Gross deferred tax assets

Less: valuation allowance

Total deferred tax assets

Deferred tax liabilities:

Depreciation and amortization
Right of use asset

Total deferred tax liabilities
Net deferred tax assets

5,172
1,528
20,312
15
434
143,119
(142,761)
358

—
(358)
(358)

$

— $

6,569
1,140
20,991
—
—
102,899
(102,891)
8

(8)
—
(8)
—

The Company concluded that it was more likely than not that its deferred tax assets would not be realized.

Accordingly, the total deferred tax assets were fully offset by a valuation allowance. The Company’s valuation
allowance increased by approximately $39.9 million and $19.2 million in 2019 and 2018, respectively.

At December 31, 2019, the Company had federal and state net operating loss carryforwards of approximately
$278.7 million and $225.7 million, respectively. The federal net operating loss carryforwards will begin to expire in
2032. Due to tax reform, federal net operating loss carryforwards generated in 2018 and forward no longer have an
expiration date. In 2019, state net operating losses of $21.1 million expired and the state net operating loss
carryforwards as of December 31, 2019 will begin to expire in 2028.

As of December 31, 2019, the Company has federal and state research and development credit carryforwards
of $11.5 million and $9.0 million, respectively. The federal research and development credits will begin to expire in
2020 if not utilized. California research and development credits can be carried forward indefinitely. In 2019, the
Company performed a tax credit study and as a result, expects to claim $46.9 million of orphan drug credits in the
2019 tax return. Such orphan drug credit will begin to expire in 2034 if not utilized.

Utilization of the net operating loss and credit carryforwards may be subject to annual limitation due to
historical or future ownership percentage change rules provided by the Internal Revenue Code of 1986, and similar
state provisions. The annual limitation may result in the expiration of certain net operating loss and credit
carryforwards before their utilization.

F-31

13.

Income Taxes (continued)

A reconciliation of the Company’s unrecognized tax benefits for the years ended December 31, 2019, 2018

and 2017, is as follows (in thousands):

Balance as of December 31, 2017

Additions for current tax positions

Balance as of December 31, 2018

Additions for current tax positions
Additions for prior tax positions

Balance as of December 31, 2019

Unrecognized
Income
Tax Benefits
8,786
$
928
9,714
3,455
12,090
25,259

$

As of December 31, 2019 and 2018, the Company had approximately $25.3 million and $9.7 million,
respectively, of unrecognized tax benefits, none of which would currently affect the Company’s effective tax rate if
recognized due to the Company’s deferred tax assets being fully offset by a valuation allowance. In 2019,
unrecognized tax benefits increased due to uncertainty associated with the Company’s claim of prior year research
and development and orphan drug credits. The Company is not aware of any items that will significantly increase or
decrease its unrecognized tax benefits in the next 12 months.

For U.S. federal and California income tax purposes, the statute of limitations remains open for the years

beginning 2016 and 2015, respectively, except for the carryforward of net operating losses and research and
development credits generated in prior years.

If applicable, the Company would classify interest and penalties related to uncertain tax positions in income
tax expense. Through December 31, 2019, there has been no interest expense or penalties related to unrecognized
tax benefits.

14.

Selected Quarterly Financial Data (unaudited)

Selected quarterly results from operations for the years ended December 31, 2019 and 2018 are as follows (in

thousands except per share amounts):

2019 Quarter Ended

Revenue
Net loss
Basic and diluted net loss per share

Revenue
Net loss
Basic and diluted net loss per share

$
$
$

$
$
$

March 31

June 30

8,327 $
(11,949) $
(0.23) $

7,173 $
(15,150) $
(0.26) $

September 30 December 31
10,047
(15,528)
(0.26)

10,581 $
(12,862) $
(0.22) $

2018 Quarter Ended

March 31

June 30

9,546 $
(9,417) $
(0.19) $

15,022 $
(6,874) $
(0.14) $

September 30 December 31
9,332
(10,785)
(0.21)

8,975 $
(10,890) $
(0.22) $

The four quarters of net earnings per share may not add to the total year because of differences in the

weighted-average numbers of shares outstanding during the quarters and the year.

F-32

15.

Subsequent Event

In January 2020, the Company entered into an Amended and Restated Loan and Security Agreement (the

Amended Loan Agreement) with Hercules, which provides the Company with an additional term loan in an
aggregate principal amount of up to $100.0 million (the Restated Credit Facility) in three tranches, subject to certain
terms and conditions.

The first tranche of up to $40.0 million is available to the Company through December 15, 2020, of which

$20.0 million would be available upon submission of the avacopan New Drug Application (NDA) for the treatment
of ANCA vasculitis. Under the first tranche, $5.0 million will be advanced to the Company on or before March 15,
2020. The second tranche of up to an additional $30.0 million is available to the Company through December 15,
2021 upon NDA approval of avacopan for the treatment of ANCA vasculitis. The third tranche of up to an
additional $30.0 million is available through December 15, 2022, subject to certain conditions.

For advances under the Restated Credit Facility, the Company will make interest only payments through

September 1, 2022 and will then repay the principal balance and interest of the advances in equal monthly
installments through February 1, 2024. Upon satisfaction of certain conditions, the interest only payment period and
the principal balance repayment period may be extended.

The initial interest rate equals to the greater of either (i) 8.50% plus the prime rate as reported in The Wall
Street Journal minus 5.25%, and (ii) 8.50%, which may be reduced upon the Company achieving certain cumulative
net avacopan revenue levels.

The Company may prepay advances under the Restated Credit Facility, in whole or in part, at any time subject

to a prepayment charge up to 2.0% of prepayment amounts. In addition, the Company will pay an end of term
charge of 7.15% of the aggregate amount of the advances. The Restated Credit Facility is secured by substantially
all of the Company’s assets, excluding intellectual property.

In connection with the Amended Loan Agreement, the Company also entered into a Right to Invest
Agreement with Hercules, pursuant to which Hercules shall have the right to participate, in an amount up to $3.0
million, in any subsequent equity financing broadly marketed to multiple investors in an amount greater than $30.0
million.

The Amended Loan Agreement also includes customary affirmative and negative covenants and events of

default, the occurrence and continuance of which provide Hercules with the right to demand immediate repayment
of all principal and unpaid interest under Amended Loan Agreement, and to exercise remedies against the Company
and the collateral securing the Amended Loan Agreement.

F-33

SIGNATURES

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 Annual Report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized.

Date: March 10, 2020

CHEMOCENTRYX, INC.

By: /s/ Thomas J. Schall, Ph.D.
Thomas J. Schall, Ph.D.
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on
Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.

Signature

Title

/s/ Thomas J. Schall, Ph.D.
Thomas J. Schall, Ph.D.

President, Chief Executive Officer and Director
(Principal Executive Officer)

Date

March 10, 2020

Executive Vice President,
Chief Financial and Administrative Officer and Secretary March 10, 2020
(Principal Financial Officer)

/s/ Susan M. Kanaya
Susan M. Kanaya

/s/ Pui San Kwan
Pui San Kwan

/s/ Thomas A. Edwards
Thomas A. Edwards

/s/ Joseph M. Feczko, M.D.
Joseph M. Feczko, M.D.

/s/ Rita Jain, M.D.
Rita Jain, M.D.

Vice President, Finance
(Principal Accounting Officer)

Director

Director

Director

/s/ Henry A. McKinnell, Jr., Ph.D.
Henry A. McKinnell, Jr., Ph.D.

Director

/s/ Geoffrey M. Parker
Geoffrey M. Parker

/s/ James L. Tyree
James L. Tyree

Director

Director

March 10, 2020

March 10, 2020

March 10, 2020

March 10, 2020

March 10, 2020

March 10, 2020

March 10, 2020