Concert Pharmaceuticals Inc
Annual Report 2015

Plain-text annual report

CONCERT PHARMACEUTICALS, INC. FORM 10-K (Annual Report) Filed 03/01/16 for the Period Ending 12/31/15 Address Telephone CIK 99 HAYDEN AVENUE SUITE 500 LEXINGTON, MA 02421 781-860-0045 0001367920 Symbol CNCE SIC Code Fiscal Year 2834 - Pharmaceutical Preparations 12/31 http://www.edgar-online.com © Copyright 2016, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549_____________________FORM 10-K_____________________ (Mark One)ýANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended: December 31, 2015or¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the transition period from to Commission file number: 001-36310 _____________________CONCERT PHARMACEUTICALS, INC.(Exact name of registrant as specified in its charter)_____________________ Delaware 20-4839882(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.)99 Hayden Avenue, Suite 500Lexington, Massachusetts 02421(Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (781) 860-0045Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registeredCommon Stock, par value $0.001 per share The NASDAQ Global MarketSecurities 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 ýIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ýIndicate 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 thepreceding 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 past90 days. Yes ý No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submittedand posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required tosubmit and post such files). Yes ý No ¨1Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ýThe aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2015 was approximately $195,641,000, basedon the closing price of the registrant’s common stock on the NASDAQ Global Market on that date.The number of shares outstanding of the registrant’s Common Stock as of February 23, 2016: 22,204,3472CONCERT PHARMACEUTICALS, INC.TABLE OF CONTENTS PART I Item 1. Business 5 Item 1A. Risk Factors 23 Item 1B. Unresolved Staff Comments 52 Item 2. Properties 52 Item 3. Legal Proceedings 52 Item 4. Mine Safety Disclosures 52 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 52 Item 6. Selected Financial Data 55 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 56 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 71 Item 8. Financial Statements and Supplementary Data 71 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 97 Item 9A. Controls and Procedures 97 Item 9B. Other Information 98 PART III Item 10. Directors, Executive Officers and Corporate Governance 98 Item 11. Executive Compensation 98 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 98 Item 13. Certain Relationships and Related Person Transactions, and Director Independence 98 Item 14. Principal Accountant Fees and Services 98 PART IV Item 15. Exhibits and Financial Statement Schedules 98 SIGNATURES 99 EXHIBIT INDEX 1013References to ConcertThroughout this Annual Report on Form 10-K, the “Company,” “Concert,” “we,” “us,” and “our,” except where the context requires otherwise, refer toConcert Pharmaceuticals, Inc. and its consolidated subsidiary, and “our board of directors” refers to the board of directors of Concert Pharmaceuticals, Inc.Forward-Looking InformationThis Annual Report on Form 10-K contains forward-looking statements regarding, among other things, our future discovery and development efforts, ourfuture operating results and financial position, our business strategy, and other objectives for our operations. The words “anticipate,” “believe,” “estimate,”“expect,” “intend,” “may,” “plan,” “predict,” “project,” “would” and similar expressions are intended to identify forward-looking statements, although not allforward-looking statements contain these identifying words. You also can identify forward-looking statements by the fact that they do not relate strictly tohistorical or current facts. There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated byforward-looking statements. These risks and uncertainties include those inherent in pharmaceutical research and development, such as adverse results in our drugdiscovery and clinical development activities, decisions made by the U.S. Food and Drug Administration and other regulatory authorities with respect to thedevelopment and commercialization of our drug candidates, our ability to obtain, maintain and enforce intellectual property rights for our drug candidates, ourability to obtain any necessary financing to conduct our planned activities and other risk factors. We may not actually achieve the plans, intentions or expectationsdisclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differmaterially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionarystatements included in this Annual Report on Form 10-K, particularly in the section entitled “Risk Factors” in Part I that could cause actual results or events todiffer materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions,mergers, dispositions, joint ventures or investments that we may make. Unless required by law, we do not undertake any obligation to publicly update any forward-looking statements.4Part IItem 1.BusinessOVERVIEWWe are a clinical stage biopharmaceutical company applying our extensive knowledge of deuterium chemistry to discover and develop novel small molecule drugs.Incorporation of deuterium into known molecules has the potential to provide better pharmacokinetic or metabolic properties, thereby enhancing their clinicalsafety, tolerability or efficacy. Our approach starts with approved drugs, advanced clinical candidates or previously studied compounds that may be improved withdeuterium substitution. Our technology provides the opportunity to develop products that may compete with the non-deuterated drug in existing markets or toleverage the known activity of approved drugs to expand into new indications. Our DCE Platform® has broad potential across numerous therapeutic areas. Thefollowing table summarizes our diverse clinical pipeline of product candidates. All of these candidates are small molecules designed for oral administration.Product CandidateLead IndicationStatusWorldwide rightsAVP-786Deuterated dextromethorphanAlzheimer’s AgitationPhase 3Avanir PharmaceuticalsMajor Depressive DisorderPhase 2Residual SchizophreniaPhase 2CTP-656Deuterated ivacaftorCystic FibrosisPhase 1ConcertCTP-730Deuterated apremilastInflammationPhase 1CelgeneJZP-386Deuterated sodium-oxybateNarcolepsyPhase 1Jazz PharmaceuticalsOUR STRATEGYOur strategy is to apply our deuterium technology to well characterized molecules in order to leverage their known safety and efficacy profile. We select pipelinecandidates based on the medical needs of patients, commercial opportunity, regulatory considerations, and competitive landscape. Our approach aims to enable drug discovery and clinical development that is more efficient and less expensive than conventional small molecule drug research anddevelopment. Key elements of our strategy include:•Using deuterium technology to develop deuterated product candidates with substantially improved safety, tolerability or efficacy profiles to competedirectly with the non-deuterated compound in its approved indication. In addition, we expect to develop deuterated product candidates that are based onapproved drugs but for new indications that we believe are promising in view of the known biology of the approved drug.•Developing our deuterated product candidates quickly through proof-of-concept clinical trials, which could be as early as Phase 1, and then determiningwhether to advance it independently or with a partner; and•Commercializing product candidates where they can be marketed by a small, focused sales force or seeking partners based on strategic considerations.DEUTERIUMDue to its natural abundance, the average adult human body contains approximately two grams of deuterium. While essentially identical to hydrogen in size andshape, deuterium differs from hydrogen in that it contains an additional neutron. As a result, deuterium forms a more stable chemical bond with carbon than doeshydrogen. The deuterium-carbon bond is typically six to nine times more stable than the hydrogen-carbon bond. This has important implications for drugdevelopment because drug metabolism often involves the breaking of hydrogen-carbon bonds.5Because deuterium forms more stable bonds with carbon, deuterium substitution can in some cases alter drug metabolism, including through improved metabolicstability, reduced formation of toxic metabolites, increased formation of desired active metabolites, or a combination of these effects. At the same time, becausedeuterium closely resembles hydrogen, the substitution of deuterium for hydrogen has generally been found not to materially alter the intrinsic biological activityof a compound. Deuterated compounds can generally be expected to retain biochemical potency and selectivity similar to their hydrogen analogs. The effects, ifany, of deuterium substitution on metabolic properties are highly dependent on the specific molecular positions at which deuterium is substituted for hydrogen. Inaddition, the metabolic effects of deuterium substitution, if any, are unpredictable, even in compounds that have similar chemical structures.Potential advantages of product candidates based on our DCE PlatformUsing our DCE Platform we create novel drugs designed to have superior properties - including enhanced clinical safety, tolerability or efficacy - based oncompounds that have established pharmacological activity. In many instances, Phase 1 clinical evaluation has the potential to demonstrate whether there will beproduct differentiation. Potential advantages of our DCE Platform include the following:•Improved metabolic profile. An improved metabolic profile may potentially reduce or eliminate unwanted side effects or undesirable drug interactions orincrease efficacy. Metabolic profile refers to the relative amounts and exposure profile of the parent drug and its metabolites in the body.•Increased half-life. A longer half-life may decrease the number of doses that a patient is required to take per day or provide more consistent exposure ofthe compound in comparison to the corresponding non-deuterated compound. Half-life is a measure of how long it takes for the body to clear half of thedose of the drug.•Avoidance of undesirable metabolism: By avoiding first pass metabolism, we may be able to improve oral bioavailability, which could potentially leadto better efficacy at a lower dose of drug. First pass metabolism is metabolism that occurs before the drug reaches the circulatory system.OUR PRODUCT CANDIDATESOur pipeline is focused on leveraging our deuterium expertise and proprietary product platform to develop novel medications designed to enhance patientoutcomes in diverse therapeutic areas including genetic disease, inflammatory disease and neurologic disorders. The discussion below highlights our currentclinical programs including those being developed by our collaborators.CTP-656Background on Cystic FibrosisCystic fibrosis is a rare, life-threatening genetic disease affecting approximately 70,000 people worldwide. There is no known cure for cystic fibrosis. The medianpredicted survival age is close to 40 years and nearly half of the cystic fibrosis population is 18 or older. Cystic fibrosis is caused by mutations in the gene thatencodes the cystic fibrosis transmembrane conductance regulator protein, or CFTR, a chloride channel that regulates the movement of salt and water into and outof cells. Children who develop cystic fibrosis inherit two defective CFTR genes, one from each parent, which are referred to as alleles. There are more than 1,900known mutations in the CFTR gene, some of which result in cystic fibrosis, including the most prevalent F508del mutation and the less prevalent G551D gatingmutation. In the United States, it is estimated that approximately 85% of individuals with cystic fibrosis have at least one F508del mutation and approximately4.4% of people with cystic fibrosis have a G551D gating mutation. Each mutation causes a different defect in the CFTR protein. When there is a defect caused bythe G551D gating mutation, the defective CFTR protein reaches the surface of a cell but does not efficiently transport chloride ions across the cell membrane. TheF508del mutation results in a different defect that largely prevents the CFTR protein from reaching the cell surface and also impairs its ability to transport chlorideions.Defective CFTR results in decreased chloride secretion and reduced hydration of the mucus layer leading to the buildup of thick mucus in the lungs and other vitalorgans. Lung disease, the most critical manifestation of cystic fibrosis, is characterized by airway obstruction, infection and inflammation, such that more than 90%of all cystic fibrosis patients die of lung disease. Cystic fibrosis patients typically require lifelong treatment, with multiple daily medications, in many caseshospitalization due to lung infections, and potentially lung transplantation.6Ivacaftor (Kalydeco®) is a drug marketed by Vertex Pharmaceuticals, Inc., or Vertex, and initially approved for patients with the G551D gating mutation. Thelabel has been expanded to include patients with certain other mutations. Ivacaftor is a CFTR potentiator, which keeps the CFTR protein channels on the cellsurface open more often, to increase the flow of salt and water into and out of the cell. Vertex has also developed Orkambi®, a combination of lumacaftor andivacaftor, which is marketed for patients with two F508del mutations.CTP-656 OpportunityCTP-656 is a novel, next generation potentiator that we are initially developing for the treatment of cystic fibrosis in patients who have gating mutations, includingthe G551D mutation. CTP-656 was discovered by applying our deuterium chemistry technology to modify ivacaftor, which is the current standard of care for thispopulation. Due to its differentiated pharmacokinetic profile, CTP-656 has the potential to offer a greater therapeutic benefit relative to ivacaftor for this patientpopulation. The potential benefits of CTP-656 include improved efficacy due to better treatment adherence, as a result of once-daily dosing and enhanced exposureto the parent drug, which is more active than the metabolites; and fewer drug-drug interactions.CTP-656 also has the potential to be a key component of combination therapies that enable the treatment of patients having many other CFTR mutations. Toadvance combination therapies of CTP-656, we intend to collaborate with companies who are focused on developing drugs that target other mechanisms of actionand that we believe may be suitable to combine with CTP-656.Clinical Development of CTP-656In the third quarter of 2015, we completed a single ascending dose Phase 1 trial in healthy volunteers which included a comparison of CTP-656 with a single doseof Kalydeco. The single ascending dose Phase 1 clinical trial was conducted in 10 healthy volunteers and evaluated three doses (75, 150 and 300 mg) of CTP-656as an aqueous suspension and a single dose 150 mg tablet of Kalydeco in one period. The single ascending dose findings support once-daily administration of CTP-656 based on a half-life in the range of 14 to 17 hours. In this trial, CTP-656 also demonstrated a linear dose response. CTP-656 was well-tolerated across all dosegroups. There were no serious adverse events reported in subjects who received CTP-656. Comparison of CTP-656 single dose pharmacokinetic profiles against Kalydeco®In the single dose crossover comparison of an aqueous suspension of 150 mg of CTP-656 to a 150 mg solid dose of Kalydeco, nine subjects completed the Phase 1trial, and CTP-656 demonstrated a superior pharmacokinetic profile. CTP-656 demonstrated a reduced rate of clearance, longer half-life, and substantiallyincreased exposure with greater plasma levels at 127and 24 hours vs. Kalydeco. For CTP-656, there was greater plasma exposure of the parent drug relative to its less active metabolites. With Kalydeco, the less activemetabolites were more prominent than the parent drug.In November 2015, we initiated a multiple ascending dose Phase 1 clinical trial in healthy volunteers. The trial is being conducted in two parts and will enrollapproximately 38 healthy volunteers to assess safety, tolerability and pharmacokinetics of CTP-656 in a tablet formulation. The first part assessed thepharmacokinetic properties of a single dose tablet formulation of 150 mg of CTP-656 versus the 150 mg commercial tablet formulation of Kalydeco in 8 healthyvolunteers following a high-fat meal. The second part will assess three doses of CTP-656, starting at 75 mg and up to 225 mg daily for seven days compared toplacebo, again following a high-fat meal. In February 2016, we announced results from Part 1 of the multiple ascending dose trial with a tablet formulation of CTP-656. The data from this trial wasconsistent with results from the previously completed single ascending dose trial, in which an aqueous suspension of CTP-656 demonstrated superiorpharmacokinetic properties compared to Kalydeco. In this trial, CTP-656 tablets demonstrated a reduced rate of clearance, longer half-life, substantially increasedexposure and greater plasma levels at 24 hours compared to Kalydeco. With both the solid dose and aqueous suspension formulations, the overall metaboliteexposure profile of CTP-656 differed from that of Kalydeco. After administration of CTP-656, there was greater plasma exposure of the more active parent drugrelative to less-active metabolites, whereas with Kalydeco there was greater plasma exposure of the less-active metabolites. Top-line data from Part 2 of the Phase 1 multiple ascending trial and a food effect trial are expected in the second quarter of 2016. We also plan to commence aPhase 2 clinical trial with CTP-656 in patients with cystic fibrosis associated with gating mutations in the second half of 2016.Collaboration Product Candidates-Development ProgramsWe have entered into several collaborative arrangements with companies to develop deuterium-modified versions of their marketed products. The deuteriumproduct candidates may be developed for an existing indication or in new indications.AVP-786In February 2012, we granted Avanir Pharmaceuticals, Inc., or Avanir, an exclusive worldwide license to develop and commercialize deuterated dextromethorphananalogs. Subsequent to our agreement, Avanir was acquired by Otsuka Pharmaceutical Co., Ltd. and is now a wholly owned subsidiary of Otsuka America, Inc.Avanir is developing AVP-786, which is a combination of a deuterated dextromethorphan analog and a low dose of quinidine. Avanir is conducting several Phase2 and Phase 3 clinical trials to evaluate AVP-786 for the treatment of neurologic and psychiatric disorders.•In November 2015, Avanir announced the initiation of the Phase 3 clinical program to evaluate the safety and efficacy of AVP-786 for the treatment ofagitation associated with Alzheimer’s disease. It expects to enroll approximately 700 patients in two Phase 3 trials. The Phase 3 trials are expected to becompleted in the third quarter of 2018. •In August 2014, Avanir initiated a Phase 2 randomized, placebo-controlled clinical trial to evaluate the safety and efficacy of AVP-786 as an adjunctivetreatment in patients with major depressive disorder who have had an inadequate response to antidepressant treatment. This trial is expected to becompleted in the second quarter of 2016.•In September 2015, Avanir initiated a Phase 2 clinical trial to evaluate the safety and efficacy of AVP-786 as an adjunctive treatment for patients withresidual schizophrenia. This trial is expected to be completed in the third quarter of 2017.CTP-730In April 2013, we entered into a strategic worldwide collaboration with Celgene Pharmaceuticals, Inc., Celgene International Sarl and Celgene Corporation,together referred to as Celgene, related to certain deuterium-substituted compounds for the treatment of inflammation or cancer. While the collaboration has thepotential to encompass multiple programs, it is initially focused on one program, CTP-730.CTP-730 is a deuterated analog of apremilast, which is marketed by Celgene for the treatment of certain types of psoriasis and psoriatic arthritis. We havecompleted the Phase 1 clinical evaluation of CTP-730. Once daily dosing of 50 mg of CTP-730 administered for seven days in the Phase 1 clinical trialdemonstrated similar steady state exposure to historical data for 30 mg8of apremilast twice daily. Treatment with CTP-730 was generally well-tolerated and no serious adverse events were observed. Celgene is responsible for anydevelopment of CTP-730 beyond the completed Phase 1 clinical trials. Celgene is assessing the path forward for CTP-730, however, CTP-730 has not advancedinto new trials at this time.JZP-386In February 2013, we licensed the commercial rights to deuterated analogs of sodium oxybate, including JZP-386, to Jazz Pharmaceuticals under an exclusiveworldwide license agreement. Sodium oxybate is the active ingredient in Xyrem®, marketed in the United States by Jazz Pharmaceuticals to treat two of the keysymptoms of narcolepsy, excessive daytime sleepiness and cataplexy.JZP-386 is being developed for the potential treatment of patients with narcolepsy. In May 2015, we and Jazz Pharmaceuticals announced the completion of aPhase 1 clinical study. Clinical data from this Phase 1 study demonstrated that JZP-386 provided favorable deuterium-related effects, including higher serumconcentrations and correspondingly increased PD effects at clinically relevant time points compared to Xyrem® (sodium oxybate) oral solution. The safety profileof JZP-386 was similar to that observed with Xyrem. Jazz Pharmaceuticals is responsible for any further development of JZP-386.INTELLECTUAL PROPERTYWe protect our product candidates through the use of patents, trade secrets and careful monitoring of our proprietary know-how. Our patents and patentapplications, if they issue as patents, for our lead programs expire between 2028 and 2034. The expected expiration dates are before any patent term extension towhich we may be entitled under the Hatch-Waxman Act or equivalent laws in other jurisdictions where we have issued patents.AVP-786We hold U.S. patents and pending applications covering the composition of matter and methods of use of the deuterated dextromethorphan analog, as well as aU.S. patent application covering methods of use of certain other dextromethorphan compounds. These patents and patent applications are expected to expirebetween 2028 and 2030. We have corresponding patents and patent applications in Europe and Japan that are expected to expire in 2028. We have grantedexclusive licenses under these patent rights to Avanir.CTP-656We hold U.S. patents covering the composition of matter of deuterated analogs of ivacaftor and a corresponding U.S. patent application. The patents and the patentapplication are expected to expire in 2032. We have corresponding patent applications in Europe and Japan that are expected to expire in 2032. We have retainedall of the CTP-656 patent rights.JZP-386We hold a U.S. patent, as well as a corresponding U.S. patent application, covering the composition of matter of deuterated analogs of sodium oxybate, includingJZP-386, and methods of using them for treating certain diseases and disorders, including narcolepsy. This patent and patent application are expected to expire in2030. We hold a corresponding European patent that is expected to expire in 2030. We also have a U.S. patent covering methods of use of JZP-386 for treatingcertain diseases and disorders, including narcolepsy, as well as patent applications in the United States, Europe and Japan, covering the composition of matter andmethods of use of JZP-386, that are expected to expire in 2032. We have granted exclusive licenses under these patent rights to Jazz Pharmaceuticals.CTP-730We hold U.S. patents and a U.S. patent application covering the composition of matter of CTP-730. The patents and the patent application are expected to expire in2030. We also hold corresponding patents in Europe and Japan that are expected to expire in 2030. We have granted exclusive licenses under these patent rightsto Celgene.9Other Product CandidatesWe also have patent portfolios that are related to a number of other programs. These patent portfolios are wholly owned by us. These include issued patents orpatent applications that claim deuterated analogs of more than 90 non-deuterated drugs and drug candidates.The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In the United States and other countries inwhich we file, the patent term is 20 years from the earliest date of filing a non-provisional patent application.Under U.S. patent law, the patent term may be extended by patent term adjustment due to certain failures of the U.S. Patent and Trademark Office to act in a timelymanner. The patent term of a patent that covers an FDA-approved drug may also be eligible for patent term extension, which permits patent term restoration ascompensation for the patent term lost during the FDA regulatory review process. The Hatch-Waxman Act permits a patent term extension of up to five yearsbeyond the expiration of the patent. The length of the patent term extension is related to the length of time the drug is under regulatory review. Patent extensioncannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval and only one patent applicable to an approved drug maybe extended. Similar provisions are available in Europe and other non-U.S. jurisdictions to extend the term of a patent that covers an approved drug. In the future,if and when our pharmaceutical products receive FDA approval, we expect to apply for patent term extensions on patents that we believe are eligible for suchextension. We also intend to seek patent term extensions in other jurisdictions where these are available. However, there is no guarantee that the applicableauthorities, including the FDA, will agree with our assessment of whether such extensions should be granted, and even if granted, the length of such extensions.We also rely on trade secrets and careful monitoring of our proprietary know-how to protect aspects of our business that are not amenable to, or that we do notconsider appropriate for, patent protection, including our DCE Platform, such as:•our methods of evaluating candidate compounds for deuteration;•our bioanalytical methods for identifying and measuring metabolites formed by the in vitro and in vivo metabolism of deuterated compounds;•our analytical methods for evaluating how selective deuterium substitution affects different pharmacokinetic and metabolic parameters in vitro and in vivosystems; and•our methods to determine the degree of deuterium substitution in compounds we manufacture.MANUFACTURING AND SUPPLYWe currently rely, and expect to continue to rely, on third parties for the manufacture of product candidates for our clinical trials. We obtain these manufacturingservices, including both the manufacture of the active pharmaceutical ingredients and finished drug product, on a purchase order basis and have not entered intolong-term contracts with any of these third party manufacturers. We expect to rely on third parties for commercial manufacturing for any of our product candidatesthat receive marketing approval.We have successfully transferred the methods we use in our internal manufacturing to our third party manufacturers, allowing them to produce multi-kilogramquantities of clinical trial materials with similar efficiency as we manufacture compounds internally. If any of our third party manufacturers should becomeunavailable to us for any reason, we believe that there are a number of potential replacements, although we might incur some delay in identifying and qualifyingsuch replacements.We believe that all of the deuterium that we use in manufacturing our product candidates is currently derived, directly or indirectly, from deuterium oxide. Formost of our deuterium supply we rely on bulk supplies of deuterium oxide, which we currently source from multiple suppliers, including two located in NorthAmerica, one of which is in the United States. In order to internationally transport any deuterium oxide that we purchase from foreign suppliers, we, or our U.S.supplier, may be required to obtain an export license from the country of origin and we may be required to obtain an International Import Certificate from thecountry of destination. We are also generally required to obtain an export license from the Nuclear Regulatory Commission before shipping deuterium oxide fromthe United States to any contract manufacturer in another country. Each of these documents specifies the maximum amount of deuterium oxide that we, or oursuppliers, are permitted to either import or export. In particular, in order to obtain additional supplies of deuterium oxide from one of the foreign suppliers fromwhich we have previously purchased deuterium oxide, the supplier will be required to obtain an additional export license10from the country of origin and, as part of the export license application process, we may be required to obtain a U.S. import certificate. While we and our suppliershave obtained similar licenses and certificates in the past, we or our suppliers may not be able to obtain them in the future in a timely manner or at all.Certain of our manufacturing processes for our product candidates incorporate deuterium by using deuterated chemical intermediates or reagents that are derivedfrom deuterium oxide. For the deuterated chemical intermediates and reagents, we are not subject to the license requirements applicable to deuterium oxide.However, the manufacturer of the deuterated chemical intermediate or reagent may themselves be required to obtain deuterium oxide under applicable licensingrequirements. Most of the manufacturers of these deuterated chemical intermediates and reagents are not located in countries that produce bulk quantities ofdeuterium oxide. Therefore, our ability to source these deuterated chemical intermediates or reagents will depend on the ability of these manufacturers to obtaindeuterium oxide from other countries.We purchase our raw materials on a purchase order basis and have not entered into long-term contracts with any of these third party suppliers. We believe that theraw materials for our product candidates are readily available and that the cost of manufacturing for our product candidates will not preclude us from selling themprofitably, if approved for sale.COMMERCIALIZATIONWe have not yet established a sales, marketing or product distribution infrastructure. We plan to use a combination of third party collaboration, licensing anddistribution arrangements and a focused in-house commercialization capability to sell any of our products that receive marketing approval. With respect to theUnited States, we plan to seek to retain full commercialization rights for products that we can commercialize with a specialized sales force and to retain co-promotion or similar rights when feasible in indications requiring a larger commercial infrastructure. We plan to collaborate with third parties forcommercialization in the United States of any products that require a large sales, marketing and product distribution infrastructure. We also plan to collaborate withthird parties for commercialization outside the United States.We plan to build a marketing and sales management organization to create and implement marketing strategies for any products that we market through our ownsales organization and to oversee and support our sales force. We expect the responsibilities of the marketing organization would include developing educationalinitiatives with respect to approved products and establishing relationships with thought leaders in relevant fields of medicine.COMPETITIONThe development and commercialization of new drug products is highly competitive. We expect that we, and our collaborators, will face significant competitionfrom major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide with respect to our product candidates thatwe, or they, may seek to develop or commercialize in the future. Specifically, there are a number of large pharmaceutical and biotechnology companies thatcurrently market and sell products or are pursuing the development of product candidates for the treatment of neurologic disorders, inflammation, and cysticfibrosis, the key indications for our current research and development programs. Our competitors may succeed in developing, acquiring or licensing technologiesand drug products that are more effective, have fewer or more tolerable side effects or are less costly than any product candidates that we are currently developingor that we may develop, which could render our product candidates obsolete and noncompetitive.Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer orless severe side effects, are more convenient or are less expensive than any products that we, or our collaborators, may develop. Our competitors also may obtainFDA or other marketing approval for their products before we, or our collaborators, are able to obtain approval for ours, which could result in our competitorsestablishing a strong market position before we, or our collaborators, are able to enter the market.Many of our existing and potential future competitors have significantly greater financial resources and expertise in research and development, manufacturing,non-clinical testing, conducting clinical trials, obtaining marketing approvals and marketing approved products than we do. Mergers and acquisitions in thepharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller or earlystage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. Thesecompetitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patientregistration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.11Many pharmaceutical and biotechnology companies have begun to cover deuterated analogs of their product candidates in patent applications and may choose todevelop these deuterated compounds. Some of these pharmaceutical and biotechnology companies may have significantly greater financial resources and expertisein research and development, manufacturing, non-clinical testing, conducting clinical trials, obtaining marketing approvals and marketing approved products thanwe do. In addition, we know of other companies that are broadly utilizing deuterium substitution for drug development, including Auspex Pharmaceuticals, Inc., awholly owned subsidiary of Teva Pharmaceutical Industries Ltd., and DeuteRx LLC. In some cases, these competitors may be interested in developing deuteratedcompounds that we may be interested in developing for ourselves. In addition, these competitors may enter into collaborative arrangements or businesscombinations that result in their ability to research and develop deuterated compounds more effectively than us. Our potential competitors also include academicinstitutions, government agencies and other public and private research organizations.AVP-786Avanir is developing AVP-786 for the treatment of agitation associated with Alzheimer's disease, major depressive disorder and for adjunctive treatment forresidual schizophrenia. While there are product candidates in clinical development for Alzheimer's agitation, such as brexpiprazole in Phase 3 development byOtsuka, there are no approved treatments. There are marketed drugs for major depressive disorder or product candidates in clinical development for eachindication.CTP-656We are initially developing CTP-656, a deuterated analog of ivacaftor, as a treatment for cystic fibrosis in individuals with gating mutations of the CFTR gene,including G551D. The current standard of care for this population is ivacaftor, which is marketed by Vertex Pharmaceuticals, Inc. under the name Kalydeco®. IfCTP-656 receives marketing approval, it would compete with this product and may face competition from a number of other product candidates that are currentlyin clinical development, including additional candidates being developed by Vertex, among others.JZP-386JZP-386 is a deuterated analog of sodium oxybate, which is being developed for the treatment of excessive daytime sleepiness and cataplexy in patients withnarcolepsy. The current standard of care is treatment with sodium oxybate, which is marketed by Jazz Pharmaceuticals, Inc., under the name Xyrem®. FlamelTechnologies SA announced their intent to initiate Phase 3 clinical development for an extended release formulation of sodium oxybate for the treatment ofnarcolepsy.CTP-730CTP-730 is a deuterated analog of apremilast, which is a selective inhibitor of the enzyme phosphodiesterase 4 or PDE4. Apremilast is marketed by Celgene forthe treatment of certain types of psoriasis and psoriatic arthritis. Apremilast is also being evaluated for its efficacy in other chronic inflammatory diseases for whicha PDE4 inhibitor may be useful. If CTP-730 receives marketing approval, it may face competition with drugs having the same or different mechanisms of action.GOVERNMENT REGULATIONSGovernment authorities in the United States, at the federal, state and local level, and in other countries and jurisdictions, including the European Union, extensivelyregulate, among other things, the research, development, testing, manufacture, manufacturing changes, packaging, storage, recordkeeping, labeling, advertising,promotion, sales, distribution, marketing, and import and export of pharmaceutical products. The processes for obtaining regulatory approvals in the United Statesand in foreign countries and jurisdictions, along with subsequent compliance with applicable statutes and regulations and other regulatory authorities, require theexpenditure of substantial time and financial resources.Review and Approval of Drugs in the United StatesIn the United States, the FDA regulates drugs under The Federal Food, Drug, and Cosmetic Act, or FDCA, and implementing regulations. The process of obtainingregulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations requires the expenditure ofsubstantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approvalprocess or after approval, may subject an applicant and/or sponsor to a variety of administrative or judicial sanctions, including refusal by the FDA to approvepending applications, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters and other types of letters, product recalls, productseizures, total or partial suspension of production or distribution, injunctions, fines, refusals of12government contracts, restitution, disgorgement of profits, or civil or criminal investigations and penalties brought by the FDA and the Department of Justice orother governmental entities.An applicant seeking approval to market and distribute a new drug product in the United States must typically undertake the following: •completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s good laboratory practice, or GLP,regulations;•submission to the FDA of an IND, which allows human clinical trials to begin unless the FDA objects within 30 days;•approval by an independent institutional review board, or IRB, representing each clinical site before each clinical trial may be initiated;•performance of adequate and well-controlled human clinical trials in accordance with the FDA’s current Good Clinical Practices, or cGCPs, to establish thesafety and efficacy of the proposed drug product for each indication;•preparation and submission to the FDA of an NDA;•satisfactory review of the NDA by an FDA advisory committee, where appropriate or if applicable;•satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities at which the drug product, and the active pharmaceuticalingredient or ingredients thereof, are produced to assess compliance with current good manufacturing practices and to assure that the facilities, methods andcontrols are adequate to ensure the product’s identity, strength, quality and purity;•payment of user fees and securing FDA approval of the NDA; and•compliance with any post-approval requirements, including REMS and post-approval studies required by the FDA.Preclinical Studies and an INDPreclinical studies can include in vitro and animal studies to assess the potential for adverse events and, in some cases, to establish a rationale for therapeutic use.The conduct of preclinical studies is subject to federal regulations and requirements, including GLP regulations. Other studies include laboratory evaluation of thepurity, stability and physical form of the manufactured drug substance or active pharmaceutical ingredient and the physical properties, stability and reproducibilityof the formulated drug or drug product. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data,any available clinical data or literature and plans for clinical studies, among other things, to the FDA as part of an IND. Some preclinical testing, such as longer-term toxicity testing, animal tests of reproductive adverse events and carcinogenicity, may continue after the IND is submitted. An IND automatically becomeseffective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to a proposed clinical trial and places the trial onclinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. As a result, submission of anIND may not result in the FDA allowing clinical trials to commence.Following commencement of a clinical trial under an IND, the FDA may place a clinical hold on that trial. A clinical hold is an order issued by the FDA to thesponsor to delay a proposed clinical investigation or to suspend an ongoing investigation. A partial clinical hold is a delay or suspension of only part of the clinicalwork requested under the IND. For example, a specific protocol or part of a protocol is not allowed to proceed, while other protocols may do so. No more than 30days after imposition of a clinical hold or partial clinical hold, the FDA will provide the sponsor a written explanation of the basis for the hold. Following issuanceof a clinical hold or partial clinical hold, an investigation may only resume after the FDA has notified the sponsor that the investigation may proceed. The FDAwill base that determination on information provided by the sponsor correcting the deficiencies previously cited or otherwise satisfying the FDA that theinvestigation can proceed.Human Clinical Studies in Support of an NDAClinical trials involve the administration of the investigational product to human subjects under the supervision of qualified investigators in accordance with cGCPrequirements, which include, among other things, the requirement that all research subjects provide their informed consent in writing before their participation inany clinical trial. Clinical trials are conducted under written study protocols detailing, among other things, the objectives of the study, the parameters to be used inmonitoring13safety and the effectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA aspart of the IND. In addition, an IRB representing each institution participating in the clinical trial must review and approve the plan for any clinical trial before itcommences at that institution, and the IRB must conduct continuing review and reapprove the study at least annually. The IRB must review and approve, amongother things, the study protocol and informed consent information to be provided to study subjects. An IRB must operate in compliance with FDA regulations.Information about certain clinical trials must be submitted within specific timeframes to the NIH for public dissemination on their ClinicalTrials.gov website.Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined: Phase 1: The product candidate is initially introduced into healthy human subjects or patients with the target disease or condition and tested for safety,dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its effectiveness. Phase 2: The product candidate is administered to a limited patient population to identify possible adverse effects and safety risks, to preliminarilyevaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and dosage for Phase 3 studies. Phase 3: The product candidate is administered to an expanded patient population, generally at geographically dispersed clinical trial sites, in well-controlled clinical trials to generate enough data to statistically evaluate the efficacy and safety of the product for approval, to establish theoverall risk-benefit profile of the product, and to provide adequate information for the labeling of the product.Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse events occur. Phase1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, or at all. Furthermore, the FDA or the sponsor may suspend orterminate a clinical trial at any time on various grounds, including a finding that the research subjects are being exposed to an unacceptable health risk. Similarly,an IRB can suspend or terminate approval of a clinical trial at its institution, or an institution it represents, if the clinical trial is not being conducted in accordancewith the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients. The FDA will often inspect one or more clinical sites inlate-stage clinical trials to assure compliance with cGCP and the integrity of the clinical data submitted.Section 505(b)(2) NDAsNDAs for most new drug products are based on two adequate and well-controlled clinical trials which must contain substantial evidence of the safety and efficacyof the proposed new product. These applications are submitted under Section 505(b)(1) of the FDCA. The FDA is, however, authorized to approve an alternativetype of NDA under Section 505(b)(2) of the FDCA. This type of application allows the applicant to rely, in part, on the FDA’s previous findings of safety andefficacy for a similar product, or may rely on published literature. Specifically, Section 505(b)(2) applies to NDAs for a drug for which the applicant relies, as partof its application, on investigations made to show whether or not the drug is safe and effective for use “that were not conducted by or for the applicant and forwhich the applicant has not obtained a right of reference or use from the person by or for whom the investigations were conducted.”Thus, Section 505(b)(2) authorizes the FDA to approve an NDA based on safety and effectiveness data that were not developed by the applicant. NDAs filed underSection 505(b)(2) may provide an alternate and potentially more expeditious pathway to FDA approval for new or improved formulations or new uses ofpreviously approved products. If the 505(b)(2) applicant can establish that reliance on the FDA’s previous approval is scientifically appropriate, the applicant mayeliminate the need to conduct certain preclinical or clinical studies of the new product. The FDA may also require companies to perform additional studies ormeasurements to support the change from the approved product. The FDA may then approve the new drug candidate for all or some of the label indications forwhich the referenced product has been approved, as well as for any new indication sought by the Section 505(b)(2) applicant.If our partners submit NDAs for approval of deuterated analogs of marketed compounds for which they are the NDA holder, we believe that in certain cases theFDA may allow referencing of data from the non-deuterated compound in support of the application for approval of the deuterated product. Since this referencingby our partners would involve use of their own data and not require the use of another party’s data, it would constitute a Section 505(b)(1) application.Submission of an NDA to the FDAAssuming successful completion of required clinical testing and other requirements, the results of the preclinical and clinical studies, together with detailedinformation relating to the product’s chemistry, manufacture, controls and proposed labeling,14among other things, are submitted to the FDA as part of an NDA requesting approval to market the drug product for one or more indications. Under federal law,the submission of most NDAs is additionally subject to an application user fee, currently exceeding $2.1 million, and the sponsor of an approved NDA is alsosubject to annual product and establishment user fees, currently exceeding $104,000 per product and $554,600 per establishment. These fees are typically increasedannually.Under certain circumstances, the FDA will waive the application fee for the first human drug application that a small business, defined as a company with less than500 employees, or its affiliate submits for review. An affiliate is defined as a business entity that has a relationship with a second business entity if one businessentity controls, or has the power to control, the other business entity, or a third party controls, or has the power to control, both entities.The FDA conducts a preliminary review of an NDA within 60 days of its receipt and informs the sponsor by the 74th day after the FDA’s receipt of the submissionto determine whether the application is sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDAfor filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDAaccepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA has agreed to specified performancegoals in the review process of NDAs. Most such applications are meant to be reviewed within ten months from the date of filing, and most applications for“priority review” products are meant to be reviewed within six months of filing. The review process may be extended by the FDA for three additional months toconsider new information or clarification provided by the applicant to address an outstanding deficiency identified by the FDA following the original submission.Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not approve an applicationunless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of theproduct within required specifications. Additionally, before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance withcGCP.The FDA also may require submission of a risk evaluation and mitigation strategy, or REMS, plan to mitigate any identified or suspected serious risks. The REMSplan could include medication guides, physician communication plans, assessment plans, and elements to assure safe use, such as restricted distribution methods,patient registries, or other risk minimization tools.The FDA is required to refer an application for a novel drug to an advisory committee or explain why such referral was not made. Typically, an advisorycommittee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whetherthe application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers suchrecommendations carefully when making decisions.The FDA’s Decision on an NDAOn the basis of the FDA’s evaluation of the NDA and accompanying information, including the results of the inspection of the manufacturing facilities, the FDAmay issue an approval letter or a complete response letter. An approval letter authorizes commercial marketing of the product with specific prescribing informationfor specific indications. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing orinformation in order for the FDA to reconsider the application. If and when those deficiencies have been addressed to the FDA’s satisfaction in a resubmission ofthe NDA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type ofinformation included. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatorycriteria for approval.If the FDA approves a product, it may limit the approved indications for use for the product, require that contraindications, warnings or precautions be included inthe product labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess the drug’s safety after approval, requiretesting and surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution restrictions or other riskmanagement mechanisms, including REMS, which can materially affect the potential market and profitability of the product. The FDA may prevent or limit furthermarketing of a product based on the results of post-market studies or surveillance programs. After approval, some types of changes to the approved product, suchas adding new indications, manufacturing changes and additional labeling claims, are subject to further testing requirements and FDA review and approval.The product may also be subject to official lot release, meaning that the manufacturer is required to perform certain tests on each lot of the product before it isreleased for distribution. If the product is subject to official release, the manufacturer must submit samples of each lot, together with a release protocol showing asummary of the history of manufacture of the lot and the15results of all of the manufacturer’s tests performed on the lot, to the FDA. The FDA may in addition perform certain confirmatory tests on lots of some productsbefore releasing the lots for distribution. Finally, the FDA will conduct laboratory research related to the safety and effectiveness of drug products.Post-Approval RequirementsDrugs 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 withthe product. After approval, most changes to the approved product, such as adding new indications or other labeling claims, are subject to prior FDA review andapproval. There also are continuing, annual user fee requirements for any marketed products and the establishments at which such products are manufactured, aswell as new application fees for supplemental applications with clinical data.In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments withthe 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 requireinvestigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon the sponsor and any third-partymanufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production andquality control to maintain cGMP compliance.Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occurafter the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events or problems with manufacturingprocesses of unanticipated severity or frequency, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add newsafety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMSprogram. 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 license approvals;•product seizure or detention, or refusal to permit the import or export of products; or•injunctions or the imposition of civil or criminal penalties.The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promoted only for the approvedindications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting thepromotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability.In addition, the distribution of prescription pharmaceutical products is subject to the Prescription DrugMarketing Act, or PDMA, which regulates the distribution of drugs and drug samples at the federal level, and sets minimum standards for the registration andregulation of drug distributors by the states. Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and imposerequirements to ensure accountability in distribution.Abbreviated New Drug Applications for Generic DrugsIn 1984, with passage of the Hatch-Waxman Amendments to the FDCA, Congress authorized the FDA to approve generic drugs that are the same as drugspreviously approved by the FDA under the NDA provisions of the statute. To obtain approval of a generic drug, an applicant must submit an abbreviated new drugapplication, or ANDA, to the agency. In support of such applications, a generic manufacturer may rely on the preclinical and clinical testing previously conductedfor a drug product previously approved under an NDA, known as the reference listed drug, or RLD. To reference that information, however, the ANDA applicantmust demonstrate, and the FDA must conclude, that the generic drug does, in fact, perform in the same way as the RLD it purports to copy.Specifically, in order for an ANDA to be approved, the FDA must find that the generic version is identical to the RLD with respect to the active ingredients, theroute of administration, the dosage form, and the strength of the drug. At the same time, the FDA must also determine that the generic drug is “bioequivalent” tothe innovator drug. Under the statute, a generic drug is16bioequivalent to a RLD if “the rate and extent of absorption of the generic drug do not show a significant difference from the rate and extent of absorption of thereference listed drug. . . .”Upon approval of an ANDA, the FDA indicates that the generic product is “therapeutically equivalent” to the RLD and it assigns a therapeutic equivalence ratingto the approved generic drug in its publication “Approved Drug Products with Therapeutic Equivalence Evaluations,” also referred to as the “Orange Book.”Physicians and pharmacists consider the therapeutic equivalence rating to mean that a generic drug is fully substitutable for the RLD. In addition, by operation ofcertain state laws and numerous health insurance programs, the FDA’s designation of a therapeutic equivalence rating often results in substitution of the genericdrug without the knowledge or consent of either the prescribing physician or patient.Under the Hatch Waxman Amendments, the FDA may not approve an ANDA until any applicable period of non-patent exclusivity for the RLD has expired. TheFDCA provides a period of five years of data exclusivity for new drug containing a new chemical entity. For the purposes of this provision, a new chemical entityis a drug that contains no active moiety that has been previously approved by FDA in any other NDA. An active moiety is the molecule or ion responsible for thephysiological or pharmacological action of the drug substance. In cases where such new chemical entity exclusivity has been granted, an ANDA may not be filedwith the FDA until the expiration of five years unless the submission is accompanied by a Paragraph IV certification, in which case the applicant may submit itsapplication four years following the original product approval.The FDCA also provides for a period of three years of exclusivity if the NDA includes reports of one or more new clinical investigations, other than bioavailabilityor bioequivalence studies, that were conducted by or for the applicant and are essential to the approval of the application. This three-year exclusivity period oftenprotects changes to a previously approved drug product, such as a new dosage form, route of administration, combination or indication. Three year exclusivitywould be available for a drug product that contains a previously approved active moiety, provided the statutory requirement for a new clinical investigation issatisfied. Unlike five year new chemical entity exclusivity, an award of three year exclusivity does not block the FDA from accepting ANDAs seeking approval forgeneric versions of the drug as of the date of approval of the original drug product.Hatch-Waxman Patent Certification and the 30 Month StayNDA sponsors are required to list with the FDA each patent with claims that cover the applicant’s product or a method of using the product. Each of the patentslisted by the NDA sponsor is published in the Orange Book. When an ANDA applicant files its application with the FDA, the applicant is required to certify to theFDA concerning any patents listed for the reference product in the Orange Book, except for patents covering methods of use for which the ANDA applicant is notseeking approval.Specifically, the applicant must certify with respect to each patent that: •the required patent information has not been filed;•the listed patent has expired;•the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or•the listed patent is invalid, unenforceable or will not be infringed by the new product.A certification that the new product will not infringe the already approved product’s listed patents or that such patents are invalid or unenforceable is called aParagraph IV certification. If the applicant does not challenge the listed patents or indicate that it is not seeking approval of a patented method of use, the ANDAapplication will not be approved until all the listed patents claiming the referenced product have expired.If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA andpatent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response tothe notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days after the receipt of a Paragraph IV certification automaticallyprevents the FDA from approving the ANDA until the earlier of 30 months, expiration of the patent, settlement of the lawsuit or a decision in the infringement casethat is favorable to the ANDA applicant.To the extent that the Section 505(b)(2) applicant is relying on studies conducted for an already approved product, the applicant is required to certify to the FDAconcerning any patents listed for the approved product in the Orange Book to the same extent that an ANDA applicant would. As a result, approval of a 505(b)(2)NDA can be stalled until all the listed patents claiming the referenced product have expired, until any non-patent exclusivity, such as exclusivity for obtainingapproval of a new chemical entity, listed in the Orange Book for the referenced product has expired, and, in the case of a Paragraph IV certification and subsequentpatent infringement suit, until the earlier of 30 months, settlement of the lawsuit or a decision in the infringement case that is favorable to the Section 505(b)(2)applicant.17Pediatric Studies and ExclusivityUnder the Pediatric Research Equity Act of 2003, a NDA or supplement thereto must contain data that are adequate to assess the safety and effectiveness of thedrug product for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation forwhich the product is safe and effective. With enactment of the Food and Drug Administration Safety and Innovation Act, or FDASIA, in 2012, sponsors must alsosubmit pediatric study plans prior to the assessment data. Those plans must contain an outline of the proposed pediatric study or studies the applicant plans toconduct, including study objectives and design, any deferral or waiver requests, and other information required by regulation. The applicant, the FDA, and theFDA’s internal review committee must then review the information submitted, consult with each other, and agree upon a final plan. The FDA or the applicant mayrequest an amendment to the plan at any time.The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the productfor use in adults, or full or partial waivers from the pediatric data requirements. Additional requirements and procedures relating to deferral requests and requestsfor extension of deferrals are contained in FDASIA. Unless otherwise required by regulation, the pediatric data requirements do not apply to products with orphandesignation.Pediatric exclusivity is another type of non-patent marketing exclusivity in the United States and, if granted, provides for the attachment of an additional sixmonths of marketing protection to the term of any existing regulatory exclusivity, including the non-patent and orphan exclusivity. This six-month exclusivity maybe granted if an NDA sponsor submits pediatric data that fairly respond to a written request from the FDA for such data. The data do not need to show the productto be effective in the pediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA’s request, the additional protection is granted. Ifreports of requested pediatric studies are submitted to and accepted by the FDA within the statutory time limits, whatever statutory or regulatory periods ofexclusivity or patent protection cover the product are extended by six months. This is not a patent term extension, but it effectively extends the regulatory periodduring which the FDA cannot accept or approve another application.Patent Term Restoration and ExtensionA patent claiming a new drug product may be eligible for a limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of1984 (commonly referred to as the Hatch-Waxman Amendments). Those Amendments permit a patent restoration of up to five years for patent term lost duringproduct development and the FDA regulatory review. The restoration period granted is typically one-half the time between the effective date of an IND and thesubmission date of a NDA, plus the time between the submission date of a NDA and ultimate approval. Patent term restoration cannot be used to extend theremaining term of a patent past a total of 14 years from the product’s approval date. Only one patent applicable to an approved drug product is eligible for theextension, and the application for the extension must be submitted prior to the expiration of the patent in question. The U.S. Patent and Trademark Office reviewsand approves the application for any patent term extension or restoration in consultation with the FDA.Review and Approval of Drug Products in the European UnionIn order to market any product outside of the United States, a company must also comply with numerous and varying regulatory requirements of other countriesand jurisdictions regarding quality, safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales anddistribution of our products. Whether or not it obtains FDA approval for a product, the company would need to obtain the necessary approvals by the comparableforeign regulatory authorities before it can commence clinical trials or marketing of the product in those countries or jurisdictions. The approval process ultimatelyvaries between countries and jurisdictions and can involve additional product testing and additional administrative review periods. The time required to obtainapproval in other countries and jurisdictions might differ from and be longer than that required to obtain FDA approval. Regulatory approval in one country orjurisdiction does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country or jurisdiction may negativelyimpact the regulatory process in others.Pursuant to the European Clinical Trials Directive, a system for the approval of clinical trials in the European Union has been implemented through nationallegislation of the member states. Under this system, an applicant must obtain approval from the competent national authority of a European Union member state inwhich the clinical trial is to be conducted. Furthermore, the applicant may only start a clinical trial after a competent ethics committee has issued a favorableopinion. Clinical trial applications must be accompanied by an investigational medicinal product dossier with supporting information prescribed by the EuropeanClinical Trials Directive and corresponding national laws of the member states and further detailed in applicable guidance documents.18To obtain marketing approval of a drug under European Union regulatory systems, an applicant must submit a marketing authorization application, or MAA, eitherunder a centralized or decentralized procedure.The centralized procedure provides for the grant of a single marketing authorization by the European Commission that is valid for all European Union memberstates. The centralized procedure is compulsory for specific products, including for medicines produced by certain biotechnological processes, products designatedas orphan medicinal products, advanced therapy products and products with a new active substance indicated for the treatment of certain diseases. For productswith a new active substance indicated for the treatment of other diseases and products that are highly innovative or for which a centralized process is in the interestof patients, the centralized procedure may be optional.Under the centralized procedure, the Committee for Medicinal Products for Human Use, or the CHMP, established at the European Medicines Agency, or EMA, isresponsible for conducting the initial assessment of a drug. The CHMP is also responsible for several post-authorization and maintenance activities, such as theassessment of modifications or extensions to an existing marketing authorization. Under the centralized procedure in the European Union, the maximum timeframefor the evaluation of an MAA is 210 days, excluding clock stops, when additional information or written or oral explanation is to be provided by the applicant inresponse to questions of the CHMP. Accelerated evaluation might be granted by the CHMP in exceptional cases, when a medicinal product is of major interestfrom the point of view of public health and in particular from the viewpoint of therapeutic innovation. In this circumstance, the EMA ensures that the opinion ofthe CHMP is given within 150 days.The decentralized procedure is available to applicants who wish to market a product in various European Union member states where such product has not receivedmarketing approval in any European Union member states before. The decentralized procedure provides for approval by one or more other, or concerned, memberstates of an assessment of an application performed by one member state designated by the applicant, known as the reference member state. Under this procedure,an applicant submits an application based on identical dossiers and related materials, including a draft summary of product characteristics, and draft labeling andpackage leaflet, to the reference member state and concerned member states. The reference member state prepares a draft assessment report and drafts of therelated materials within 120 days after receipt of a valid application. Within 90 days of receiving the reference member state’s assessment report and relatedmaterials, each concerned member state must decide whether to approve the assessment report and related materials.If a member state cannot approve the assessment report and related materials on the grounds of potential serious risk to public health, the disputed points aresubject to a dispute resolution mechanism and may eventually be referred to the European Commission, whose decision is binding on all member states.Data and Market Exclusivity in the European UnionIn the European Union, new chemical entities qualify for eight years of data exclusivity upon marketing authorization and an additional two years of marketexclusivity. This data exclusivity, if granted, prevents regulatory authorities in the European Union from referencing the innovator’s data to assess a generic(abbreviated) application for eight years, after which generic marketing authorization can be submitted, and the innovator’s data may be referenced, but notapproved for two years. The overall ten-year period will be extended to a maximum of eleven years if, during the first eight years of those ten years, the marketingauthorization holder obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to their authorization, areheld to bring a significant clinical benefit in comparison with existing therapies. Even if a compound is considered to be a new chemical entity and the sponsor isable to gain the prescribed period of data exclusivity, another company nevertheless could also market another version of the drug if such company can complete afull MAA with a complete database of pharmaceutical test, preclinical tests and clinical trials and obtain marketing approval of its product.Pharmaceutical Coverage, Pricing and ReimbursementSignificant uncertainty exists as to the coverage and reimbursement status of products approved by the FDA and other government authorities. Sales of productswill depend, in part, on the extent to which third-party payors, including government health programs in the United States such as Medicare and Medicaid,commercial health insurers and managed care organizations, provide coverage, and establish adequate reimbursement levels, for such products. The process fordetermining whether a payor will provide coverage for a product may be separate from the process for setting the price or reimbursement rate that the payor willpay for the product once coverage is approved. Third-party payors are increasingly challenging the prices charged for medical products and services and imposingcontrols to manage costs. Third-party payors may limit coverage to specific products on an approved list, or formulary, which might not include all of the approvedproducts for a particular indication. In order to secure coverage and reimbursement for any product that might be approved for sale, a19company may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the product, inaddition to the costs required to obtain FDA or other comparable regulatory approvals. A payor’s decision to provide coverage for a drug product does not implythat an adequate reimbursement rate will be approved. Third-party reimbursement may not be sufficient to maintain price levels high enough to realize anappropriate return on our investment in product development.The containment of healthcare costs has also become a priority of federal, state and foreign governments, and the prices of drugs have been a focus in this effort.Governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement andrequirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies injurisdictions with existing controls and measures, could adversely affect our net revenue and results.Outside of the United States, ensuring adequate coverage and payment for products remains challenging. Pricing of prescription pharmaceuticals is subject togovernmental control in many countries. Pricing negotiations with governmental authorities can extend well beyond the receipt of regulatory marketing approvalfor a product and may require us to conduct a clinical trial that compares the cost effectiveness of our product candidates or products to other available therapies.The conduct of such a clinical trial could be expensive and result in delays in our commercialization efforts.As a result, the marketability of any product which receives regulatory approval for commercial sale may suffer if the government and third-party payors fail toprovide adequate coverage and reimbursement. In addition, an increasing emphasis on managed care in the United States has increased and will continue toincrease the pressure on drug pricing. Coverage policies, third-party reimbursement rates and drug pricing regulation may change at any time. In particular, thePatient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, contains provisions that may reducethe profitability of drug products, including, for example, increased rebates for drugs sold to Medicaid programs, extension of Medicaid rebates to Medicaidmanaged care plans, mandatory discounts for certain Medicare Part D beneficiaries and annual fees based on pharmaceutical companies’ share of sales to federalhealth care programs. Even if favorable coverage and reimbursement status is attained for one or more products that receive regulatory approval, less favorablecoverage policies and reimbursement rates may be implemented in the future.In the European Union, pricing and reimbursement schemes vary widely from country to country. Some countries provide that drug products may be marketedonly after a reimbursement price has been agreed. Some countries may require the completion of additional studies that compare the cost-effectiveness of aparticular product candidate to currently available therapies. For example, the European Union provides options for its member states to restrict the range of drugproducts for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. European Unionmember states may approve a specific price for a drug product or it may instead adopt a system of direct or indirect controls on the profitability of the companyplacing the drug product on the market. Other member states allow companies to fix their own prices for drug products, but monitor and control company profits.The downward pressure on health care costs in general, particularly prescription drugs, has become intense. As a result, increasingly high barriers are being erectedto the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert competitive pressure that may reduce pricingwithin a country. Any country that has price controls or reimbursement limitations for drug products may not allow favorable reimbursement and pricingarrangements for any of our products.Healthcare Law and RegulationHealthcare providers, physicians and third-party payors will play a primary role in the recommendation and prescription of drug products that are grantedmarketing approval. Arrangements with third-party payors and customers are subject to broadly applicable fraud and abuse and other healthcare laws andregulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our products for which weobtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations, include the following: •the federal healthcare Anti-Kickback Statute prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, receivingor providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order orrecommendation of, any good or service, for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare andMedicaid;•the federal civil and criminal false claims laws, including the False Claims Act, which imposes civil monetary penalties, and provides for civil whistlebloweror qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, to the federal government,claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federalgovernment;20•the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes federal criminal and civil liability for, among otherthings, knowingly and willingly executing, or attempting to execute, a scheme to defraud any healthcare benefit program or making false statements relatingto healthcare matters;•HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, also imposesobligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable healthinformation;•the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially falsestatement in connection with the delivery of or payment for healthcare benefits, items or services;•the federal transparency requirements under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education ReconciliationAct, or the Affordable Care Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies to report to the Department ofHealth and Human Services information related to payments and other transfers of value to physicians and teaching hospitals and physician ownership andinvestment interests; and•analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to healthcare items or services that arereimbursed by non-governmental third-party payors, including private insurers.Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant complianceguidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and otherhealth care providers or marketing expenditures. State and foreign laws also govern the privacy and security of health information in some circumstances, many ofwhich differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.Regulation of Deuterium OxideWe believe that all of the deuterium that we use in manufacturing our product candidates is currently derived, directly or indirectly, from deuterium oxide. Formost of our deuterium supply we rely on bulk supplies of deuterium oxide, which we currently source from multiple suppliers, including two located in NorthAmerica, one of which is located in the United States. In order to internationally transport any deuterium oxide that we purchase from foreign suppliers, we, or ourU.S. supplier, may be required to obtain an export license from the country of origin and we may be required to obtain an International Import Certificate from thecountry of destination. We are also generally required to obtain an export license from the Nuclear Regulatory Commission before shipping deuterium oxide fromthe United States to any contract manufacturer in another country. Each of these documents specifies the maximum amount of deuterium oxide that we, or oursuppliers, are permitted to either import or export. We have obtained a license from the Nuclear Regulatory Commission, or NRC, for the export of 20,000kilograms of heavy water over the life of the license, which is valid until January 2019. We have applied for an additional export license from the NRC. Inaddition, in order to obtain additional supplies of deuterium oxide from one of the foreign suppliers from which we have previously purchased deuterium oxide, thesupplier will be required to obtain an additional export license from the country of origin and, as part of the export license application process, we may be requiredto obtain a U.S. import certificate. While we and our suppliers have obtained similar licenses and certificates in the past, we or our suppliers may not be able toobtain them in the future in a timely manner or at all. We have not obtained an export license from the country in which our potential future foreign supplier islocated. In addition, if any of our product candidates is approved by the FDA, then the FDA will also have regulatory jurisdiction over the manufacture and use ofdeuterium oxide in such product.EMPLOYEESAs of December 31, 2015, we had 59 employees, 39 of whom were primarily engaged in research and product development activities. A total of 22 employeeshave Ph.D. degrees. None of our employees are represented by a labor union and we believe our relations with our employees are good.FACILITIESOur offices are located in Lexington, Massachusetts, consisting of approximately 50,000 square feet of leased office and laboratory space. The term of the leaseexpires in September 2018.21LEGAL PROCEEDINGSWe are not currently a party to any material legal proceedings.AVAILABLE INFORMATIONWe file reports and other information with the Securities and Exchange Commission, or SEC, as required by the Securities Exchange Act of 1934, as amended,which we refer to as the Exchange Act. You can find, copy and inspect information we file at the SEC’s public reference room, which is located at 100 F Street,N.E., Room 1580, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for more information about the operation of the SEC’s public reference room.You can review our electronically filed reports and other information that we file with the SEC on the SEC’s web site at http://www.sec.gov.We were incorporated under the laws of the State of Delaware on April 12, 2006 as Concert Pharmaceuticals, Inc. Our principal executive offices are located at 99Hayden Avenue, Suite 500, Lexington, Massachusetts, 02421, and our telephone number is (781) 860-0045. Our Internet website ishttp://www.concertpharma.com. We make available free of charge through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act. We make these reportsavailable through our website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC. In addition, weregularly use our website to post information regarding our business, product development programs and governance, and we encourage investors to use ourwebsite, particularly the information in the section entitled “Investors,” as a source of information about us.The foregoing references to our website are not intended to, nor shall they be deemed to, incorporate information on our website into this Annual Report on Form10-K by reference.22Item 1A.Risk Factors.Our business is subject to numerous risks. The following important factors, among others, could cause our actual results to differ materially from those expressedin forward-looking statements made by us or on our behalf in this Annual Report on Form 10-K and other filings with the Securities and Exchange Commission, orthe SEC, press releases, communications with investors and oral statements. Actual future results may differ materially from those anticipated in our forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.RISKS RELATED TO OUR FINANCIAL POSITION AND NEED FOR ADDITIONAL CAPITALWe have incurred significant losses since inception, expect to incur losses for at least the next several years and may never sustain profitability.We have incurred significant annual net operating losses in every year since our inception, except for fiscal year 2015. Although we were profitable for fiscal year2015, as a result of a one-time payment of $50.2 million that we received in June 2015 as a result of our patent assignment agreement with Auspex, we expect toincur significant annual net operating losses in future periods. As of December 31, 2015, we had an accumulated deficit of $121.2 million . We have not generatedany revenues from product sales and have financed our operations to date primarily through the public offering of our common stock, private placements of ourpreferred stock, debt financings and funding from collaborations and patent assignment agreement. We have not completed development of any product candidateand have devoted substantially all of our financial resources and efforts to research and development, including preclinical studies and our clinical developmentprograms. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. Our net losses may fluctuatesignificantly from quarter to quarter and year to year. Net losses and negative cash flows have had, and will continue to have, an adverse effect on ourstockholders’ equity and working capital.We anticipate that our expenses will increase substantially if and as we: •continue to develop and conduct non-clinical studies and clinical trials with respect to our product candidates;•seek to identify additional product candidates;•in-license or acquire additional product candidates;•seek marketing approvals for our product candidates that successfully complete clinical trials;•establish sales, marketing, distribution and other commercial infrastructure in the future to commercialize various products for which we may obtainmarketing approval;•require the manufacture of larger quantities of product candidates for clinical development and potentially commercialization;•maintain, expand and protect our intellectual property portfolio;•hire additional personnel;•add equipment and physical infrastructure to support our research and development; and•continue to implement the infrastructure necessary to support our product development and help us comply with our obligations as a public company.Our ability to become and remain profitable depends on our ability to generate revenue. We do not expect to generate significant revenue unless and until we are,or one of our collaborators is, able to successfully commercialize one or more of our product candidates. This will require success in a range of challengingactivities, including completing clinical trials of our product candidates, obtaining marketing approval for these product candidates, manufacturing, marketing andselling those products for which we, or our collaborators, may obtain marketing approval, satisfying any post-marketing requirements and obtaining reimbursementfor our products from private insurance or government payors. We, and our collaborators, may never succeed in these activities and, even if we do, or one of ourcollaborators does, we may never generate revenues that are large enough for us to achieve profitability. Even if we do achieve profitability, we may not be able tosustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and couldimpair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our pipeline of product candidates or continue ouroperations. A decline in the value of our company could cause our stockholders to lose all or part of their investments in us.23We have a limited operating history and no history of commercializing pharmaceutical products, which may make it difficult to evaluate the prospects for ourfuture viability.We began operations in April 2006. Our operations to date have been limited to financing and staffing our company, developing our technology and productcandidates and establishing collaborations. We have not yet demonstrated an ability to successfully conduct an international multi-center clinical trial, conduct alarge-scale pivotal clinical trial, obtain marketing approvals, manufacture product on a commercial scale or arrange for a third party to do so on our behalf, orconduct sales and marketing activities necessary for successful product commercialization. Consequently, predictions about our future success or viability may notbe as accurate as they could be if we had a longer operating history or a history of successfully developing and commercializing pharmaceutical products.We will need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our productdevelopment programs or commercialization efforts.Developing pharmaceutical products, including conducting non-clinical studies and clinical trials, is a very time-consuming, expensive and uncertain process thattakes years to complete. We expect our expenses to increase in connection with our ongoing activities, particularly as we initiate new clinical trials of, initiate newresearch and non-clinical development efforts for and seek marketing approval for, our product candidates, or if we in-license or acquire product candidates. Inaddition, if we obtain marketing approval for any of our product candidates, we may incur significant commercialization expenses related to product sales,marketing, manufacturing and distribution to the extent that such sales, marketing and distribution are not the responsibility of one of our collaborators. Inparticular, the costs that we may be required to incur for the manufacture of any product candidate that receives marketing approval may be substantial. To ourknowledge, no deuterated drug has ever been successfully commercialized. Manufacturing a deuterated drug at commercial scale may require specialized facilities,processes and materials. Furthermore, we will continue to incur costs associated with operating as a public company. Accordingly, we will need to obtainsubstantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we may be forcedto delay, reduce or eliminate our research and development programs or any future commercialization efforts.In any event, our existing cash and cash equivalents and investments will not be sufficient to fund all of the efforts that we plan to undertake or to fund thecompletion of development of any of our product candidates. Accordingly, we will be required to obtain further funding through public or private equity offerings,debt financings, collaborations and licensing arrangements or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all.Our failure to raise capital when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.Based on our current expectations, including with respect to our development plans, we believe our existing cash and cash equivalents and investments as ofDecember 31, 2015 will enable us to fund our operating expenses and capital expenditure requirements into 2018. Our estimate as to how long we expect ourexisting cash and cash equivalents and investments to be able to continue to fund our operations is based on assumptions that may prove to be wrong, and we coulduse our available capital resources sooner than we currently expect. Changing circumstances could cause us to consume capital significantly faster than wecurrently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. Our future fundingrequirements, both short-term and long-term, will depend on many factors, including: •the progress, timing, costs and results of clinical trials of, and research and non-clinical development efforts for, our product candidates and potentialproduct candidates, including current and future clinical trials;•our current collaboration agreements and achievement of milestones under these agreements;•our ability to enter into and the terms and timing of any additional collaborations, licensing, product acquisition or other arrangements that we mayestablish;•the number of product candidates that we pursue and their development requirements;•the outcome, timing and costs of seeking regulatory approvals;•our headcount growth and associated costs as we expand our research and development and establish a commercial infrastructure;•the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending againstintellectual property related claims; and•the costs of operating as a public company.24Raising additional capital may cause dilution to our stockholders or require us to relinquish rights to our technologies or product candidates.Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of public or private equityofferings, debt financings and additional collaborations and licensing arrangements. We do not have any committed external source of funds, other than potentialmilestone payments and royalties under our collaborations with Celgene, Avanir and Jazz Pharmaceuticals, each of which is subject to the achievement ofdevelopment, regulatory and/or sales-based milestones with respect to our product candidates. To the extent that we raise additional capital through the sale ofcommon stock, convertible securities or other equity securities, the ownership interests of our stockholders may be materially diluted, and the terms of thesesecurities could include liquidation or other preferences and anti-dilution protections that could adversely affect the rights of our stockholders. In addition, debtfinancing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability totake specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct ourbusiness.If we raise additional funds through collaborations or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuablerights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raiseadditional funds when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rightsto develop and market product candidates that we would otherwise prefer to develop and market ourselves.Any future indebtedness could adversely affect our ability to operate our business.We could in the future incur indebtedness containing financial obligations and restrictive covenants, which could have significant adverse consequences, including:•requiring us to dedicate a portion of our cash resources to the payment of interest and principal, reducing money available to fund working capital, capitalexpenditures, product development and other general corporate purposes;•increasing our vulnerability to adverse changes in general economic, industry and market conditions;•subjecting us to restrictive covenants that may reduce our ability to take certain corporate actions or obtain further debt or equity financing;•limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and•placing us at a competitive disadvantage compared to our competitors that have less debt or better debt servicing options.Any financial obligations or restrictive covenants could negatively impact our ability to conduct our business.RISKS RELATED TO THE DISCOVERY, DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCT CANDIDATESOur approach to the discovery and development of product candidates based on selective deuteration is unproven, and we do not know whether we will be ableto develop any products of commercial value.We are focused on discovering and developing novel small molecule drugs that have improved metabolic or pharmacokinetic characteristics as a result of ourselective substitution of deuterium for hydrogen. We apply our proprietary platform to systematically identify approved drugs, advanced clinical candidates orpreviously studied compounds that we believe can be improved with deuterium substitution to provide better pharmacokinetic or metabolic properties and therebyenhance clinical safety, efficacy and convenience. To our knowledge, no deuterated drug has ever been approved for sale in the United States. While we believethat selective deuteration can produce compounds that possess favorable pharmaceutical properties, we have not yet succeeded and may not succeed indemonstrating efficacy and safety for any of our product candidates in pivotal clinical trials or in obtaining marketing approval thereafter.Clinical drug development involves a lengthy and expensive process with an uncertain outcome.Clinical testing is expensive, time-consuming and uncertain as to outcome. We cannot guarantee that any clinical trials will be conducted as planned or completedon schedule, if at all. The clinical development of our product candidates is susceptible to the risk of failure inherent at any stage of drug development, includingfailure to demonstrate efficacy in a clinical trial or25across a broad population of patients, the occurrence of severe or medically or commercially unacceptable adverse events, failure to comply with protocols orapplicable regulatory requirements and determination by the Food and Drug Administration, or FDA, or any comparable foreign regulatory authority that a drugproduct is not approvable. It is possible that even if one or more of our product candidates has a beneficial effect, that effect will not be detected during clinicalevaluation as a result of one or more of a variety of factors, including the size, duration, design, measurements, conduct or analysis of our clinical trials.Conversely, as a result of the same factors, our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positiveeffect, if any. Similarly, in our clinical trials, we may fail to detect toxicity of or intolerability caused by our product candidates, or mistakenly believe that ourproduct candidates are toxic or not well tolerated when that is not in fact the case.While we believe that our DCE Platform may enable drug discovery and clinical development that is more efficient and less expensive than conventional smallmolecule drug research and development, we may not be able to realize the advantages that we expect. In addition, while a key element of our drug discovery anddevelopment strategy involves utilizing existing information regarding non-deuterated compounds to assist the discovery and development of deuterated analogs ofthose compounds, not all of the product candidates that we develop are based on drugs or drug candidates that progressed into advanced clinical development.Particularly in these situations, existing information regarding the corresponding non-deuterated compound may not be sufficient to mitigate drug developmentrisks.In addition to the risk of failure inherent in drug development, certain of the deuterated compounds that we, and our collaborators, are developing and may developin the future may be particularly susceptible to failure to the extent they are based on compounds that others have previously studied or tested, but did not progressin development due to safety, tolerability or efficacy concerns or otherwise. Deuteration of these compounds may not be sufficient to overcome the problemsexperienced with the corresponding non-deuterated compound.We may not be able to continue further clinical development of our wholly owned development programs, including CTP-656. If we are unable to develop,obtain marketing approval for or commercialize our wholly owned development programs, ourselves or through a collaboration, or experience significantdelays in doing so, our business could be materially harmed.We currently have no products approved for sale. The success of our wholly owned development programs will depend on several factors, including: •in the case of CTP-656, our ability to enroll sufficient numbers of patients and in a timely manner to conduct our clinical trials;•in the case of CTP-656, if we need to develop it in combination with other agents to maximize its therapeutic and sales potential, our ability to develop orlicense such combinations;•in the case of CTP-499, our ability to find a suitable partner to continue development;•successful completion of clinical trials;•receipt of marketing approvals from applicable regulatory authorities;•the performance of our future collaborators, if any, for our wholly owned development programs;•the extent of any required post-marketing approval commitments to applicable regulatory authorities;•establishment of supply arrangements with third party raw materials suppliers and manufacturers;•our ability to manufacture or arrange for the manufacture of our wholly owned development programs with sufficient quality and quantity to support clinicaltrials and potential future commercialization;•establishment of arrangements with third party manufacturers to obtain finished drug products that are appropriately packaged for sale;•obtaining and maintaining patent, trade secret protection and regulatory exclusivity, both in the United States and internationally;•amount of commercial sales, if and when approved;•a continued acceptable safety profile of our wholly owned development programs following any marketing approval; and•agreement by third party payors to reimburse patients for the costs of treatment with our products, and the terms of such reimbursement.If we are unable to successfully develop, receive marketing approval for, and commercialize our wholly owned development programs, or experience delays as aresult of any of these factors or otherwise, our business could be materially harmed.26If clinical trials of our product candidates fail to satisfactorily demonstrate safety and efficacy to the FDA and other regulators, we, or our collaborators, mayincur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of these productcandidates.We, or our collaborators, must complete non-clinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of our productcandidates in humans in order to obtain marketing approval from regulatory authorities for the sale of our product candidates. Clinical testing is expensive, difficultto design and implement, can take many years to complete and is inherently uncertain as to outcome. Further, the outcome of non-clinical studies and early clinicaltrials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Moreover, non-clinicaland clinical data are often susceptible to varying interpretations and analyses. Many companies in the pharmaceutical and biotechnology industries have sufferedsignificant setbacks in late-stage clinical trials after achieving positive results in earlier development, and we cannot be certain that we will not face similarsetbacks.Any inability to successfully complete non-clinical and clinical development could result in additional costs to us, or our collaborators, and impair our ability togenerate revenues from product sales, regulatory and commercialization milestones and royalties. In addition, if (1) we, or our collaborators, are required toconduct additional clinical trials or other testing of our product candidates beyond the trials and testing that we, or they, contemplate (2) we, or our collaborators,are unable to successfully complete clinical trials of our product candidates or other testing, (3) the results of these trials or tests are unfavorable, uncertain or areonly modestly favorable, or (4) there are unacceptable safety concerns associated with our product candidates, we, or our collaborators, in addition to incurringadditional costs, may: •be delayed in obtaining marketing approval for our product candidates;•not obtain marketing approval at all;•obtain approval for indications or patient populations that are not as broad as intended or desired;•obtain approval with labeling that includes significant use or distribution restrictions or significant safety warnings, including boxed warnings;•be subject to additional post-marketing testing or other requirements; or•be required to remove the product from the market after obtaining marketing approval.Even if we, or our collaborators, believe that the results of clinical trials for our product candidates warrant marketing approval, the FDA or comparable foreignregulatory authorities may disagree and may not grant marketing approval of our product candidates.If we, or our collaborators, experience any of a number of possible unforeseen events in connection with clinical trials of our product candidates, potentialmarketing approval or commercialization of our product candidates could be delayed or prevented.We, or our collaborators, may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent marketing approval of ourproduct candidates, including: •clinical trials of our product candidates may produce unfavorable or inconclusive results;•we, or our collaborators, may decide, or regulators may require us or them, to conduct additional clinical trials or abandon product development programs;•the number of patients required for clinical trials of our product candidates may be larger than we, or our collaborators, anticipate, patient enrollment in theseclinical trials may be slower than we, or our collaborators, anticipate or participants may drop out of these clinical trials at a higher rate than we, or ourcollaborators, anticipate;•our third party contractors or those of our collaborators, including those manufacturing our product candidates or components or ingredients thereof orconducting clinical trials on our behalf or on behalf of our collaborators, may fail to comply with regulatory requirements or meet their contractualobligations to us or our collaborators in a timely manner or at all;•regulators or institutional review boards may not authorize us, our collaborators or our or their investigators to commence a clinical trial or conduct a clinicaltrial at a prospective trial site;•we, or our collaborators, may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols withprospective trial sites;•patients that enroll in a clinical trial may misrepresent their eligibility to do so or may otherwise not comply with the clinical trial protocol, resulting in theneed to drop the patients from the clinical trial, increase the needed enrollment size for the clinical trial, extend the clinical trial’s duration or cause spuriousresults;•investigators may provide inaccurate or false data, resulting in spurious clinical results, an inadequate data set or regulators’ unwillingness to approve aproduct;27•regulators or institutional review boards may require that we, or our collaborators, or our or their investigators suspend or terminate clinical research forvarious reasons, including noncompliance with regulatory requirements or their standards of conduct, a finding that the participants are being exposed tounacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate or findings of undesirable effects caused by achemically or mechanistically similar drug or drug candidate;•the FDA or comparable foreign regulatory authorities may disagree with our or our collaborators’ clinical trial design or our or their interpretation of datafrom non-clinical studies and clinical trials;•the FDA or comparable foreign regulatory authorities may change their requirements for approvability for a given product or for an indication after we haveinitiated work based on their previous guidance;•the supply or quality of raw materials or manufactured product candidates or other materials necessary to conduct clinical trials of our product candidatesmay be insufficient, inadequate or not available at an acceptable cost, or we may experience interruptions in supply;•we, or our manufacturing vendors, may not produce, or may not consistently produce material that meets necessary specifications for commercialization;•the FDA or comparable foreign regulatory authorities may determine that our, or our manufacturing vendors, manufacturing or quality control processes failto meet their specifications or guidelines; and•the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical datainsufficient to obtain marketing approval.Product development costs for us, or our collaborators, will increase if we, or they, experience delays in testing or pursuing marketing approvals and we, or they,may be required to obtain additional funds to complete clinical trials and prepare for possible commercialization of our product candidates. We, and ourcollaborators, do not know whether any non-clinical tests or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or atall. Significant non-clinical or clinical trial delays also could shorten any periods during which we, or our collaborators, may have the exclusive right tocommercialize our product candidates or allow our competitors, or the competitors of our collaborators, to bring products to market before we, or our collaborators,do and impair our ability, or the ability of our collaborators, to successfully commercialize our product candidates and may harm our business and results ofoperations. In addition, many of the factors that cause, or lead to, clinical trial delays may ultimately lead to the denial of marketing approval of any of our productcandidates.If we, or our collaborators, experience delays or difficulties in the enrollment of patients in clinical trials, our, or their, receipt of necessary regulatoryapprovals could be delayed or prevented.We, or our collaborators, may not be able to initiate or continue clinical trials for any of our product candidates if we, or they, are unable to locate and enroll asufficient number of eligible patients to participate in clinical trials as required by the FDA or comparable foreign regulatory authorities, such as the EuropeanMedicines Agency. Patient enrollment is a significant factor in the timing of clinical trials, and is affected by many factors, including: •the size and nature of the patient population;•the severity of the disease under investigation;•the proximity of patients to clinical sites;•the eligibility criteria for the trial;•the design of the clinical trial;•access to relevant clinical trial sites;•efforts to facilitate timely enrollment;•competing clinical trials; and•clinicians’ and patients’ perceptions as to the potential advantages and risks of the drug being studied in relation to other available therapies, including anynew drugs that may be approved for the indications we are investigating.Our inability, or the inability of our collaborators, to enroll a sufficient number of patients for our, or their, clinical trials could result in significant delays or mayrequire us or them to abandon one or more clinical trials altogether. Enrollment delays in our, or their, clinical trials may result in increased development costs forour product candidates, delay or halt the development of and approval processes for our product candidates and jeopardize our, or our collaborators’, ability tocommence sales of and generate revenues from our product candidates, which could cause the value of our company to decline and limit our ability to obtainadditional financing, if needed.28We believe we, or our collaborators, may in some instances be able to secure clearances from the FDA or comparable foreign regulatory authorities to useexpedited development pathways. However, if we or our collaborators are unable to obtain such clearances, we, or they, may be required to conduct additionalnon-clinical studies or clinical trials beyond those that we, or they, contemplate, which could increase the expense of obtaining, and delay the receipt of,necessary marketing approvals.The deuterated compounds that we produce and seek to develop can have similar pharmacological properties as their corresponding non-deuterated compounds.Therefore, we believe that we, or our collaborators, may, in some instances, be able to obtain clearance from the FDA or comparable foreign regulatory authoritiesto follow expedited development programs for some deuterated compounds that reference and rely on findings previously obtained from prior non-clinical studiesor clinical trials of the corresponding non-deuterated compounds. For example, our collaborator Avanir reported in June 2013 that the FDA has agreed to anexpedited development pathway for AVP-786, a product candidate Avanir is developing that includes our licensed deuterated dextromethorphan compound,permitting Avanir to reference data from its development of dextromethorphan and quinidine in its investigational new drug application, or IND, and any futurenew drug application, or NDA for AVP-786.While we anticipate that following an expedited development pathway may be possible for some of our current and future product candidates, we cannot be certainthat we, or our collaborators, will be able to secure clearance to follow such expedited development pathways from the FDA or comparable foreign regulatoryauthorities. In addition, if we follow, or one of our collaborators follows, such an expedited regulatory pathway and the FDA or comparable foreign regulatoryauthorities are not satisfied with the results of our having done so, such as might be the case if a deuterated compound is found to have undesirable side effects orother undesirable properties that were not anticipated based on the corresponding non-deuterated compound, the FDA or foreign regulatory authorities may beunwilling to grant clearance to follow expedited development pathways for other deuterated compounds.Consequently, we, or our collaborators, may be required to pursue full development programs with respect to any product candidates that we, or they, previouslyanticipated would be able to follow an expedited development pathway, including conducting a full range of non-clinical and clinical studies to attempt to establishthe safety and efficacy of these product candidates. A need to conduct a full range of development activities would significantly increase the costs of developmentand length of time required before we, or our collaborators, could seek marketing approval of such a product candidate as compared to the costs and timing that weor they anticipate. While we have been able to reference, for purposes of some of our IND-enabling studies, data generated during development of thecorresponding non-deuterated compound, we have not ourselves obtained clearance from the FDA or any comparable foreign regulatory authority to referencesuch data in connection with more advanced stages of development.Serious adverse events, undesirable side effects or other unexpected properties of our product candidates, including those that we have licensed tocollaborators, may be identified during development that could delay or prevent the product candidate’s marketing approval.All of our product candidates are in non-clinical and clinical development stages and their risk of failure is high. Serious adverse events or undesirable side effectscaused by, or other unexpected properties of, our product candidates could cause us, one of our collaborators, an institutional review board or regulatory authoritiesto interrupt, delay or halt clinical trials of one or more of our product candidates and could result in a more restrictive label or the delay or denial of marketingapproval by the FDA or comparable foreign regulatory authorities. A dose of a deuterated compound could, in comparison to an equal dose of the correspondingnon-deuterated compound, result in increased exposure levels, distribution and half-life in the body and alter the levels of particular metabolites that are present inthe body. These changes may cause serious adverse events or undesirable side effects that we or our collaborators did not anticipate, whether based on thecharacteristics of the corresponding non-deuterated compound or otherwise. If any of our product candidates is associated with serious adverse events orundesirable side effects or have properties that are unexpected, we, or our collaborators, may need to abandon development or limit development of that productcandidate to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from arisk-benefit perspective. Many compounds that initially showed promise in clinical or earlier stage testing have later been found to cause undesirable or unexpectedside effects that prevented further development of the compound. In addition, unexpected adverse clinical effects of a deuterated product candidate, includingeither those identified by us or deuterated analogs of approved drugs being developed by any third parties, may create general concerns regarding deuterationtechnology that could delay the development of our product candidates.29Even if one of our product candidates receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third partypayors and others in the medical community necessary for commercial success and the market opportunity for the product candidate may be smaller than weestimate.Even if one of our product candidates, including those licensed to our collaborators, is approved by the appropriate regulatory authorities for marketing and sale, itmay nonetheless fail to gain sufficient market acceptance by physicians, patients, third party payors and others in the medical community. For example, physiciansare often reluctant to switch their patients from existing therapies even when new and potentially more effective or convenient treatments enter the market. Further,patients often acclimate to the therapy that they are currently taking and do not want to switch unless their physicians recommend switching products or they arerequired to switch therapies due to lack of reimbursement for existing therapies.Efforts to educate the medical community and third party payors on the benefits of our product candidates may require significant resources and may not besuccessful. If any of our product candidates is approved but does not achieve an adequate level of market acceptance, we may not generate significant revenues andwe may not become profitable. The degree of market acceptance of our product candidates, including those licensed to our collaborators, if approved forcommercial sale, will depend on a number of factors, including: •the efficacy and safety of the product;•the potential advantages of the product compared to alternative treatments;•the prevalence and severity of any side effects;•the clinical indications for which the product is approved;•whether the product is designated under physician treatment guidelines as a first-line therapy or as a second- or third-line therapy;•limitations or warnings, including distribution or use restrictions or burdensome prescription requirements contained in the product’s approved labeling;•our ability, or the ability of our collaborators, to offer the product for sale at commercially acceptable prices;•the product’s convenience and ease of administration compared to alternative treatments;•the willingness of the target patient population to try, and of physicians to prescribe, the product;•the strength of sales, marketing and distribution support;•the approval of other new products for the same indications;•changes in the standard of care for the targeted indications for the product;•the timing of market introduction of our approved products as well as competitive products; and•availability and amount of reimbursement from government payors, managed care plans and other third party payors.The potential market opportunities for our product candidates are difficult to precisely estimate. Our estimates of the potential market opportunities are predicatedon many assumptions including industry knowledge and publications, third party research reports and other surveys. While we believe that our internalassumptions are reasonable, these assumptions involve the exercise of significant judgment on the part of our management, are inherently uncertain and thereasonableness of these assumptions has not been assessed by an independent source. If any of the assumptions proves to be inaccurate, the actual markets for ourproduct candidates could be smaller than our estimates of the potential market opportunities.If any of our product candidates receives marketing approval and we, or others, later discover that the drug is less effective than previously believed or causesundesirable side effects that were not previously identified, our ability to market the drug, or that of our collaborators, could be compromised.Clinical trials of our product candidates are conducted in carefully defined subsets of patients who have agreed to enter into clinical trials. Consequently, it ispossible that our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any, or alternativelyfail to identify undesirable side effects. If, following approval of a product candidate, we, or others, discover that the drug is less effective than previously believedor causes undesirable side effects that were not previously identified, any of the following adverse events could occur: •regulatory authorities may withdraw their approval of the drug or seize the drug;•we, or our collaborators, may be required to recall the drug or change the way the drug is administered;•additional restrictions may be imposed on the marketing of, or the manufacturing processes for, the particular drug, including the addition of labelingstatements, such as a “black box” warning or a contraindication;•we may be subject to fines, injunctions or the imposition of civil or criminal penalties;•we, or our collaborators, may be required to create a Medication Guide outlining the risks of the previously unidentified side effects for distribution topatients;•we, or our collaborators, could be sued and held liable for harm caused to patients; and30•the drug may become less competitive.Any of these events could have a material and adverse effect on our operations and business and could adversely impact our stock price.If we are unable to establish sales, marketing and distribution capabilities or enter into sales, marketing and distribution arrangements with third parties, wemay not be successful in commercializing any product candidates that we develop if and when those product candidates are approved.We do not have a sales, marketing or distribution infrastructure and have no experience in the sale, marketing or distribution of pharmaceutical products. Toachieve commercial success for any approved product, we must either develop a sales and marketing organization or outsource these functions to third parties. Weplan to use a combination of third party collaboration, licensing and distribution arrangements and a focused in-house commercialization capability to sell anyproducts that receive marketing approval.We generally plan to seek to retain full commercialization rights for the United States for products that we can commercialize with a specialized sales force and toretain co-promotion or similar rights for the United States when feasible in indications requiring a larger commercial infrastructure. The development of sales,marketing and distribution capabilities will require substantial resources, will be time-consuming and could delay any product launch. If the commercial launch ofa product candidate for which we recruit a sales force and establish marketing and distribution capabilities is delayed or does not occur for any reason, we couldhave prematurely or unnecessarily incurred these commercialization costs. This may be costly, and our investment could be lost if we cannot retain or repositionour sales and marketing personnel. In addition, we may not be able to hire or retain a sales force in the United States that is sufficient in size or has adequateexpertise in the medical markets that we plan to target. If we are unable to establish or retain a sales force and marketing and distribution capabilities, our operatingresults may be adversely affected. If a potential partner has development or commercialization expertise that we believe is particularly relevant to one of ourproducts, then we may seek to collaborate with that potential partner even if we believe we could otherwise develop and commercialize the product independently.We plan to collaborate with third parties for commercialization in the United States of any products that require a large sales, marketing and product distributioninfrastructure. We also plan to commercialize our product candidates outside the United States through collaboration, licensing and distribution arrangements withthird parties. As a result of entering into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or theprofitability of these product revenues may be lower, perhaps substantially lower, than if we were to directly market and sell products in those markets.Furthermore, we may be unsuccessful in entering into the necessary arrangements with third parties or may be unable to do so on terms that are favorable to us. Inaddition, we may have little or no control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market ourproducts effectively.If we do not establish sales and marketing capabilities, either on our own or in collaboration with third parties, we will not be successful in commercializing any ofour product candidates that receive marketing approval.We face substantial competition from other pharmaceutical and biotechnology companies and our operating results may suffer if we fail to compete effectively.The development and commercialization of new drug products is highly competitive. We expect that we, and our collaborators, will face significant competitionfrom major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide with respect to our product candidates thatwe, or they, may seek to develop or commercialize in the future. Specifically, there are a number of large pharmaceutical and biotechnology companies thatcurrently market and sell products or are pursuing the development of product candidates for the treatment of neurologic disorders, cystic fibrosis andinflammation, the key indications for our development programs. Our competitors may succeed in developing, acquiring or licensing technologies and drugproducts that are more effective, have fewer or more tolerable side effects or are less costly than any product candidates that we are currently developing or that wemay develop, which could render our product candidates obsolete and noncompetitive.Avanir is developing AVP-786 for the treatment of agitation associated with Alzheimer's Disease, major depressive disorder and residual schizophrenia. There aremarketed drugs for major depressive disorder and product candidates in clinical development for each indication.We are initially developing CTP-656, a deuterated analog of ivacaftor, as a treatment for cystic fibrosis. The current standard of care for the treatment of cysticfibrosis in patients who have gating mutations is ivacaftor, which is marketed by Vertex31Pharmaceuticals, Inc. under the name Kalydeco®. If CTP-656 receives marketing approval, it would compete with this product and may face competition from anumber of other product candidates that are currently in clinical development, including additional candidates being developed by Vertex, among others.JZP-386 is being developed for the treatment of excessive daytime sleepiness and cataplexy in patients with narcolepsy. The current standard of care is treatmentwith sodium oxybate. In addition, Flamel Technologies is currently developing an extended release formulation of sodium oxybate for the treatment of narcolepsy.CTP-730 is a PDE4 inhibitor that has potential for the treatment of inflammatory diseases. The non-deuterated drug apremilast is marketed for certain types ofpsoriasis and psoriatic arthritis. It is also being evaluated for efficacy in other chronic inflammatory diseases. If CTP-730 receives marketing approval, it may facecompetition from drugs with similar or different mechanisms of action.Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer orless severe side effects, are more convenient or are less expensive than any products that we, or our collaborators, may develop. Our competitors also may obtainFDA or other marketing approval for their products before we, or our collaborators, are able to obtain approval for ours, which could result in our competitorsestablishing a strong market position before we, or our collaborators, are able to enter the market.Many of our existing and potential future competitors have significantly greater financial resources and expertise in research and development, manufacturing,non-clinical testing, conducting clinical trials, obtaining marketing approvals and marketing approved products than we do. Mergers and acquisitions in thepharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller or earlystage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. Thesecompetitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patientregistration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.We also face competition in the development of deuterated compounds.Many pharmaceutical and biotechnology companies have begun to cover deuterated analogs of their product candidates in patent applications and may choose todevelop these deuterated compounds. Some of these pharmaceutical and biotechnology companies may have significantly greater financial resources and expertisein research and development, manufacturing, non-clinical testing, conducting clinical trials, obtaining marketing approvals and marketing approved products thanwe do. In addition, we know of other companies that are broadly utilizing deuterium substitution for drug development, including Auspex Pharmaceuticals, Inc., awholly owned subsidiary of Teva Pharmaceutical Industries Ltd., and DeuteRx LLC. In some cases, these competitors may be interested in developing deuteratedcompounds that we may be interested in developing for ourselves. In addition, these competitors may enter into collaborative arrangements or businesscombinations that result in their ability to research and develop deuterated compounds more effectively than us. Our potential competitors also include academicinstitutions, government agencies and other public and private research organizations.If our competitors in the development of deuterated compounds are able to grow their intellectual property estates and create new and successful deuteratedcompounds more effectively than us, our ability to identify additional compounds for non-clinical and clinical development and obtain product revenues in futureperiods could be compromised, which could result in significant harm to our operations and financial position.If the FDA or comparable foreign regulatory authorities approve generic versions of any of our products that receive marketing approval, or such authoritiesdo not grant our products appropriate periods of data exclusivity before approving generic versions of our products, the sales of our products could beadversely affected.Once an NDA is approved, the product covered thereby becomes a “reference listed drug” in the FDA’s publication, “Approved Drug Products with TherapeuticEquivalence Evaluations.” Manufacturers may seek approval of generic versions of reference listed drugs through submission of abbreviated new drugapplications, or ANDAs, in the United States. In support of an ANDA, a generic manufacturer need not conduct clinical studies. Rather, the applicant generallymust show that its product has the same active ingredient(s), dosage form, strength, route of administration and conditions of use or labeling as the reference listeddrug and that the generic version is bioequivalent to the reference listed drug, meaning it is absorbed in the body at the same rate and to the same extent. Genericproducts may be significantly less costly to bring to market than the reference listed drug and companies that produce generic products are generally able to offerthem at lower prices. Thus, following the introduction32of a generic drug, a significant percentage of the sales of any branded product or reference listed drug may be typically lost to the generic product.The FDA may not approve an ANDA for a generic product until any applicable period of non-patent exclusivity for the reference listed drug has expired. TheFederal Food, Drug, and Cosmetic Act, or FDCA, provides a period of five years of non-patent exclusivity for a new drug containing a new chemical entity.Specifically, in cases where such exclusivity has been granted, an ANDA may not be filed with the FDA until the expiration of five years unless the submission isaccompanied by a Paragraph IV certification that a patent covering the reference listed drug is either invalid or will not be infringed by the generic product, inwhich case the applicant may submit its application four years following approval of the reference listed drug. While we believe that our product candidatescontain active ingredients that would be treated as new chemical entities by the FDA and, therefore, if approved, should be afforded five years of data exclusivity,the FDA may disagree with that conclusion and may approve generic products after a period that is less than five years. Manufacturers may seek to launch thesegeneric products following the expiration of the applicable marketing exclusivity period, even if we still have patent protection for our product.Competition that our products may face from generic versions of our products could materially and adversely impact our future revenue, profitability and cashflows and substantially limit our ability to obtain a return on the investments we have made in those product candidates.To the extent we, or our collaborators, market products that are deuterated analogs of generic drugs that are approved or will be approved while we market ourproducts, our products will likely compete against these generic products and the sales of our products could be adversely affected.We anticipate that some of the products that we, or our collaborators, may develop will be deuterated analogs of approved drugs that are or will then be availableon a generic basis. In addition, if we develop a product that is a deuterated analog of a non-generic approved drug, the FDA or comparable foreign regulatoryauthorities may also approve generic versions of the corresponding non-deuterated drug. If approved, we expect that our deuterated products will compete againstthese generic non-deuterated compounds in the same indications. Efforts to educate the medical community and third party payors on the benefits of any productthat we develop as compared to the corresponding non-deuterated compound, or generic versions of it, may require significant resources and may not besuccessful. If physicians, rightly or wrongly, do not believe that a product that we, or our collaborators, develop offers substantial advantages over thecorresponding non-deuterated compound, or generic versions of the corresponding non-deuterated compound, or that the advantages offered by our product ascompared to the corresponding non-deuterated compound, or its generic versions, are not sufficient to merit the increased price over the corresponding non-deuterated compound, or its generic versions, that we, or our collaborators, would seek, physicians might not prescribe that product. In addition, third party payorsmay refuse to provide reimbursement for a product that we, or our collaborators, develop when the corresponding non-deuterated compound, or generic versions ofthe corresponding non-deuterated compound, offer a cheaper alternative therapy in the same indication, or may otherwise encourage use of the corresponding non-deuterated compound, or generic versions of the corresponding non-deuterated compound, over our product, even if our product possesses favorablepharmaceutical properties.Competition that our product candidates may face from any generic non-deuterated product on which our product candidate is based or a later-approved genericversion of a branded non-deuterated product on which our product is based, could materially and adversely impact our future revenue, profitability and cash flowsand substantially limit our ability to obtain a return on the investments we have made in those product candidates.If we develop a deuterated analog of a drug with orphan disease exclusivity, we may be prevented from marketing our compound prior to the expiration of thatexclusivity unless we can show that the deuterated analog is not the same drug for the same indication.Under the Orphan Drug Act, if the FDA has granted a drug orphan disease exclusivity with respect to an orphan indication, which is generally defined as a diseaseor condition with a patient population of less than 200,000 patients in the United States annually, the FDA cannot approve a new drug application for the sameproduct and for the same orphan indication until the end of the exclusivity period of seven years following approval of the orphan drug. If one of our deuterium-modified analogs is deemed by the FDA to be the same product for the same indication as a corresponding non-deuterium modified drug that has orphan drugexclusivity, we may be prevented from marketing our drug during the exclusivity period.33Even if we, or our collaborators, are able to commercialize any product candidate that we, or they, develop, the product may become subject to unfavorablepricing regulations, third party payor reimbursement practices or healthcare reform initiatives that could harm our business.The commercial success of our product candidates will depend substantially, both domestically and abroad, on the extent to which the costs of our productcandidates will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or reimbursed by governmenthealth administration authorities, private health coverage insurers and other third party payors. Government authorities and third party payors, such as privatehealth insurers and health maintenance organizations, decide which medications they will cover and establish reimbursement levels. The healthcare industry isacutely focused on cost containment, both in the United States and elsewhere. Government authorities and third party payors have attempted to control costs bylimiting coverage and the amount of reimbursement for particular medications, which could affect our ability or that of our collaborators to sell our productcandidates profitably. These payors may not view our products, if any, as cost-effective, and coverage and reimbursement may not be available to our customers,or those of our collaborators, or may not be sufficient to allow our products, if any, to be marketed on a competitive basis. Cost-control initiatives could cause us,or our collaborators, to decrease the price we, or they, might establish for products, which could result in lower than anticipated product revenues. Ifreimbursement is not available, or is available only to limited levels, we, or our collaborators, may not be able to successfully commercialize our productcandidates. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us, or our collaborators, to establish or maintainpricing sufficient to realize a sufficient return on our or their investments.There is significant uncertainty related to third party payor coverage and reimbursement of newly approved drugs. Marketing approvals, pricing and reimbursementfor new drug products vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed. In manycountries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricingremains subject to continuing governmental control even after initial approval is granted. As a result, we, or our collaborators, might obtain marketing approval fora product in a particular country, but then be subject to price regulations that delay commercial launch of the product, possibly for lengthy time periods, which maynegatively impact the revenues we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability or the abilityof our collaborators to recoup our or their investment in one or more product candidates, even if our product candidates obtain marketing approval.Third party payor coverage of newly approved drugs may be more limited than the indications for which the drugs are approved by the FDA or comparable foreignregulatory authorities. Moreover, eligibility for reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers our costs, includingresearch, development, manufacture, sale and distribution. Reimbursement rates may vary, by way of example, according to the use of the drug and the clinicalsetting in which it is used. Reimbursement rates may also be based on reimbursement levels already set for lower cost drugs or may be incorporated into existingpayments for other services.In addition, increasingly, third party payors are requiring higher levels of evidence of the benefits and clinical outcomes of new technologies, requiringburdensome comparison studies with currently approved drugs and challenging the prices charged. We, and our collaborators, cannot be sure that coverage will beavailable for any product candidate that we, or they, commercialize and, if available, that the reimbursement rates will be adequate. Further, the net reimbursementfor drug products may be subject to additional reductions if there are changes to laws that presently restrict imports of drugs from countries where they may be soldat lower prices than in the United States. An inability to promptly obtain coverage and adequate payment rates from both government-funded and private payorsfor any our product candidates for which we, or our collaborators, obtain marketing approval could have a material adverse effect on our operating results, ourability to raise capital needed to commercialize products and our overall financial condition.We may not be successful in our efforts to identify or discover additional potential product candidates.A significant portion of our research involves the development of new deuterated compounds using our DCE Platform. These efforts may not be successful increating compounds that have commercial value or therapeutic utility beyond the corresponding non-deuterated compound, or at all. Our research programs mayinitially show promise in creating potential product candidates, yet fail to yield viable product candidates for clinical development for a number of reasons,including: •deuterated analogs of existing non-deuterated compounds or newly designed deuterated compounds may not demonstrate satisfactory efficacy or otherbenefits, such as convenience of dosing, increased tolerability, enhanced formation of desirable active metabolites or reduced formation of toxic metabolites;•potential product candidates may, on further study, be shown to have harmful side effects or other characteristics that indicate that they are unlikely to beproducts that will receive marketing approval and achieve market acceptance; or34•pharmaceutical and biotechnology companies have begun to claim deuterated analogs of their compounds in patent filings, resulting in otherwise promisingdeuterated product candidates already being covered by patents or patent applications.If we are unable to identify suitable additional compounds for non-clinical and clinical development, our ability to develop product candidates and obtain productrevenues in future periods could be compromised, which could result in significant harm to our financial position and adversely impact our stock price.Product liability lawsuits against us could divert our resources, cause us to incur substantial liabilities and limit commercialization of any products that wemay develop.We face an inherent risk of product liability claims as a result of the clinical testing of our product candidates despite obtaining appropriate informed consents fromour clinical trial participants. We will face an even greater risk if we or our collaborators commercially sell any product that we may or they may develop. If wecannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our productcandidates. Regardless of the merits or eventual outcome, liability claims may result in: •decreased demand for our product candidates or products that we may develop;•injury to our reputation and significant negative media attention;•withdrawal of clinical trial participants;•significant costs to defend litigation;•distraction to our management diverting focus from business operations and strategy;•initiation of investigations by regulators;•product recalls, withdrawals or labeling, marketing or promotional restrictions;•substantial monetary awards to trial participants or patients;•loss of revenue; and•the inability to commercialize any products that we may develop.Although we maintain product liability insurance coverage, it may not fully cover potential liabilities that we may incur. The cost of any product liability litigationor other proceeding, even if resolved in our favor, could be substantial. We will need to increase our insurance coverage if and when we begin selling any productcandidate that receives marketing approval. In addition, insurance coverage is becoming increasingly expensive. If we are unable to obtain or maintain sufficientinsurance coverage at an acceptable cost or to otherwise protect against potential product liability claims, it could prevent or inhibit the development andcommercial production and sale of our product candidates, which could adversely affect our business, financial condition, results of operations and prospects.JZP-386 is a deuterated analog of a Schedule I controlled substance and the active pharmaceutical ingredient will likely be classified as a Schedule Icontrolled substance and the drug product will likely be classified as a Schedule III controlled substance, which could substantially limit our, or ourcollaborator's, ability to obtain the quantities of JZP-386 needed to conduct clinical trials and the ability of our collaborator to market and sell JZP-386 if itreceives marketing approval.The placement of drugs or other substances into schedules under the Controlled Substances Act of 1970, or CSA, is based upon the substance’s medical use,potential for abuse and safety or dependence liability. Under the CSA, every person who manufactures, distributes, dispenses, imports or exports any controlledsubstance must register with the U.S. Drug Enforcement Agency, or DEA, unless exempt. Our product candidate JZP-386, which we have licensed to JazzPharmaceuticals, is a deuterated sodium oxybate analog. Sodium oxybate is regulated as a chemical by the DEA as a Schedule I controlled substance. Because ofthe Schedule I classification of sodium oxybate, JZP-386 is regulated by the DEA as a Schedule I controlled substance. As a result, we or Jazz Pharmaceuticalswill be required to obtain a license to ship the chemical intermediate that we are using as the precursor to JZP-386, which may delay or prevent the manufacturingof JZP-386 for clinical trials.Specifically, the DEA limits the quantity of certain Schedule I controlled substances that may be produced in the United States in any year through a quota system.If our contract manufacturers for JZP-386, or those for Jazz Pharmaceuticals, manufacture JZP-386 in the United States, they will be required to obtain separateDEA quotas to supply us or Jazz Pharmaceuticals with JZP-386 for the conduct of clinical trials. Different, but potentially no less burdensome regulations, mayapply if we or Jazz Pharmaceuticals choose to contract for the manufacture of JZP-386 outside of the United States.The process of obtaining the quotas needed to conduct the planned clinical trials of JZP-386 may involve lengthy legal and other efforts and we or JazzPharmaceuticals, or suppliers or manufacturers for us or Jazz Pharmaceuticals, may not be able to obtain sufficient quotas from the DEA. If we or JazzPharmaceuticals, or suppliers or manufacturers for us or Jazz35Pharmaceuticals, cannot obtain the quotas that are needed on a timely basis, or at all, we and Jazz Pharmaceuticals may not be able to conduct, on a timely basis orat all, the clinical trials of JZP-386 that are planned, and our business, financial condition, results of operations and growth prospects could be adversely affected.If JZP-386 is approved for marketing in the United States, we believe that the commercial drug containing JZP-386 will remain subject to the CSA as a ScheduleIII controlled substance. Those restrictions could limit the marketing and distribution of the commercial drug containing JZP-386.In addition, failure to maintain compliance with applicable requirements under the CSA, particularly as manifested in loss or diversion of regulated substances, canresult in enforcement action that could include civil penalties, refusal to renew registrations or quotas, revocation of registrations or quotas or criminal proceedings,any of which could have a material adverse effect on our business, results of operations and financial condition. Individual states also regulate controlledsubstances, and we and Jazz Pharmaceuticals, and contract manufacturers for us and Jazz Pharmaceuticals, will be subject to state regulation on distribution ofthese products.RISKS RELATED TO OUR DEPENDENCE ON THIRD PARTIESWe depend on collaborations with third parties for the development and commercialization of some of our product candidates and expect to continue to do soin the future. Our prospects with respect to those product candidates will depend in significant part on the success of those collaborations.We have entered into collaborations with Celgene, Avanir and Jazz Pharmaceuticals for the development and commercialization of certain of our productcandidates and expect to enter into additional collaborations in the future. We have limited control over the amount and timing of resources that our collaboratorsdedicate to the development or commercialization of our product candidates and our ability to generate revenues from these arrangements will depend on ourcollaborators’ abilities to successfully perform the functions assigned to them in these arrangements. In addition, our collaborators have the right to abandonresearch or development projects and terminate applicable agreements, including funding obligations, prior to or upon the expiration of the agreed upon terms.Collaborations involving our product candidates pose a number of risks, including: •collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations;•collaborators may not perform their obligations as expected;•collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renew development orcommercialization programs, based on clinical trial results, changes in the collaborators’ strategic focus or available funding or external factors, such as anacquisition, that divert resources or create competing priorities;•collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat orconduct new clinical trials or require a new formulation of a product candidate for clinical testing;•product candidates developed in collaboration with us, including in particular product candidates based on deuteration of a collaborator’s marketed drugs oradvanced clinical candidates, may be viewed by our collaborators as competitive with their own product candidates or products, which may causecollaborators to cease to devote resources to the commercialization of our product candidates;•a collaborator with marketing and distribution rights to one or more products may not commit sufficient resources to the marketing and distribution of suchproduct or products;•disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course of development, mightcause delays or termination of the research, development or commercialization of product candidates, might lead to additional responsibilities for us withrespect to product candidates, or might result in litigation or arbitration, any of which would be time-consuming and expensive;•collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigationthat could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation;•collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability; and•collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or commercialization of theapplicable product candidates.36Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner or at all. If a collaborator of oursis involved in a business combination, it could decide to delay, diminish or terminate the development or commercialization of any product candidate licensed to itby us.We expect to seek to establish additional collaborations, and if we are not able to establish them on commercially reasonable terms, we may have to alter ourdevelopment and commercialization plans.Our drug development programs and the potential commercialization of our product candidates will require substantial additional cash to fund expenses. We areseeking a collaborator for CTP-499 and may seek one or more collaborators for the development and commercialization of one or more of our product candidates.We do not currently intend to conduct further clinical development of CTP-499 for the treatment of diabetic nephropathy absent such a collaboration.We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for collaboration will depend, among other things,upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’sevaluation of a number of factors. Those factors may include the potential differentiation of our product candidate from its corresponding non-deuterated analog,design or results of clinical trials, the likelihood of approval by the FDA or comparable foreign regulatory authorities and the regulatory pathway for any suchapproval, the potential market for the product candidate, the costs and complexities of manufacturing and delivering the product to patients and the potential ofcompeting products. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available forcollaboration and whether such collaboration could be more attractive than the one with us for our product candidate.Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinationsamong large pharmaceutical companies that have resulted in a reduced number of potential future collaborators. We are also restricted under the terms of certain ofour existing collaboration agreements from entering into collaborations regarding or otherwise developing specified compounds that are similar to the compoundsthat are subject to those agreements and collaboration agreements that we enter into in the future may contain further restrictions on our ability to enter intopotential collaborations or to otherwise develop specified compounds.We may not be able to negotiate collaborations for CTP-499 or our other product candidates on a timely basis, on acceptable terms, or at all. If we are unable to doso, we may have to limit the development of the product candidate for which we are seeking to collaborate, reduce or delay its development program or one ormore of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase ourexpenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development orcommercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not havesufficient funds, we may not be able to further develop our product candidates or bring them to market and generate product revenue. In cases where we seek acollaborator for a product compound that is a deuterated analog of a compound that has been previously developed, failure to enter into a collaboration with thedeveloper of the corresponding non-deuterated compound may result in a loss of the potential to obtain clearance from the FDA to follow expedited developmentprograms that reference and rely on findings previously obtained from the developer’s prior non-clinical or clinical studies of the corresponding non-deuteratedcompound.We rely on third parties to conduct our clinical trials and some aspects of our research and non-clinical testing. If they terminate their relationships with us ordo not perform satisfactorily, our business may be materially harmed.We do not independently conduct clinical trials of any of our product candidates. We rely on third parties, such as contract research organizations, clinical datamanagement organizations, medical institutions and clinical investigators, to conduct these clinical trials and expect to rely on these third parties to conduct clinicaltrials of any other product candidate that we develop. We also rely on third parties to conduct some aspects of our research and non-clinical testing and expect torely on these third parties in the future. Any of these third parties may terminate their engagements with us under certain circumstances. If any of our relationshipswith these third parties terminate, we may not be able to enter into arrangements with alternative third parties on commercially reasonable terms or at all.Switching to or adding additional third parties would involve additional cost and require management time and focus. In addition, there is a natural transitionperiod when a new third party commences work, which could result in delays in our product development activities. Although we seek to carefully manage ourrelationships with our contract research organizations, any such challenges or delays could have a material adverse impact on our business, financial condition andprospects.Our reliance on these third parties for clinical development activities limits our control over these activities but we remain responsible for ensuring that each of ourstudies is conducted in accordance with the applicable protocol, legal, regulatory and37scientific standards. For example, notwithstanding the obligations of a contract research organization for a trial of one of our product candidates, we remainresponsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, theFDA requires us to comply with standards, commonly referred to as current Good Clinical Practices, or cGCPs, for conducting, recording and reporting the resultsof clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected.The FDA enforces these cGCPs through periodic inspections of trial sponsors, principal investigators, clinical trial sites and institutional review boards. If we orour third party contractors fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA mayrequire us to perform additional clinical trials before approving our product candidates, which would delay the marketing approval process. We cannot be certainthat, upon inspection, the FDA will determine that any of our clinical trials comply with cGCPs.Furthermore, these third parties are not our employees, and except for remedies available to us under our agreements with such contractors, we cannot controlwhether or not they devote sufficient time, skill and resources to our ongoing development programs. These contractors may also have relationships with othercommercial entities, including our competitors, which could impede their ability to devote appropriate time to our clinical programs. If these third parties do notsuccessfully carry out their contractual duties, meet expected deadlines or conduct their services in accordance with our contracts, regulatory requirements or ourstated protocols, we may not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates. If that occurs, we will not be ableto, or may be delayed in our efforts to, successfully commercialize our product candidates. In such an event, our financial results and the commercial prospects forany product candidates that we seek to develop could be harmed, our costs could increase and our ability to generate revenues could be delayed, impaired orforeclosed.We also rely on other third parties to store and distribute drug supplies for our clinical trials. Any performance failure on the part of our distributors could delayclinical development or marketing approval of our product candidates or commercialization of any resulting products, producing additional losses and depriving usof potential product revenue.We are also required to register clinical trials and post the results of completed clinical trials on a government-sponsored database, such as ClinicalTrials.gov,within certain timeframes. Failure to do so can result in the inability to report our clinical results in certain publications, fines, adverse publicity and civil andcriminal sanctions.Because there are limited sources of deuterium, we, and our collaborators, are exposed to a number of risks and uncertainties associated with our deuteriumsupply.We believe that all of the deuterium that we use in manufacturing our product candidates is currently derived, directly or indirectly, from deuterium oxide. Formost of our deuterium supply, we rely on bulk supplies of deuterium oxide which we currently source from multiple suppliers, including two located in NorthAmerica, one of which is in the United States.In order to internationally transport any deuterium oxide that we purchase from our current or potential future foreign suppliers, we, or our suppliers, may berequired to obtain an export license from the country of origin and we may be required to obtain an International Import Certificate or other governmentalapprovals or assurances from the country of destination. We are also required to obtain an export license from the Nuclear Regulatory Commission before shippingdeuterium oxide from the United States to any contract manufacturer in another country. Export licenses and certain other required documents may specify themaximum amount of deuterium oxide that we, or our suppliers, are permitted to either import or export. In order for us to obtain supplies of deuterium oxide fromforeign suppliers, they may be required to obtain an export license from the country of origin and we may be required to obtain domestic governmental approvalsor assurances. In addition, our current U.S. export licenses may be insufficient to meet our future requirements. We, or our suppliers, may not be able to obtainsuch licenses, approvals or assurances in a timely manner or at all.Certain of our manufacturing processes for our product candidates incorporate deuterium by using deuterated chemical intermediates or reagents that are derivedfrom deuterium oxide. For the deuterated chemical intermediates and reagents, we are not subject to the license requirements applicable to deuterium oxide;however the manufacturer of the deuterated chemical intermediate or reagent may themselves be required to obtain deuterium oxide under applicable licensingrequirements. Most of the manufacturers of these deuterated chemical intermediates and reagents are not located in countries that produce bulk quantities ofdeuterium oxide. Therefore, our ability to source these deuterated chemical intermediates will depend on the ability of these manufacturers to obtain deuteriumoxide from other countries. In the future we may arrange for supplies of deuterated chemical intermediates or reagents from manufacturers located in countriesfrom which they can source deuterium oxide in bulk. However, contract manufacturers in these countries may not represent a viable alternative to our currentsuppliers. We do not have long-term agreements with our suppliers of deuterated chemical intermediates or reagents and we obtain some of these deuteratedchemical intermediates or reagents from single sources, putting us at risk of uncontrolled cost38increases or supply interruptions if we cannot establish alternative sourcing arrangements. Deuterated chemical intermediates may be expensive or difficult toobtain or may be produced by specialized techniques that are not widely practiced and we may not be able to enter into arrangements for larger scale supply ofdeuterated chemical intermediates on acceptable terms, or at all.We estimate that our current sources of deuterium oxide will be sufficient to meet our anticipated requirements; however, we do not have long-term agreementswith our current suppliers. If we are not able to establish or maintain supply arrangements, or any relevant foreign governments decide to withhold authorizationsfor the export of deuterium oxide that we seek, we may be unable to secure alternative sources. If we are unable to obtain sufficient supplies of deuterium oxidefrom our current suppliers or our potential future foreign supplier, we would be forced to either seek alternative suppliers of deuterium oxide, likely in othercountries, or alternative sources of deuterium. Such alternative supplies may not be available to us on acceptable terms or at all.If we are unable to obtain sufficient supplies of deuterium, our ability to produce our product candidates would be impeded and our business, financial conditionand prospects could be harmed. In particular, certain of our manufacturing processes are projected to require particularly large quantities of deuterium for late-stage clinical trials and for commercialization. Consequently, any adverse impact on our ability to obtain deuterium oxide from our current suppliers, importdeuterium oxide into the United States or export deuterium oxide to our contract manufacturers could have a particularly severe impact on our ability to develop orcommercialize those product candidates.Similarly, to develop and commercialize any of our licensed product candidates, our collaborators will need to obtain supplies of deuterium and will be subject torisks and requirements in connection with sourcing deuterium that are similar to the ones that we face. In addition, if any of our product candidates is approved bythe FDA, then the FDA will also have regulatory jurisdiction over the manufacture and use of deuterium oxide and deuterated chemical intermediates or reagentsin such products. Any adverse impact on our, or our collaborators’, ability to obtain deuterium could delay or prevent the development or commercialization of ourproduct candidates, which could have a material adverse effect on our business.We contract with third parties for the manufacture and distribution of our product candidates for non-clinical and clinical testing and expect to continue to doso in connection with our future development and commercialization efforts. This reliance on third parties increases the risk that we will not have sufficientquantities of our product candidates or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercializationefforts.We currently rely, and expect to continue to rely, on third party contractors to manufacture non-clinical and clinical supplies of our product candidates and topackage, label and ship these supplies. We expect to rely on third party contractors to manufacture, package, label and distribute commercial quantities of anyproduct candidate that we commercialize following approval for marketing by applicable regulatory authorities. Reliance on such third party contractors entailsrisks, including: •manufacturing delays if our third party contractors give greater priority to the supply of other products over our product candidates or otherwise do notsatisfactorily perform according to the terms of the agreements between us and them;•the possible termination or nonrenewal of agreements by our third party contractors at a time that is costly or inconvenient for us;•the possible breach by the third party contractors of our agreements with them;•possible theft of intellectual property or trade secrets;•the failure of third party contractors to comply with applicable regulatory requirements;•the possible mislabeling of clinical supplies, potentially resulting in the wrong dose amounts being supplied or active drug or placebo not being properlyidentified;•possible contamination of our product during its manufacture;•possible interruptions in our contractors’ operations, including departure of key personnel, disruption due to merger and acquisitions activities or supplychain disruptions;•the possibility of clinical supplies not being delivered to clinical sites on time, leading to clinical trial interruptions, or of drug supplies not being distributedto commercial vendors in a timely manner, resulting in lost sales; and•the possible misappropriation of our proprietary information, including our trade secrets and know-how.If any of our product candidates are approved by any regulatory agency, we plan to enter into agreements with third party contract manufacturers for thecommercial production and distribution of those products. It may be difficult for us to reach agreement with a contract manufacturer on satisfactory terms or in atimely manner, especially if the manufacturer believes it is uniquely suited to use our deuterium chemistry manufacturing processes or that our deuteriumchemistry manufacturing processes bear greater production risks than manufacture of non-deuterated compounds. In addition, we may face competition for accessto manufacturing facilities as there are a limited number of contract manufacturers operating under current good39manufacturing practices, or cGMPs, that are capable of manufacturing our product candidates. Consequently, we may not be able to reach agreement with thirdparty manufacturers on satisfactory terms, which could delay our commercialization efforts.Third party manufacturers are required to comply with cGMPs and similar regulatory requirements outside the United States. Facilities used by our third partymanufacturers must be approved by the FDA after we submit an NDA and before potential approval of the product candidate. Similar regulations apply tomanufacturers of our product candidates for use or sale in foreign countries. We do not control the manufacturing process and are completely dependent on ourthird party manufacturers for compliance with the applicable regulatory requirements for the manufacture of our product candidates. If our manufacturers cannotsuccessfully manufacture material that conforms to the strict regulatory requirements of the FDA and any applicable foreign regulatory authority, they will not beable to secure the applicable approval for their manufacturing facilities. If these facilities are not approved for commercial manufacture, we may need to findalternative manufacturing facilities, which could result in delays in obtaining approval for the applicable product candidate.In addition, our manufacturers are subject to ongoing periodic inspections by the FDA and corresponding state and foreign agencies for compliance with cGMPsand similar regulatory requirements both prior to and following the receipt of marketing approval for any of our product candidates. Some of these inspections maybe unannounced. Failure by any of our manufacturers to comply with applicable cGMPs or other regulatory requirements could result in sanctions being imposedon us, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of approvals, operating restrictions, interruptions in supply and criminalprosecutions, any of which could significantly and adversely affect supplies of our product candidates and have a material adverse impact on our business,financial condition and results of operations.Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and ourability to commercialize any products that receive marketing approval on a timely and competitive basis.RISKS RELATED TO OUR INTELLECTUAL PROPERTYIf we are unable to obtain and maintain sufficient patent protection for our product candidates, or if the scope of the patent protection is not sufficiently broad,our competitors could develop and commercialize products similar or identical to ours, and our ability to successfully commercialize our product candidatesmay be adversely affected.Our success depends in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to our proprietaryproduct candidates. If we do not adequately protect our intellectual property, competitors may be able to erode or negate any competitive advantage we may have,which could harm our business and ability to achieve profitability. To protect our proprietary position, we file patent applications in the United States and abroadrelated to our novel product candidates that are important to our business. The patent application and approval process is expensive and time-consuming. We maynot be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Neither deuterium itself, nor the generalconcept of selective substitution of deuterium for hydrogen in existing compounds, are patentable; therefore we usually seek patents on a compound-by-compoundbasis or on a relatively narrow genus of compounds. We are not guaranteed that patents will issue protecting any particular deuterated compound for which weseek patent protection.Our ability to obtain and maintain patent protection for our product candidates may be limited if disclosures of non-deuterated compounds are held to anticipate ormake obvious claims of deuterated analogs of the same or similar compounds. In addition, several large pharmaceutical and biotechnology companies have begunto pursue patent protection for deuterated analogs of their products and product candidates, and may in the future obtain patent protection that covers deuteratedanalogs of those product candidates. If patents directed primarily to non-deuterated compounds are deemed to protect deuterated analogs of those compounds orpatent claims on deuterated analogs of compounds become common in the biotechnology and pharmaceutical industries, these factors may limit, in part or inwhole, our ability to seek and obtain patent protection for new product candidates based on deuterium modification of compounds. It may also limit in part or inwhole, our ability to develop new product candidates based on deuterium modification of such compounds without obtaining a license from those patent holders.The patent position of biotechnology and pharmaceutical companies generally is highly uncertain. No consistent policy regarding the breadth of claims allowed inbiotechnology and pharmaceutical patents has emerged to date in the United States or in many foreign jurisdictions. In addition, the determination of patent rightswith respect to pharmaceutical compounds commonly involves complex legal and factual questions, which has in recent years been the subject of much litigation.As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain.40Assuming the other requirements for patentability are met, currently, the first to file a patent application is generally entitled to the patent. However, prior toMarch 16, 2013, in the United States, the first to invent was entitled to the patent. Publications of discoveries in the scientific literature often lag behind the actualdiscoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all.Therefore we cannot be certain that we were the first to make the inventions claimed in our patents or pending patent applications, or that we were the first to filefor patent protection of such inventions.Moreover, we may be subject to a third party preissuance submission of prior art to the U.S. Patent and Trademark Office, or become involved in opposition,derivation, reexamination, post grant review, inter partes review or interference proceedings, in the United States or elsewhere, challenging our patent rights or thepatent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allowthird parties to commercialize our technology or product candidates and compete directly with us, without payment to us, or result in our inability to manufactureor commercialize products without infringing third party patent rights.Our pending and future patent applications may not result in patents being issued which protect our product candidates, in whole or in part, or which effectivelyprevent others from commercializing competitive products. Changes in either the patent laws or interpretation of the patent laws in the United States and othercountries may diminish the value of our patents or narrow the scope of our patent protection. In addition, the laws of foreign countries may not protect our rights tothe same extent or in the same manner as the laws of the United States. For example, European patent law restricts the patentability of methods of treatment of thehuman body more than United States law does.Even if our patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors fromcompeting with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our patents by developing similar oralternative technologies or products in a non-infringing manner. Our competitors may also seek approval to market their own products similar to or otherwisecompetitive with our products. Alternatively, our competitors may seek to market generic versions of any approved products by submitting ANDAs to the FDA inwhich they claim that patents owned or licensed by us are invalid, unenforceable or not infringed. In these circumstances, we may need to defend or assert ourpatents, or both, including by filing lawsuits alleging patent infringement. In any of these types of proceedings, a court or other agency with jurisdiction may findour patents invalid or unenforceable, or that our competitors are competing in a non-infringing manner. Thus, even if we have valid and enforceable patents, thesepatents still may not provide protection against competing products or processes sufficient to achieve our business objectives.The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned and licensed patents may be challenged in thecourts or patent offices in the United States and abroad, including challenges through the U.S. Patent and Trademark Office post-grant review procedures. Suchchallenges may result in loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our abilityto stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology andproducts. In addition, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting suchcandidates might expire before or shortly after such candidates are commercialized.If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected and our business would beharmed.While we have obtained composition of matter patents with respect to our most advanced product candidates, our DCE Platform is not patented. In seeking todevelop and maintain a competitive position through our DCE Platform and as to other aspects of our business, we rely on trade secrets, including unpatentedknow-how, technology and other proprietary information. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentialityagreements with parties who have access to them, such as our consultants, independent contractors, advisors, corporate collaborators, outside scientificcollaborators, contract manufacturers, suppliers and other third parties. We also enter into confidentiality and invention or patent assignment agreements withemployees and certain consultants. Any party with whom we have executed such an agreement may breach that agreement and disclose our proprietaryinformation, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed ormisappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, if any of our trade secrets were to belawfully obtained or independently developed by a competitor, we would have no right to prevent such third party, or those to whom they communicate suchtechnology or information, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independentlydeveloped by a competitor, our business and competitive position could be harmed.41Third parties may sue us alleging that we are infringing their intellectual property rights, and such litigation could be costly and time consuming and couldprevent or delay us from developing or commercializing our product candidates.Our commercial success depends, in part, on our ability to develop, manufacture, market and sell our product candidates without infringing the intellectual propertyand other proprietary rights of third parties. Some of the non-deuterated compounds on which our current and future product candidates, including CTP-656, arebased are products that are covered by issued patents or patent applications, the holders of which may attempt to assert claims against us. To date, we are not awareof any judicial decision holding that a patent that covers a non-deuterated compound should be construed to also cover deuterated analogs thereof, absent specificclaims with respect to the deuterated analogs. However, any such judicial decision, or legal proceedings asserting such claims, could increase the likelihood ofpotential infringement claims being asserted against us. If any third party patents or patent applications are found to cover our product candidates or their methodsof use, we may not be free to manufacture or market our product candidates as planned without obtaining a license, which may not be available on commerciallyreasonable terms, or at all.For example, CTP-656 is a deuterium-modified version of ivacaftor. Ivacaftor is marketed by Vertex under the name Kalydeco. Vertex currently has patentscovering ivacaftor that may still exist if and when we receive marketing approval for CTP-656. If we have to defend ourselves in a patent infringement suit, wemay incur significant expenses in doing so. Such litigation could delay our ability to market CTP-656 or prevent us from marketing CTP-656.There is a substantial amount of intellectual property litigation in the biotechnology and pharmaceutical industries, and we may become party to, or threatenedwith, litigation or other adversarial proceedings regarding intellectual property rights with respect to our products candidates, including interference proceedingsbefore the U.S. Patent and Trademark Office. Third parties may assert infringement claims against us based on existing or future intellectual property rights. Theoutcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in advance. The coverage of patents is subject tointerpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our productcandidates, products or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid or unenforceable, and we maynot be able to do this. Proving invalidity is difficult. For example, in the United States, proving invalidity requires a showing of clear and convincing evidence toovercome the presumption of validity enjoyed by issued patents. We may also assert that a patent claim for a corresponding non-deuterated compound does notcover our product. Even if we are successful in these proceedings, we may incur substantial costs and the time and attention of our management and scientificpersonnel could be diverted in pursuing these proceedings, which could have a material adverse effect on us. In addition, we may not have sufficient resources tobring these actions to a successful conclusion.If we are found to infringe a third party’s intellectual property rights, we could be forced, including by court order, to cease developing, manufacturing orcommercializing the infringing product candidate or product and could be required to pay potentially significant damages. Alternatively, we may be required toobtain a license from such third party in order to use the infringing technology and continue developing, manufacturing or marketing the infringing productcandidate. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, itcould be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In addition, we could be found liable for monetary damages,including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializingour product candidates or force us to cease some of our business operations, which could materially harm our business. Claims that we have misappropriated theconfidential information or trade secrets of third parties could have a similar negative impact on our business.We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time consuming andunsuccessful.Competitors may infringe our patents, trademarks, copyrights or other intellectual property. To counter infringement or unauthorized use, we may be required tofile infringement claims, which can be expensive and time consuming and divert the time and attention of our management and scientific personnel. In any patentinfringement proceeding, there is a risk that a court will decide that a patent of ours is invalid or unenforceable, in whole or in part, and that we do not have theright to stop the other party from using the invention at issue. There is also a risk that, even if the validity of such patents is upheld, the court will construe thepatent’s claims narrowly or decide that we do not have the right to stop the other party from using the invention at issue on the grounds that our patent claims donot cover the invention. An adverse outcome in a litigation or proceeding involving our patents could limit our ability to assert our patents against those parties orother competitors, and may curtail or preclude our ability to exclude third parties from making and selling similar or competitive products. Any of theseoccurrences could adversely affect our competitive business position, business prospects and financial condition.42Even if we establish infringement, the court may decide not to grant an injunction against further infringing activity and instead award only monetary damages,which may or may not be an adequate remedy. Furthermore, because of the substantial amount of discovery required in connection with intellectual propertylitigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation. Moreover, there can be no assurance thatwe will have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they are concluded. Even if weultimately prevail in such claims, the monetary cost of such litigation and the diversion of the attention of our management and scientific personnel could outweighany benefit we receive as a result of the proceedings.RISKS RELATED TO REGULATORY APPROVAL AND OTHER LEGAL COMPLIANCE MATTERSEven if we complete the necessary non-clinical studies and clinical trials the marketing approval process is expensive, time consuming and uncertain and wemay not obtain approvals for the commercialization of some or all of our product candidates. As a result, we cannot predict when or if, and in whichterritories, we, or our collaborators, will obtain marketing approval to commercialize a product candidate.The research, testing, manufacturing, labeling, approval, selling, marketing, promotion and distribution of drug products are subject to extensive regulation by theFDA and comparable foreign regulatory authorities, which regulations differ from country to country. Failure to obtain marketing approval for a product candidatein a given territory will prevent us and our collaborators from commercializing the product candidate in that territory. Our product candidates are in various stagesof development and are subject to the risks of failure inherent in drug development. We, and our collaborators, have not submitted an application for or receivedmarketing approval for any of our product candidates in the United States or in any other jurisdiction. We have limited experience in filing and supporting theapplications necessary to gain marketing approvals.The process of obtaining marketing approvals, both in the United States and abroad, is lengthy, expensive and uncertain. It may take many years, if approval isobtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved. This is thecase even though the deuterated compounds that we produce and seek to develop can have similar pharmacological properties as their corresponding non-deuterated compounds. Even if, as a result of any such similarities, we, or our collaborators, obtain clearance from the FDA and other regulatory authorities tofollow expedited development programs for some deuterated compounds that reference and rely on previous findings for non-deuterated compounds, the reviewand approval of our product candidates may still take a substantial period of time.In addition, changes in marketing approval policies during the development period, changes in or the enactment or promulgation of additional statutes, regulationsor guidance or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. Regulatoryauthorities have substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval andrequire additional non-clinical, clinical or other studies. In addition, varying interpretations of the data obtained from non-clinical and clinical testing could delay,limit or prevent marketing approval of a product candidate. Any marketing approval we, or our collaborators, ultimately obtain may be limited or subject torestrictions or post-approval commitments that render the approved product not commercially viable.Any delay in obtaining or failure to obtain required approvals could materially adversely affect our ability or that of our collaborators to generate revenue from theparticular product candidate, which likely would result in significant harm to our financial position and adversely impact our stock price.Failure to obtain marketing approval in international jurisdictions would prevent our product candidates from being marketed abroad.In order to market and sell our products in the European Union and many other jurisdictions, we, or our collaborators, must obtain separate marketing approvalsand comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The timerequired to obtain approval may differ substantially from that required to obtain FDA approval. The marketing approval process outside the United States generallyincludes all of the risks associated with obtaining FDA approval. In addition, in many territories outside the United States, it is required that the product beapproved for reimbursement before the product can be approved for sale in that territory. Our products may not receive commercially feasible prices in any giventerritory, or the price offered for our products in a territory may have an adverse effect on their prices in other territories if we were to accept. We, and ourcollaborators, may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensureapproval by43regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatoryauthorities in other countries or jurisdictions or by the FDA.Even if we, or our collaborators, obtain marketing approvals for our product candidates, the terms of approvals and ongoing regulation of our products maylimit how we, or they, manufacture and market our products, which could materially impair our ability to generate revenue.Once marketing approval has been granted, an approved product and its manufacturer and marketer are subject to ongoing review and extensive regulation. We,and our collaborators, must therefore comply with requirements concerning advertising and promotion for any of our product candidates for which we or theyobtain marketing approval. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must beconsistent with the information in the product’s approved labeling. Thus, we and our collaborators will not be able to promote any products we develop forindications or uses for which they are not approved.In addition, manufacturers of approved products and those manufacturers’ facilities are required to comply with extensive FDA requirements, including ensuringthat quality control and manufacturing procedures conform to cGMPs, which include requirements relating to quality control and quality assurance as well as thecorresponding maintenance of records and documentation and reporting requirements. We, our contract manufacturers, our collaborators and their contractmanufacturers could be subject to periodic unannounced inspections by the FDA to monitor and ensure compliance with cGMPs.Accordingly, assuming we, or our collaborators, receive marketing approval for one or more of our product candidates, we, and our collaborators, and our and theircontract manufacturers will continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production, productsurveillance and quality control.If we, and our collaborators, are not able to comply with post-approval regulatory requirements, we, and our collaborators, could have the marketing approvals forour products withdrawn by regulatory authorities and our, or our collaborators’, ability to market any future products could be limited, which could adversely affectour ability to achieve or sustain profitability. Further, the cost of compliance with post-approval regulations may have a negative effect on our operating results andfinancial condition.Any of our product candidates for which we, or our collaborators, obtain marketing approval in the future could be subject to post-marketing restrictions orwithdrawal from the market and we, or our collaborators, may be subject to substantial penalties if we, or they, fail to comply with regulatory requirements orif we, or they, experience unanticipated problems with our products following approval.Any of our product candidates for which we, or our collaborators, obtain marketing approval in the future, as well as the manufacturing processes, post-approvalstudies and measures, labeling, advertising and promotional activities for such product, among other things, will be subject to continual requirements of and reviewby the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration andlisting requirements, requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents,requirements regarding the distribution of samples to physicians and recordkeeping. Even if marketing approval of a product candidate is granted, the approvalmay be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, including the requirement to implementa Risk Evaluation and Mitigation Strategy, or REMS.The FDA may also impose requirements for costly post-marketing studies or clinical trials and surveillance to monitor the safety or efficacy of a product. The FDAand other agencies, including the Department of Justice, closely regulate and monitor the post-approval marketing and promotion of products to ensure that theyare manufactured, marketed and distributed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA imposesstringent restrictions on manufacturers’ communications regarding off-label use and if we, or our collaborators, do not market any of our product candidates forwhich we, or they, receive marketing approval for only their approved indications, we, or they, may be subject to warnings or enforcement action for off-labelmarketing. Violation of the FDCA and other statutes, including the False Claims Act, relating to the promotion and advertising of prescription drugs may lead toinvestigations or allegations of violations of federal and state health care fraud and abuse laws and state consumer protection laws.In addition, later discovery of previously unknown adverse events or other problems with our products or their manufacturers or manufacturing processes, orfailure to comply with regulatory requirements, may yield various results, including: •restrictions on such products, manufacturers or manufacturing processes;44•restrictions on the indication, patient population, or other parameters for which the drug is approved;•restrictions on the labeling or marketing of a product;•restrictions on product distribution or use;•requirements to conduct post-marketing studies or clinical trials;•warning letters or untitled letters;•withdrawal of the products from the market;•refusal to approve pending applications or supplements to approved applications that we submit;•recall of products;•fines, restitution or disgorgement of profits or revenues;•suspension or withdrawal of marketing approvals;•refusal to permit the import or export of products;•product seizure; or•injunctions or the imposition of civil or criminal penalties.Recently enacted and future legislation may increase the difficulty and cost for us and our collaborators to obtain marketing approval of and commercializeour product candidates and affect the prices we, or they, may obtain.In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcaresystem that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability, or the ability ofour collaborators, to profitably sell any products for which we, or they, obtain marketing approval.In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, changed the way Medicare covers and pays forpharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology basedon average sales prices for physician administered drugs. In addition, this legislation provided authority for limiting the number of drugs that will be covered in anytherapeutic class. Cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that we receive for any approvedproducts. While the MMA only addresses drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitationsin setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the MMA may result in a similar reduction in payments fromprivate payors.In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education AffordabilityReconciliation Act, or collectively the PPACA.Among the provisions of the PPACA of potential importance to our product candidates are the following: •an annual, non-deductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents;•an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;•expansion of healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new government investigative powers andenhanced penalties for noncompliance;•a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices;•extension of manufacturers’ Medicaid rebate liability;•expansion of eligibility criteria for Medicaid programs;•expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program new requirements to report financialarrangements with physicians and teaching hospitals;•a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; and•a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along withfunding for such research.In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. These changes included aggregate reductions to Medicarepayments to providers of up to 2% per fiscal year, starting in 2013. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012,which, among other things, reduced Medicare payments to several providers and increased the statute of limitations period for the government to recoveroverpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding.45Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceuticalproducts. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed,or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the United StatesCongress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us and our collaborators to more stringentproduct labeling and post-marketing testing and other requirements.Our future relationships with customers and third party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws andregulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.Healthcare providers, physicians and third party payors will play a primary role in the recommendation and prescription of any products for which we obtainmarketing approval. Our future arrangements with third party payors and customers, if any, will subject us to broadly applicable fraud and abuse and otherhealthcare laws and regulations. The laws and regulations may constrain the business or financial arrangements and relationships through which we market, selland distribute any products for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations in the U.S.include the following: •Anti-Kickback Statute . The federal healthcare anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering,receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, orthe purchase, order or recommendation or arranging of, any good or service, for which payment may be made under a federal healthcare program such asMedicare and Medicaid;•False Claims Act . The federal False Claims Act imposes criminal and civil penalties, including through civil whistleblower or qui tam actions, againstindividuals or entities for, among other things, knowingly presenting, or causing to be presented false or fraudulent claims for payment by a federalhealthcare program or making a false statement or record material to payment of a false claim or avoiding, decreasing or concealing an obligation to paymoney to the federal government, with potential liability including mandatory treble damages and significant per-claim penalties, currently set at $5,500 to$11,000 per false claim;•HIPAA . The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for executing a scheme todefraud any healthcare benefit program or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially falsestatement in connection with the delivery of or payment for healthcare benefits, items or services, and, as amended by the Health Information Technologyfor Economic and Clinical Health Act and its implementing regulations, also imposes obligations, including mandatory contractual terms and technicalsafeguards, with respect to maintaining the privacy, security and transmission of individually identifiable health information;•Transparency Requirements . Federal laws require applicable manufacturers of covered drugs to report payments and other transfers of value to physicians,other healthcare providers and teaching hospitals, as well as ownership and investment interests held by physicians and other healthcare providers and theirimmediate family members;•Controlled Substances Act . The CSA regulates the handling of controlled substances such as JZP-386; and•Analogous State and Foreign Laws . Analogous state and foreign fraud and abuse laws and regulations, such as state anti-kickback and false claims laws canapply to sales or marketing arrangements and claims involving healthcare items or services. In addition, some state laws require pharmaceutical companiesto comply with the pharmaceutical industry's voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal governmentin addition to requiring drug manufacturers to report information related to payments to physicians and other health care providers or marketing expendituresand govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often arenot preempted by HIPAA, thus complicating compliance efforts.Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant complianceguidance promulgated by the federal government and require drug manufacturers to report information related to payments and other transfers of value tophysicians and other healthcare providers or marketing expenditures. State and foreign laws also govern the privacy and security of health information in somecircumstances, many of which differ from each other in significant ways and often are not pre-empted by HIPAA, thus complicating compliance efforts.Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It ispossible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involvingapplicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmentalregulations that46may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion of products fromgovernment funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or otherhealthcare providers or entities with whom we expect to do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil oradministrative sanctions, including exclusions from government funded healthcare programs.If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have amaterial adverse effect on our business.We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage,treatment and disposal of hazardous materials and wastes. From time to time and in the future, our operations may involve the use of hazardous materials,including chemicals and biological materials, and may also produce hazardous waste products. Even if we contract with third parties for the disposal of thesematerials and waste products, we cannot completely eliminate the risk of contamination or injury resulting from these materials. In the event of contamination orinjury resulting from the use or disposal of our hazardous materials, we could be held liable for any resulting damages, and any liability could exceed ourresources. We also could incur significant costs associated with civil or criminal fines and penalties for failure to comply with such laws and regulations.We maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use ofhazardous materials, but this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability ortoxic tort claims that may be asserted against us.In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. Current or futureenvironmental laws and regulations may impair our research, development or production efforts, which could adversely affect our business, financial condition,results of operations or prospects. In addition, failure to comply with these laws and regulations may result in substantial fines, penalties or other sanctions.Governments outside the United States tend to impose strict price controls, which may adversely affect our revenues, if any.In some countries, such as the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries,pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement orpricing approval in some countries, we, or our collaborators, may be required to conduct a clinical trial that compares the cost-effectiveness of our product to otheravailable therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could bematerially harmed.RISKS RELATED TO EMPLOYEE MATTERS AND MANAGING GROWTHOur future success depends on our ability to retain our Chief Executive Officer and other key executives and to attract, retain and motivate qualifiedpersonnel.Our industry has experienced a high rate of turnover of management personnel in recent years. Our ability to compete in the highly competitive biotechnology andpharmaceuticals industries depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. We are highly dependent onthe pharmaceutical research and development and business development expertise of Roger D. Tung, our President and Chief Executive Officer, as well as theother principal members of our management, scientific and development team. Although we have formal employment agreements with our executive officers,these agreements do not prevent them from terminating their employment with us at any time. In addition, although we maintain a key-man insurance policy withrespect to Dr. Tung, we do not carry key-man insurance on any of our other executive officers or employees and may not carry any key-man insurance in thefuture.If we lose one or more of our executive officers, our ability to implement our business strategy successfully could be seriously harmed. Furthermore, replacingexecutive officers may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skillsand experience required to develop, gain marketing approval of and commercialize products successfully. Competition to hire from this limited pool is intense, andwe may be unable to hire, train, retain or motivate these additional key personnel on acceptable terms given the competition among numerous pharmaceutical andbiotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and researchinstitutions. In addition, we rely on consultants and advisors,47including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisorsmay be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availabilityto us. If we are unable to continue to attract and retain high quality personnel, our ability to develop and commercialize product candidates will be limited.We expect to grow our organization and, as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.As our pipeline grows and matures, we expect to experience significant growth in the number of our employees and the scope of our operations, including in theareas of drug manufacturing, regulatory affairs and sales, marketing and distribution. Our management may need to divert a disproportionate amount of itsattention away from our day-to-day activities to devote time to managing these growth activities. To manage these growth activities, we must continue toimplement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel.Due to our limited financial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not beable to effectively manage the expansion of our operations or recruit and train additional qualified personnel. Moreover, the expected expansion of our operationsmay lead to significant costs and may divert our business development resources. Any inability to manage growth could delay the execution of our business plansor disrupt our operations.RISKS RELATED TO OUR COMMON STOCKThe price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for purchasers of our common stock.The trading price of our comment stock has been, and may continue to be, volatile and could be subject to wide fluctuations in response to various factors, some ofwhich are beyond our control. The stock market in general and the market for smaller pharmaceutical and biotechnology companies in particular have experiencedextreme volatility that has often been unrelated to the operating performance of particular companies. The market price for our common stock may be influencedby many factors, including: •the success of existing or new competitive products or technologies;•the timing, advancement of and results of non-clinical studies and clinical trials of any of our product candidates;•commencement or termination of collaborations for our development programs;•failure, delays, changes to or discontinuation of any of our development programs;•regulatory or legal developments in the United States and other countries;•regulatory actions relating to our product candidates;•developments or disputes concerning patent applications, issued patents or other proprietary rights;•the recruitment or departure of key personnel;•disclosures by our collaborators relating to our product candidates or competitive programs;•merger or acquisition activity of our collaborators;•the level of expenses related to any of our product candidates or clinical development programs;•the results of our efforts to develop additional product candidates or products;•actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;•announcement or expectation of additional financing efforts;•receipt or expectation of receipt of revenues such as milestones, royalties, grants and license fees;•sales of our common stock by us, our insiders or other stockholders;•programmed trading based on technical stock chart or other inputs;•portfolio restructuring by large shareholders;•addition or removal of our stock from stock indices;•variations in our financial results or those of companies that are perceived to be similar to us;•changes in estimates or recommendations by securities analysts that cover our stock;•actions by short-sellers or supporters of our stock, including social media postings or reports;•changes in the structure of healthcare payment systems;•market conditions in the pharmaceutical and biotechnology sectors;•general economic, industry and market conditions; and•the other factors described in this “Risk Factors” section.48An active trading market for our common stock may not be sustained.Although we have listed our common stock on The NASDAQ Global Market, an active trading market for our common stock may not be sustained. In the absenceof an active trading market for our common stock, investors may not be able to sell their common stock at or above the price at which they acquired their shares orat the times that they would like to sell. An inactive trading market may also impair our ability to raise capital to continue to fund operations by selling shares andmay impair our ability to acquire other companies or technologies by using our shares as consideration.We have broad discretion in the use of our cash reserves and may not use them effectively.Our management will have broad discretion to use our cash reserves and could use our cash reserves in ways that do not improve our results of operations orenhance the value of our common stock. The failure by our management to apply these funds effectively could result in financial losses that could have a materialadverse effect on our business, cause the price of our common stock to decline and delay the development of our product candidates. Pending their use, we mayinvest our cash reserves in a manner that does not produce income or that loses value.We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock lessattractive to investors.We are an “emerging growth company,” as defined in the JOBS Act, and may remain an emerging growth company for up to five years. For so long as we remainan emerging growth company, we are permitted and plan to rely on exemptions from certain disclosure requirements that are applicable to other public companiesthat are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of theSarbanes-Oxley Act of 2002, or SOX Section 404, not being required to comply with any requirement that may be adopted by the Public Company AccountingOversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financialstatements, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote onexecutive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict whether investors will find ourcommon stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active tradingmarket for our common stock and our stock price may be more volatile.In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revisedaccounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise applyto private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we are subjectto the same new or revised accounting standards as other public companies that are not emerging growth companies.We will continue to incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to newcompliance initiatives and corporate governance practices.As a public company, we are incurring and expect to incur additional significant legal, accounting and other expenses that we did not incur as a private company.We expect that these expenses will further increase after we are no longer an “emerging growth company.” The Sarbanes-Oxley Act of 2002, or SOX, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of The NASDAQ Global Market and other applicable securities rules andregulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls andcorporate governance practices. We expect that we will need to hire additional personnel to comply with the requirements of being a public company, and ourmanagement and other personnel will need to devote a substantial amount of time towards maintaining compliance with these requirements. These requirementswill increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We are currently evaluating these rules andregulations, and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject tovarying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance isprovided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoingrevisions to disclosure and governance practices.Pursuant to SOX Section 404 we are required to evaluate the effectiveness of our internal control over financial reporting as of the end of each fiscal year and toreport on this evaluation in our Annual Report on Form 10-K for the year. However, while we remain an emerging growth company, we will not be required toinclude an attestation report on internal control over financial49reporting issued by our independent registered public accounting firm. We will need to continue to dedicate internal resources, potentially engage outsideconsultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve controlprocesses as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process forinternal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude that our internal control over financial reporting iseffective as required by SOX Section 404. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to aloss of confidence in the reliability of our financial statements.A significant portion of our total outstanding shares may be sold into the market in the near future, which could cause the market price of our common stockto decline significantly, even if our business is doing well.Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that theholders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock.In addition, as of February 23, 2016, there were 2,890,758 shares subject to outstanding options under our equity compensation plans, all of which shares we haveregistered under the Securities Act on a registration statement on Form S-8. These shares will be able to be freely sold in the public market upon exercise, aspermitted by any applicable vesting requirements, except to the extent they are held by our affiliates, in which case such shares will become eligible for sale in thepublic market as permitted by Rule 144 under the Securities Act. Furthermore, as of February 23, 2016, there were 70,796 shares subject to an outstanding warrantto purchase common stock. These shares will become eligible for sale in the public market, to the extent such warrant is exercised, as permitted by Rule 144 underthe Securities Act. Moreover, holders of a substantial portion of our outstanding common stock have rights, subject to conditions, to require us to file registrationstatements covering their shares or, along with the holder of our outstanding warrant to purchase common stock, to include their shares in registration statementsthat we may file for ourselves or other stockholders.We do not anticipate paying any cash dividends on our capital stock in the foreseeable future, accordingly, stockholders must rely on capital appreciation, ifany, for any return on their investment.We have never declared or paid cash dividends on our capital stock. We currently plan to retain all of our future earnings, if any, to finance the operation,development and growth of our business. Furthermore, any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any,of our common stock will be the sole source of gain for our stockholders for the foreseeable future.Our executive officers, directors and principal stockholders, if they choose to act together, have the ability to substantially influence all matters submitted tostockholders for approval.As of December 31, 2015, our executive officers and directors, combined with our stockholders who owned more than 5% of our outstanding common stock, andall affiliates, in the aggregate, beneficially owned shares representing approximately 37.9% of our capital stock. As a result, if these stockholders were to choose toact together, they would be able to substantially influence all matters submitted to our stockholders for approval, as well as our management and affairs. Forexample, these persons, if they choose to act together, would substantially influence the election of directors and approval of any merger, consolidation or sale ofall or substantially all of our assets. This concentration of ownership control may: •delay, defer or prevent a change in control;•entrench our management or the board of directors; or•impede a merger, consolidation, takeover or other business combination involving us that other stockholders may desire.Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, moredifficult and may prevent attempts by our stockholders to replace or remove our current management.Provisions in our corporate charter and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders mayconsider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares. These provisions could also limit the pricethat investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, becauseour board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by ourstockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among otherthings, these provisions:50 •establish a classified board of directors such that all members of the board are not elected at one time;•allow the authorized number of our directors to be changed only by resolution of our board of directors;•limit the manner in which stockholders can remove directors from the board;•establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on at stockholdermeetings;•require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent;•limit who may call a special meeting of stockholders;•authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work todilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors; and•require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repeal certain provisions of ourcharter or bylaws.Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibitsa person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transactionin which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. This coulddiscourage, delay or prevent someone from acquiring us or merging with us, whether or not it is desired by, or beneficial to, our stockholders.If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volumecould decline.The trading market for our common stock depends on the research and reports that securities or industry analysts publish about us or our business. We do not haveany control over these analysts. There can be no assurance that analysts will cover us, or provide favorable coverage. If one or more analysts downgrade our stockor change their opinion of our stock, our share price may decline. In addition, if one or more analysts cease coverage of our company or fail to regularly publishreports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.51 ITEM 1B.Unresolved Staff CommentsNone ITEM 2.PropertiesWe lease our principal facilities, which consist of approximately 50,000 square feet of office, research and laboratory space located at 99 Hayden Avenue,Lexington, Massachusetts. The leases covering this space expire on September 30, 2018. We believe that our existing facilities are sufficient for our current needsfor the foreseeable future. ITEM 3.Legal ProceedingsWe are not currently a party to any material legal proceedings. ITEM 4.Mine Safety DisclosuresNot applicable. Part IIITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuers Purchases of Equity SecuritiesMARKET INFORMATIONOur common stock has been publicly traded on the NASDAQ Global Market under the symbol “CNCE” since February 13, 2014. Prior to that time, therewas no public market for our common stock. Set forth below is the quarterly information with respect to the high and low prices for our common stock for the mostrecent fiscal year. High LowYear Ended December 31, 2015 First Quarter $18.29 $11.85Second Quarter 17.84 13.11Third Quarter 22.80 14.01Fourth Quarter 25.04 18.47Year Ended December 31, 2014 First Quarter $16.26 $11.42Second Quarter 13.76 7.12Third Quarter 15.19 7.50Fourth Quarter 15.32 10.31HOLDERSAs of January 31, 2016, there were 21 holders of record of our common stock. This number does not include beneficial owners whose shares are held bynominees in street name.52DIVIDENDSWe have never declared or paid any cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth anddevelopment of our business. We do not intend to pay any cash dividends to the holders of our common stock in the foreseeable future.PERFORMANCE GRAPHThe following performance graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the SEC for purposes of Section 18of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities under that Section, nor shall such information beincorporated by reference into any future filing under the Exchange Act or the Securities Act of 1933, as amended, or the Securities Act, except to the extent thatwe specifically incorporate it by reference into such filing.The following graph compares the performance of our common stock to The NASDAQ Composite Index and to The NASDAQ Biotechnology Index fromFebruary 13, 2014 (the first date that shares of our common stock were publicly traded) through December 31, 2015. The comparison assumes $100 was investedafter the market closed on February 13, 2014 in our common stock and in each of the foregoing indices, and it assumes reinvestment of dividends, if any. The stockprice performance included in this graph is not necessarily indicative of future stock price performance.PURCHASE OF EQUITY SECURITIESWe did not purchase any of our registered equity securities during the period covered by this Annual Report on Form 10-K.USE OF PROCEEDS FROM REGISTERED SECURITIESWe effected the initial public offering of our common stock through a Registration Statement on Form S-1 (File No. 333-193335) that was declared effective bythe SEC on February 12, 2014, and a registration statement on Form S-1 (File No. 333-193920) filed pursuant to Rule 462(b) of the Securities Act that becameeffective on February 12, 2014. The net53offering proceeds to us, after deducting underwriting discounts and commissions and offering expenses, were approximately $83.1 million.As of January 31, 2016, we estimate that we have used all net proceeds of $83.1 million primarily to fund the development of CTP-354, CTP-656, to advance andexpand the research and preclinical development of additional product candidates and for working capital, capital expenditures and other general corporatepurposes. None of the net proceeds were paid directly or indirectly to directors or officers of ours or their associates or to persons owning 10 percent or more of ourcommon stock or to any affiliate of ours, other than payments in the ordinary course of business to officers for salaries and to non-employee directors ascompensation for board or board committee service. There has been no material change in our planned use of the balance of the net proceeds from the offering asdescribed in our final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act.54ITEM 6.Selected Financial DataThe following tables set forth our selected consolidated financial data and has been derived from our audited consolidated financial statements. You should readthe following selected consolidated financial data together with our consolidated financial statements and accompanying notes appearing elsewhere in this AnnualReport on Form 10-K and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Annual Report on Form10-K. Our historical results for any prior period are not necessarily indicative of the results that may be expected in any future period. Years ended December 31,(in thousands, except per share data) 2015 2014 2013 2012 2011Results of Operations Total revenue $66,729 $8,576 $25,408 $12,849 $19,467Operating expenses: Research and development $28,885 $27,474 $21,790 $24,193 $23,436General and administrative 13,056 11,700 8,028 7,266 7,377Total operating expenses 41,941 39,174 29,818 31,459 30,813Income (Loss) from operations 24,788 (30,598) (4,410) (18,610) (11,346)Interest and other (expense) income, net (185) (1,101) (1,646) (1,834) 26Provision for income taxes 429 — — — —Net income (loss) $24,174 $(31,699) $(6,056) $(20,444) $(11,320)Accretion on redeemable convertible preferred stock — (55) (396) (388) (1,069)Net income (loss) applicable to common stockholders - basic anddiluted $24,174 $(31,754) $(6,452) $(20,832) $(12,389)Earnings Per Share Net income (loss) per share applicable to common stockholders - basic $1.14 $(2.00) $(4.99) $(16.15) $(9.66)Net income (loss) per share applicable to common stockholders -diluted $1.09 $(2.00) $(4.99) $(16.15) $(9.66)Weighted-average number of common shares used in net income (loss)per share applicable to common stockholders - basic 21,152 15,842 1,292 1,290 1,283Weighted-average number of common shares used in net income (loss)per share applicable to common stockholders - diluted 22,267 15,842 1,292 1,290 1,283Financial Condition Cash and cash equivalents $92,510 $13,396 $9,638 $7,490 $22,949Investments, available for sale 49,680 65,836 23,039 20,067 19,705Working capital 137,481 63,102 18,128 20,940 33,861Total assets 146,932 84,454 39,773 33,129 49,403Deferred revenue 10,170 15,821 19,631 2,750 11,022Loan payable, net of discount — 7,101 14,919 19,731 7,135Redeemable convertible preferred stock — — 112,244 111,848 111,460Total stockholders’ equity (deficit) 130,635 54,825 (112,104) (106,687) (86,718) 55ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsYou should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements andthe related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forthelsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statementsthat involve risks and uncertainties. You should read the “Risk Factors” section in Part 1—Item 1A. of this report for a discussion of important factors that couldcause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion andanalysis.OVERVIEWWe are a clinical stage biopharmaceutical company applying our extensive knowledge of deuterium chemistry to discover and develop novel small molecule drugs.Incorporation of deuterium into known molecules has the potential to provide better pharmacokinetic or metabolic properties, thereby enhancing their clinicalsafety, tolerability or efficacy. Our approach starts with approved drugs, advanced clinical candidates or previously studied compounds that may be improved withdeuterium substitution. Our technology provides the opportunity to develop products that may compete with the non-deuterated drug in existing markets or toleverage the known activity of approved drugs to expand into new indications. As discussed in detail in Item 1 above, we have a robust pipeline of wholly ownedand collaboration programs.Since our inception in 2006, we have devoted substantially all of our resources to our research and development efforts, including activities to develop ourdeuterated chemical entity platform, or DCE Platform, and our core capabilities in deuterium chemistry, identify potential product candidates, undertake non-clinical studies and clinical trials, manufacture clinical trial material in compliance with current good manufacturing practices, provide general and administrativesupport for these operations and establish our intellectual property. We have generated an accumulated deficit of $121.2 million since inception through December31, 2015 and will require substantial additional capital to fund our research and development. We do not have any products approved for sale and have notgenerated any revenue from product sales. We have funded our operations primarily through the public offering and private placement of our equity, debt financingand funding from collaborations and patent assignments. In March 2015, we sold 3,300,000 shares of common stock at a price to the public of $15.15 per share,resulting in net proceeds to us of $46.7 million, after deducting the underwriting discounts, commissions and offering-related transaction costs.We have incurred net losses in each year from our inception in 2006, except for fiscal year 2015. We generated net income of $24.2 million during the year endedDecember 31, 2015 and incurred a net loss of $31.7 million for the year ended December 31, 2014. The net income generated during the year ended December 31,2015 was primarily the result of a $50.2 million one-time payment from Auspex Pharmaceuticals, Inc., or Auspex, as discussed further in Note 14 in theconsolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. Our operating results may fluctuate significantly from year to year,depending on the timing and magnitude of clinical trial and other development activities under our current development programs. Substantially all of our netlosses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with ouroperations.We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect our expenses will increasesubstantially in connection with our ongoing activities as we continue research and development efforts and develop and conduct additional non-clinical studiesand clinical trials with respect to our product candidates.We do not expect to generate revenue from product sales unless and until we, or our collaborators, obtain marketing approval for one or more of our productcandidates, which we expect will take a number of years and is subject to significant uncertainty. If we obtain, or believe that we are likely to obtain, marketingapproval for any product candidates for which we retain commercialization rights, and intend to commercialize a product, we expect to incur significantcommercialization expenses related to product sales, marketing, manufacturing and distribution. We expect to seek to fund our operations through a combination ofequity offerings, debt financings and additional collaborations and licensing arrangements for at least the next several years. However, we may be unable to raiseadditional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements asand when needed would force us to delay, limit, reduce or terminate our research and development programs and could have a material adverse effect on our56financial condition and our ability to develop our products. We will need to generate significant revenues to achieve sustained profitability and we may never doso.COLLABORATIONSWe have entered into a number of collaborations for the research, development and commercialization of deuterated compounds. To date, our collaborations haveprovided us with significant funding for both our specific development programs and our DCE Platform. Our collaborators also have applied their considerablescientific, development, regulatory and commercial capabilities to the development of our compounds. In addition, in some instances, where we develop and seekto collaborate with respect to deuterated analogs of marketed drugs or of drug candidates that are more advanced in clinical trials, our collaborators may be eligiblefor an expedited development or regulatory pathway by relying on previous clinical data regarding their corresponding non-deuterated compound. We believe thatour collaborations have contributed to our ability to progress our product candidates and build our DCE Platform. We have established the following keycollaborations, which are discussed further in Note 13 in the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.AvanirIn February 2012, we entered into a development and license agreement with Avanir under which we granted Avanir an exclusive worldwide license to develop,manufacture and commercialize deuterated dextromethorphan analogs. Avanir is currently focused on developing AVP-786, which is a combination of adeuterated analog of dextromethorphan and a low dose of quinidine, for the treatment of neurologic and psychiatric disorders. In January 2015, Avanir wasacquired by Otsuka Pharmaceutical Co., Ltd. and it is now a wholly owned subsidiary of Otsuka America, Inc.Under the agreement, we received a non-refundable upfront payment of $2.0 million and have received milestone payments of $6.0 million. We have the potentialto earn up to $162.0 million in additional development, regulatory and sales-based milestone payments, of which $21.5 million in development and regulatorymilestone payments are associated with the first indication. The next anticipated milestone payments that we may be entitled to receive are $5.0 million uponacceptance for filing of a New Drug Application, or NDA, and $3.0 million upon acceptance for filing of a Marketing Authorization Application, or MAA, relatedto AVP-786. Avanir also is required to pay us royalties at defined percentages ranging from the mid-single digits to low double digits below 20% on net sales oflicensed products on a country-by-country basis.CelgeneIn April 2013, we entered into a master development and license agreement with Celgene, which is primarily focused on the research, development andcommercialization of specified deuterated compounds targeting inflammation or cancer. While the collaboration has the potential to encompass multiple programs,it is initially focused on one program, CTP-730, which is deuterated apremilast.We were responsible for conducting and funding research and early development activities for the CTP-730 program pursuant to mutually agreed upondevelopment plans. This included the completion of single and multiple ascending dose Phase 1 clinical trials. Celgene is responsible for any development of CTP-730 beyond the completed Phase 1 clinical trials. If Celgene exercises its rights with respect to any additional program and pays us the applicable exercise fee, weare responsible for conducting research and development activities at our own expense pursuant to mutually agreed upon development plans until the completion ofthe first Phase 1 clinical trial, which will be defined in each development plan on a program-by-program basis, discussed further in Note 13 in the consolidatedfinancial statements appearing elsewhere in this Annual Report on Form 10-K. In addition, if Celgene exercises its rights with respect to the option program andpays us the applicable exercise fee, we are responsible for seeking to generate a deuterated compound for clinical development in the selected option program atour own expense.Under the agreement, we received a non-refundable upfront payment of $35.0 million and received an $8.0 million development milestone in October 2015 uponcompletion of clinical evaluation for CTP-730. In addition, we have the potential to earn up to $312.5 million in additional development, regulatory and sales-based milestone payments with respect to CTP-730. The next milestone that we may be entitled to receive is $15.0 million upon the first actual dosing in a Phase 3clinical trial or, if earlier, acceptance for filing a NDA related to CTP-730. If Celgene exercises its rights under any additional program, we may be eligible formilestone payments for each additional program. In addition, with respect to each program, Celgene is required to pay us royalties on worldwide net sales of eachlicensed product at defined percentages ranging from the mid-single digits to low double digits below 20%.57Jazz PharmaceuticalsIn February 2013, we entered into a development and license agreement with Jazz Pharmaceuticals to research, develop and commercialize products containing adeuterated sodium oxybate analog, or D-SXB. Jazz Pharmaceuticals is initially focused on developing one analog, designated as JZP-386 for the treatment ofnarcolepsy. Under the terms of the agreement, we granted Jazz Pharmaceuticals an exclusive, worldwide, royalty-bearing license under intellectual propertycontrolled by us to develop, manufacture and commercialize D-SXB products including, but not limited to, JZP-386.We, together with Jazz Pharmaceuticals, have conducted certain development activities for Phase 1 clinical trials with respect to JZP-386 pursuant to an agreedupon development plan. We were responsible under the development plan for conducting the Phase 1 clinical trials with respect to JZP-386. Thereafter, ourobligations to conduct further development activities are subject to mutual agreement. Jazz Pharmaceuticals has assumed all manufacturing and developmentresponsibilities relating to JZP-386.Under the agreement, we received a non-refundable upfront payment of $4.0 million and are eligible to earn an aggregate of up to $113.0 million in development,regulatory and sales-based milestone payments. The next milestone payment that we may be entitled to receive is $4.0 million related to initiation of the first Phase2 clinical trial of JZP-386. In addition, Jazz Pharmaceuticals is required to pay us royalties at defined percentages ranging from the mid-single digits to low doubledigits below 20% on worldwide net sales of licensed products.For further discussion regarding our collaboration agreements, refer to Note 13 in the consolidated financial statements.PATENT ASSIGNMENT AGREEMENTIn September 2011, we entered into a patent assignment agreement with Auspex Pharmaceuticals, Inc., or Auspex, pursuant to which we assigned to Auspex a U.S.patent application relating to deuterated pirfenidone analogs as described in Note 14 in the consolidated financial statements appearing elsewhere in this AnnualReport on Form 10-K. Among other things, the patent assignment agreement provides that if Auspex is acquired in a change in control transaction at any timewhile it, or any of its affiliates, own certain patents or patent applications related to deuterated pirfenidone, we will receive within a specified period following theclosing of the transaction 1.44% of any proceeds payable as consideration for the change in control transaction, including any amounts paid to stockholders andcertain equity holders of Auspex. Any such change in control payment to us is credited to Auspex as a deduction against certain future payments that may becomedue under the agreement, such that Auspex will not be required to make further payments to us until the aggregate amount of such payments otherwise due exceedsthe amount of the change in control payment.Pursuant to the agreement, we became eligible to receive a one-time payment of $50.2 million, which was received in June 2015, due to Teva PharmaceuticalIndustries Ltd.’s acquisition of Auspex in May 2015.FINANCIAL OPERATIONS OVERVIEWRevenueWe have not generated any revenue from the sales of products. All of our revenue to date has been generated through collaboration, license and researcharrangements with collaborators and nonprofit organizations for the development and commercialization of product candidates and a patent assignment agreement.The terms of these agreements include one or more of the following types of payments: non-refundable license fees, payments for research and developmentactivities, payments based upon the achievement of specified milestones, payment of license exercise or option fees relating to product candidates and royalties onany net product sales. To date, we have received non-refundable upfront payments, several milestone payments, payments for research and development servicesprovided to our collaborators and a change in control payment pursuant to a patent assignment agreement. However, we have not yet earned any license exercise oroption fees, sales-based milestone payments or royalty revenue as a result of product sales.In the future, we will seek to generate revenue from a combination of product sales and milestone payments and royalties on product sales in connection with ourcurrent collaborations with Avanir, Celgene, and Jazz Pharmaceuticals, or other collaborations we may enter into.58Research and development expensesResearch and development expenses consist primarily of costs incurred for the development of our product candidates, which include: •employee-related expenses, including salary, benefits, travel and stock-based compensation expense;•expenses incurred under agreements with contract research organizations and investigative sites that conduct our clinical trials;•the cost of acquiring, developing and manufacturing clinical trial materials;•facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies;•platform-related lab expenses, which includes costs related to synthesis, analysis and in vitro and in vivo characterization of deuterated compounds tosupport the selection and progression of potential product candidates;•expenses related to consultants and advisors; and•costs associated with non-clinical activities and regulatory operations.Research and development costs are expensed as incurred. Costs for certain development activities are recognized based on an evaluation of the progress tocompletion of specific tasks using information and data provided to us by our vendors and our clinical sites.A significant portion of our research and development costs have been external costs, which we track on a program-by-program basis. These external costs includefees paid to investigators, consultants, central laboratories and contract research organizations in connection with our clinical trials, and costs related to acquiringand manufacturing clinical trial materials. Our internal research and development costs are primarily personnel-related costs, depreciation and other indirect costs.We do not track our internal research and development expenses on a program-by-program basis as they are deployed across multiple projects under development.The successful development of any of our product candidates is highly uncertain. As such, at this time, we cannot reasonably predict with certainty the durationand completion costs of the current or future clinical trials of any of our product candidates or if, when, or to what extent we will generate revenues from thecommercialization and sale of any of our product candidates that obtain marketing approval. We may never succeed in achieving regulatory approval for any of ourproduct candidates. The duration, costs, and timing of clinical trials and development of our product candidates will depend on a variety of factors, including: •the scope and rate of progress of our ongoing as well as any additional clinical trials and other research and development activities;•conduct of and results from ongoing as well as any additional clinical trials and research and development activities;•significant and changing government regulation;•the terms and timing and receipt of any regulatory approvals;•the performance of our collaborators;•our ability to manufacture any of our product candidates that we are developing or may develop in the future; and•the expense and success of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timingassociated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials orother research and development activities beyond those that we currently anticipate will be required for the completion of clinical development of a productcandidate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resourcesand time on the completion of clinical development.Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higherdevelopment costs than those in earlier stages of clinical development, due to the increased size and duration of later-stage clinical trials and the manufacturing thatis typically required for those later-stage clinical trials. We expect research and development costs to increase significantly for the foreseeable future as our productcandidate development programs progress but we do not believe that it is possible at this time to accurately project total program-specific expenses throughcommercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design andvarious regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, futurecommercial and regulatory factors beyond our control will impact our clinical development programs and plans.59General and administrative expensesGeneral and administrative expenses consist primarily of salaries and related costs for personnel, including stock-based compensation and travel expenses for ouremployees in executive, operational, finance, legal, business development and human resource functions. Other general and administrative expenses includefacility-related costs, depreciation and other expenses not allocated to research and development expense and professional fees for directors, accounting and legalservices and expenses associated with obtaining and maintaining patents.We anticipate that our general and administrative expenses will increase in the future as our pipeline grows and matures. Additionally, if and when we believe aregulatory approval of the first product candidate that we intend to commercialize on our own appears likely, we anticipate an increase in payroll and relatedexpenses as a result of our preparation for commercial operations, especially as it relates to the sales, marketing and distribution of our product candidates.Investment incomeInvestment income consists of interest income earned on cash equivalents and investments. The amount of investment income earned in any particular period mayvary primarily as a result of the amount of cash equivalents and investments held during the period and the types of securities included in our portfolio during theperiod. Our current investment policy is to maintain a diversified investment portfolio of U.S. government-backed securities and money market mutual fundsconsisting of U.S. government-backed securities.Interest and other expenseInterest and other expense consists primarily of interest expense on amounts outstanding under our debt facility with Hercules Technology Growth Capital, Inc., orHercules, amortization of debt discount and the re-measurement gain or loss associated with the change in the fair value of a preferred stock warrant liability. OnOctober 1, 2015, we made a final payment to Hercules, thereby fulfilling all obligations under our debt facility. Upon completion of our IPO in February 2014, thewarrant became exercisable for an aggregate of 70,796 shares of our common stock at an exercise price of $14.13 per share and the related warrant liability wasreclassified to additional paid-in capital and will not be subject to re-measurement in future periods.Income TaxesWe record a provision or benefit for income taxes on pre-tax income or loss based on our estimated effective tax rate for the year. We recorded $0.4 million inincome tax expense during the year ended December 31, 2015. The tax expense is the result of alternative minimum tax (“AMT”) which, in accordance with theU.S. federal tax code, limits the use of net operating loss carryforwards to ninety percent of AMT income resulting in an effective tax rate of approximately twopercent. No provision was recorded for fiscal years 2014 and 2013 due to the net loss generated during those years.CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATESOur management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have beenprepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make judgments andestimates that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities in our financialstatements. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under thecircumstances. Actual results may differ from these estimates. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances,facts and experience. The effects of material revisions in estimates, if any, will be reflected in the consolidated financial statements prospectively from the date ofchange in estimates.While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this AnnualReport on Form 10-K, we believe the following accounting policies used in the preparation of our financial statements require the most significant judgments andestimates: •revenue recognition;•accrued research and development expense; and•stock-based compensation.60Revenue recognitionWe have primarily generated revenue through arrangements with collaborators for the development and commercialization of product candidates.Collaboration revenueThe terms of our collaboration and license agreements have typically contained multiple elements, or deliverables, which have included licenses, or options toobtain licenses, to product candidates, referred to as exclusive licenses, as well as research and development activities to be performed by us on behalf of thecollaborator related to the licensed product candidates. Payments that we may receive under these agreements include non-refundable upfront license fees, paymentfor research and development activities, payments based upon achievement of specified milestones, payment upon exercise of license rights or options to licenseproduct candidates and royalties on any resulting product sales.Multiple-Element Arrangements . Our collaborations primarily represent multiple-element arrangements. We analyze multiple-element arrangements based on theguidance in Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 605-25, Revenue Recognition-Multiple-ElementArrangements , or ASC 605-25. Pursuant to the guidance in ASC 605-25, we evaluate multiple-element arrangements to determine the deliverables included in thearrangement and whether the individual deliverables represent separate units of accounting or whether they must be accounted for as a combined unit ofaccounting. This evaluation involves subjective determinations and requires us to make judgments about the individual deliverables and whether such deliverablesare separable from the other aspects of the contractual relationship. Deliverables are considered separate units of accounting provided that: (1) the delivered item(s)has value to the customer on a standalone basis and (2) if the arrangement includes a general right of return relative to the delivered item(s), delivery orperformance of the undelivered item(s) is considered probable and substantially in our control. In assessing whether a delivered item(s) has standalone value, weconsider whether the collaboration partner can use the delivered item(s) for its intended purpose without the receipt of the remaining element(s), whether the valueof the deliverable is dependent on the undelivered item(s) and whether there are other vendors that can provide the undelivered element(s). In making theseassessments, we consider factors such as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability of theassociated expertise in the general marketplace. The terms of our collaboration and licensing arrangements do not contain general rights of return that wouldpreclude recognition of revenue.Arrangement consideration that is fixed or determinable is allocated among the separate units of accounting using the relative selling price method. We determinethe selling price of a unit of accounting following the hierarchy of evidence prescribed by ASC 605-25. Accordingly, we determine the estimated selling price forunits of accounting within each arrangement using vendor-specific objective evidence of selling price, if available, third-party evidence of selling price if vendor-specific objective evidence is not available, or best estimate of selling price if neither vendor-specific objective evidence nor third-party evidence is available. Wetypically use best estimate of selling price to estimate the selling price for exclusive licenses and research and development services, since we generally do nothave vendor-specific objective evidence or third-party evidence of selling price for these items. Determining the best estimate of selling price for a unit ofaccounting requires significant judgment. In developing the best estimate of selling price for a unit of accounting, we consider applicable market conditions andrelevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. We validate the bestestimate of selling price for units of accounting by evaluating whether changes in the key assumptions used to determine the best estimate of selling price will havea significant effect on the allocation of arrangement consideration between multiple units of accounting.Our multiple-element revenue arrangements may include the following: •Option Arrangements . An option to obtain an exclusive license is considered substantive if, at the inception of the arrangement, we are at risk as towhether the collaboration partner will choose to exercise the option. Factors that we consider in evaluating whether an option is substantive include theoverall objective of the arrangement, the benefit the collaborator might obtain from the arrangement without exercising the option, the cost to exercise theoption and the likelihood that the option will be exercised. For arrangements under which an option is considered substantive, we do not consider the itemunderlying the option to be a deliverable at the inception of the arrangement and the associated option fees are not included in allocable arrangementconsideration, assuming the option is not priced at a significant and incremental discount. Conversely, for arrangements under which an option is notconsidered substantive, we would consider the item underlying the option to be a deliverable at the inception of the arrangement and a correspondingamount would be included in the allocable arrangement consideration. A significant and incremental discount included in an otherwise substantive optionis considered to be a separate deliverable at the inception of the arrangement.61•Exclusive Licenses . We recognize arrangement consideration allocated to each unit of accounting when all of the revenue recognition criteria included inASC Topic 605 Revenue Recognition are satisfied for that particular unit of accounting. We will recognize as revenue arrangement considerationattributed to exclusive licenses that have standalone value from the other deliverables to be provided in an arrangement upon delivery. We will recognizeas revenue arrangement consideration attributed to exclusive licenses that do not have standalone value from the other deliverables to be provided in anarrangement over our estimated performance period as the arrangement would be accounted for as a single, combined unit of accounting. •Research and Development Services . We recognize revenue associated with research and development services over the associated period ofperformance. If there is no discernible pattern of performance and/or objectively measurable performance measures do not exist, then we recognizerevenue on a straight-line basis over the period we are expected to complete our performance obligations. Conversely, if the pattern of performance inwhich the service is provided to the customer can be determined and objectively measurable performance measures exist, then we recognize revenueunder the arrangement using the proportional performance method, which requires us to make certain estimates when determining the proportion ofservices rendered in relation to the total services expected to be rendered.Milestone Revenue . At the inception of an arrangement that includes milestone payments, we evaluate whether each milestone is substantive and at risk to bothparties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether: •the consideration is commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered item(s) as aresult of a specific outcome resulting from our performance to achieve the milestone;•the consideration relates solely to past performance; and•the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement.We evaluate factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the respective milestone and the levelof effort and investment required to achieve the respective milestone in making this assessment. There is considerable judgment involved in determining whether amilestone satisfies all of the criteria required to conclude that a milestone is substantive. We have concluded that all of the development and regulatory milestonesincluded in our current collaboration arrangements are substantive. Accordingly, in accordance with FASB ASC Topic 605-28, Revenue Recognition-MilestoneMethod , revenue from development and regulatory milestone payments will be recognized in their entirety upon successful accomplishment of the milestone,assuming all other revenue recognition criteria are met. Milestones that are not considered substantive would be recognized as revenue over the remaining periodof performance, assuming all other revenue recognition criteria are met. Revenue from sales-based milestone payments will be accounted for as royalties andrecognized as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met.Royalty Revenue . We will recognize royalty revenue in the period of sale of the related product(s), based on the underlying contract terms, provided that thereported sales are reliably measurable and we have no remaining performance obligations, assuming all other revenue recognition criteria are met.Accrued research and development expensesAs part of the process of preparing our financial statements, we are required to estimate our accrued expenses as of each balance sheet date. This process involvesreviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating thelevel of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. Themajority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accruedexpenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracyof our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include feespaid to: •contract research organizations in connection with clinical trials;•investigative sites in connection with clinical trials;•vendors in connection with non-clinical development activities; and•vendors related to product manufacturing, development and distribution of clinical supplies.We generally accrue expenses related to research and development activities based on the services received and efforts expended pursuant to contracts withmultiple contract research organizations that conduct and manage clinical trials on our62behalf as well as other vendors that provide research and development services. The financial terms of these agreements are subject to negotiation, vary fromcontract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of servicesprovided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment ofsubjects and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level ofeffort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual orprepaid accordingly. Non-refundable advance payments for goods and services that will be used in future research and development activities are expensed whenthe activity has been performed or when the goods have been received rather than when the payment is made.Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performeddiffer from the actual status and timing of services performed we may report amounts that are too high or too low in any particular period. To date, there has beenno material differences from our estimates to the amount actually incurred.Stock-Based CompensationSince our inception in May 2006, we have applied the fair value recognition provisions of Financial Accounting Standards Board Accounting StandardsCodification Topic 718, Compensation-Stock Compensation , which we refer to as ASC 718, to account for stock-based compensation arrangements with ouremployees. Stock-based compensation arrangements with non-employees has not been significant. We use the Black-Scholes-Merton option pricing model fordetermining the estimated fair value for stock-based awards on the date of grant, which requires the use of subjective and complex assumptions to determine thefair value of stock-based awards, including the fair value of the common stock underlying stock-based compensation awards (for periods prior to our IPO), theaward’s expected term and the price volatility of the underlying stock. We recognize the value of the portion of the awards that is ultimately expected to vest asexpense over the requisite vesting periods on a ratable basis for the entire award. Our awards granted to employees generally have a ten year term and typicallyvest over a four year period.Prior to our IPO, the estimated fair value of our common stock was determined by our board of directors based on contemporaneous and retrospective valuationestimates provided by management and prepared in accordance with the framework of the American Institute of Certified Public Accountants’ Technical PracticeAid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation as well as independent third-party valuations. Our valuations of ourcommon stock were based on a number of objective and subjective factors, including external market conditions affecting the biotechnology industry sector andthe prices at which we sold shares of preferred stock, the superior rights and preferences of securities senior to our common stock at the time of each grant and thelikelihood of achieving a liquidity event such as an IPO. Since our IPO, the exercise price per share of all option grants has been set at the closing price of ourcommon stock on The NASDAQ Global Market on the applicable date of grant.Because there had been no public market for our common stock prior to our IPO, we believe that we have insufficient data from our limited public trading historyto appropriately utilize company-specific historical and implied volatility information. Accordingly, we utilize data from a representative group of publicly tradedcompanies to estimate expected stock price volatility. We selected representative companies from the biopharmaceutical industry with similar characteristics as us,including stage of product development and therapeutic focus.The expected term of awards represents the period of time that the awards are expected to be outstanding. We use the simplified method as prescribed by theSecurities and Exchange Commission Staff Accounting Bulletin No. 107, Share-Based Payment as we do not have sufficient historical exercise data to provide areasonable basis upon which to estimate the expected term of stock options granted to employees.We utilize a dividend yield of zero based on the fact that we have never paid cash dividends and have no current intention of paying cash dividends. The risk-freeinterest rate was estimated using an average of treasury bill interest rates over a period commensurate with the expected term of the option at the time of grant.Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.63We have computed the fair value of employee stock options at the date of grant using the following weighted-average assumptions: Year ended December 31, 2015 2014 2013Expected volatility 73.38% 80.94% 70.10%Expected term 6.0 years 6.0 years 6.0 yearsRisk-free interest rate 1.69% 1.90% 1.69%Expected dividend yield —% —% —%PENDING ACCOUNTING PRONOUNCEMENTSIn May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts withCustomers (Topic 606) , or ASU 2014-09, which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services tocustomers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this coreprinciple, ASU 2014-09 provides that an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performanceobligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognizerevenue when (or as) the entity satisfies a performance obligation. This update will be effective for us beginning in the first quarter of fiscal 2018 as a result of theFASB’s one year deferral of the effective date for this standard. Early adoption is permitted, however not before the original effective date of annual periodsbeginning on or after December 15, 2016. We are currently assessing the impact of this ASU on our financial statements.In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern , or ASU 2014-15.ASU 2014-15 amends FASB Accounting Standards Codification 205-40 Presentation of Financial Statements – Going Concern , by providing guidance ondetermining when and how reporting entities must disclose going-concern uncertainties in their financial statements, including requiring management to performinterim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financial statements andproviding certain disclosures if there is substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 will be effective for our fiscal2016 and annual financial statements and for interim periods beginning in the first quarter of fiscal 2017. The adoption of this accounting standard may affect ourfinancial statement disclosures in future periods.64RESULTS OF OPERATIONSComparison of the years ended December 31, 2015 and 2014The following table summarizes our results of operations for the years ended December 31, 2015 and 2014, together with the changes in those items in dollars. Year ended December 31, (in thousands) 2015 2014 ChangeRevenue: License and research and development revenue $6,574 $6,576 $(2)Other revenue 50,155 — 50,155Milestone revenue 10,000 2,000 8,000Total revenue 66,729 8,576 58,153Operating expenses: Research and development 28,885 27,474 1,411General and administrative 13,056 11,700 1,356Total operating expenses 41,941 39,174 2,767Income (Loss) from operations 24,788 (30,598) 55,386Investment income 124 49 75Interest and other expense (309) (1,150) 841Income (Loss) before income taxes 24,603 (31,699) 56,302Provision for income taxes 429 — 429Net income (loss) $24,174 $(31,699) $55,873License and Research and Development RevenueLicense revenue was $6.6 million for the year ended December 31, 2015 and for the prior year and is comprised of revenue recognized under our Celgene, JazzPharmaceuticals and Avanir collaboration agreements for services performed under these agreements during the years ended December 31, 2015 and 2014. Duringthe years ended December 31, 2015 and 2014, services performed under our Celgene and Jazz Pharmaceuticals collaborations were primarily attributable to theperformance of our Phase 1 clinical trials under these collaborations. Revenue recognized under our Avanir collaboration during the years ended December 31,2015 and 2014 was attributable to certain intellectual property cost reimbursements. Our Phase 1 clinical trials under our Celgene and Jazz Pharmaceuticalscollaborations were complete as of December 31, 2015.Other RevenueOther revenue recognized during the year ended December 31, 2015 was attributable to our patent assignment agreement with Auspex, whereby we received a one-time change in control payment of $50.2 million from Auspex, which was acquired by Teva Pharmaceutical Industries Ltd. in May 2015.Milestone RevenueMilestone revenue recognized during the year ended December 31, 2015 was attributable to an $8.0 million milestone payment earned upon completion of Phase 1clinical evaluation for CTP-730 as well as a $2.0 million milestone payment earned as a result of the initial dosing in a Phase 3 clinical trial of AVP-786. During2014, we earned a $2.0 million development milestone payment as a result of the initial dosing in a Phase 2 clinical trial of AVP-786.As of December 31, 2015, we had deferred revenue of: •$7.3 million related to our collaboration with Celgene, $1.2 million of which is attributable to the CTP-730 program and is expected to be recognized asrevenue during fiscal year 2016 as we satisfy our remaining research and development activities pursuant to mutually agreed upon development plans and$6.1 million of which is attributable to two additional license programs that we will not recognize as revenue until Celgene exercises its rights withrespect to those programs, or at such time that Celgene's rights lapse, as discussed further in Note 13 to the consolidated financial statements appearingelsewhere in this Annual Report on Form 10-K;65•$0.1 million related to our collaboration with Jazz Pharmaceuticals and associated with research and development services to be performed andrecognized as revenue over the estimated remaining performance period of 24 months; and•$2.8 million related to a payment received from GSK that we will not recognize as revenue until all repayment obligations lapse.Research and development expensesThe following table summarizes our external research and development expenses, by program, for the years ended December 31, 2015 and 2014, with our internalresearch expenses separately classified by category. Because Avanir is conducting the clinical development of AVP-786 at its expense, we made minimalinvestment in the program during these periods. Year ended December 31,(in thousands) 2015 2014 CTP-656 external costs 3,759 1,063CTP-730 external costs 2,711 1,904JZP-386 external costs 1,084 2,207External costs for other programs 4,686 8,694Employee and contractor-related expenses 13,507 10,523Facility and other expenses 3,138 3,083Total research and development expenses $28,885 $27,474Research and development expenses were $28.9 million for the year ended December 31, 2015, compared to $27.5 million for the prior year, an increase of $1.4million . This increase was primarily due to a $3.0 million increase in employee and contractor-related expenses, due primarily to an increase in headcount, as wellas a net increase of $2.4 million in our current clinical stage development programs, partially offset by a decrease in external costs for other programs, describedbelow. The increase in our current clinical stage development programs was primarily attributable to an increase in CTP-656 expenses and CTP-730 expenses,which was a result of expenses incurred in connection with Phase 1 clinical testing for each program during the year ended December 31, 2015.The decrease of $4.0 million in external costs for other programs during the year ended December 31, 2015 was primarily attributable to the discontinuation ourCTP-354 program and the completion of the Phase 2 CTP-499 program, which resulted in decreased expenses of $5.5 million and $0.8 million, respectively,partially offset by increased expenses of $2.4 million for certain ongoing preclinical development programs. The decrease in JZP-386 expenses of $1.1 million wasattributable to the completion of clinical conduct under this program during the year ended December 31, 2015.General and administrative expensesGeneral and administrative expenses were $13.1 million for the year ended December 31, 2015, compared to $11.7 million for the prior year. The increase of $1.4million was primarily attributable to a $0.8 million increase in non-cash stock-based compensation expense and a $0.4 million increase in cash compensation toemployees, as a result of an increase in headcount.Interest and other expenseInterest and other expense was $0.3 million for the year ended December 31, 2015, compared to $1.2 million for the prior year period. The decrease was primarilyattributable to a decrease in interest expense associated with our debt facility with Hercules, which decreased by $0.7 million for the year ended December 31,2015 compared to the prior year due to a lower principal balance outstanding. On October 1, 2015, we made our final principal payment to Hercules. Accordingly,we will not recognize any interest expense in fiscal year 2016 related to the debt facility.Additionally, a $0.1 million expense was recognized during the year ended December 31, 2014 in connection with the re-measurement of the fair value of theredeemable convertible preferred stock warrant that we issued to Hercules in connection with draws under our debt facility. Upon completion of our IPO inFebruary 2014, the warrant became exercisable for an66aggregate of 70,796 shares of our common stock at an exercise price of $14.13 per share and the related warrant liability was reclassified to additional paid-incapital and will not be subject to re-measurement in future periods.Provision for income taxesThe Company recorded a tax provision of $0.4 million during the year ended December 31, 2015. No tax provision was recorded in the prior year period due to thenet loss generated. The tax provision of $0.4 million is attributable to the federal limitation on alternative minimum tax net operating loss carryforwards.Comparison of the years ended December 31, 2014 and 2013The following table summarizes our results of operations for the years ended December 31, 2014 and 2013, together with the changes in those items in dollars. Year ended December 31, (in thousands) 2014 2013 ChangeRevenue: License and research and development revenue $6,576 $23,408 $(16,832)Milestone revenue 2,000 2,000 —Total revenue 8,576 25,408 (16,832)Operating expenses: Research and development 27,474 21,790 5,684General and administrative 11,700 8,028 3,672Total operating expenses 39,174 29,818 9,356Loss from operations (30,598) (4,410) (26,188)Investment income 49 21 28Interest and other expense (1,150) (1,667) 517Net loss $(31,699) $(6,056) $(25,643)License and Research and Development RevenueThe decrease in license and research and development revenue was primarily due to license revenue recognized during the year ended December 31, 2013 of $17.0million in connection with the delivery of a license under our collaboration agreement with Celgene, partially offset by an increase of $2.4 million recognized forresearch services performed under our Celgene agreement during the year ended December 31, 2014. The increase in research services performed during the yearended December 31, 2014 was primarily attributable to the initiation of a single ascending dose Phase 1 clinical trial of CTP-730 during the year endedDecember 31, 2014.Additionally, revenue recognized under our Jazz Pharmaceuticals collaboration decreased by $2.2 million, primarily as a result of the $3.7 million recognized inconnection with the delivery of a license during the year ended December 31, 2013, partially offset by a $1.5 million increase in revenue recognized during theyear ended December 31, 2014 for research services performed under our Jazz Pharmaceuticals agreement. The increase in research services performed during theyear ended December 31, 2014 was primarily attributable to the conduct of a Phase 1 clinical trial of JZP-386 during the year ended December 31, 2014.Milestone RevenueDuring the year ended December 31, 2014, we earned a $2.0 million milestone payment from Avanir based on the initiation of dosing in a Phase 2 clinical trial ofAVP-786. During the year ended December 31, 2013, we earned a $2.0 million milestone payment from Avanir based on positive data from Avanir’s Phase 1clinical trial of AVP-786.Research and development expensesThe following table summarizes our external research and development expenses, by program, for the years ended December 31, 2014 and 2013, with our internalresearch expenses separately classified by category. Because Avanir is67conducting the clinical development of AVP-786 at its expense, we made minimal investment in the program during these periods. Year ended December 31,(in thousands) 2014 2013 CTP-656 external costs 1,063 27CTP-730 external costs 1,904 455JZP-386 external costs 2,207 253External costs for other programs 8,694 7,042Employee and contractor-related expenses 10,523 10,723Facility and other expenses 3,083 3,290Total research and development expenses $27,474 $21,790Research and development expenses were $27.5 million for the year ended December 31, 2014, compared to $21.8 million for the year ended December 31, 2013,an increase of $5.7 million. The increase was primarily attributable to a $2.0 million increase in JZP-386 expenses, a $1.4 million increase in CTP-730 expensesdue primarily to the initiation of a Phase 1 clinical trial under each of these programs during the year ended December 31, 2014, and a $1.1 million increase inCTP-656 expenses, attributable to ongoing preclinical evaluation during the year ended December 31, 2014. The increase in external costs for other programs wasprimarily due to a $4.2 million increase in CTP-354 expenses, due to the conduct of Phase 1 clinical trials, partially offset by a $2.5 million decrease in CTP-499expenses, due to the completion of Phase 2 clinical trials in December 2013.General and administrative expensesGeneral and administrative expenses were $11.7 million for the year ended December 31, 2014, compared $8.0 million for the year ended December 31, 2013. Theincrease was primarily due to a $2.0 million increase in cash compensation to employees, non-cash stock-based compensation expense and recruiting expense, a$1.3 million increase of expenses incurred during the year ended December 31, 2014 in connection with our becoming a public company, including directors andofficers insurance premiums and professional fees, and a $0.2 million increase in rent and facility expense, which was partially attributable to a lease amendmentexecuted in August 2014 as well as an increase in higher facility operating expenses.Interest and other expenseInterest and other expense was $1.2 million for the year ended December 31, 2014, compared to $1.7 million for the year ended December 31, 2013. The decreasewas primarily attributable to a decrease in interest expense associated with our debt facility with Hercules, which decreased by $0.6 million for the year endedDecember 31, 2014 compared to the prior year due to a lower principal balance outstanding. The decrease was partially offset by a $0.1 million increase in expenserecognized during the year ended December 31, 2014 in connection with the re-measurement of the fair value of the redeemable convertible preferred stockwarrant that we issued to Hercules in connection with draws under our debt facility.LIQUIDITY AND CAPITAL RESOURCESWe have incurred cumulative losses and negative cash flows from operations since our inception in April 2006, and as of December 31, 2015, we had anaccumulated deficit of $121.2 million . Although we generated net income in fiscal year 2015 due to the one-time payment from Auspex, we anticipate that we willcontinue to incur losses for at least the next several years. We expect that our research and development and general and administrative expenses will continue toincrease and, as a result, we will need additional capital to fund our operations, which we may raise through a combination of equity offerings, debt financings andadditional collaborations and licensing arrangements.We have financed our operations to date primarily through the public offering and private placement of our equity, debt financing and funding from collaborationsand patent assignments. During February 2014, we completed our initial public offering, or IPO, whereby we sold 6,649,690 shares of common stock at a price tothe public of $14.00 per share, raising aggregate net proceeds of $83.1 million. During March 2015, we sold 3,300,000 shares of common stock through anunderwritten public offering at a price to the public of $15.15 per share, raising aggregate net proceeds of $46.7 million.68In June 2015, we received proceeds of $50.2 million in connection with the change in control payment from Auspex, relating to Teva Pharmaceutical IndustriesLtd.’s acquisition of Auspex, discussed further in Note 14 in the consolidated financial statements.As of December 31, 2015 we had cash and cash equivalents and investments of $142.2 million . Cash in excess of immediate requirements is invested inaccordance with our investment policy, primarily with a view to liquidity and capital preservation. Currently, our funds are held in U.S. government-backedsecurities and money market mutual funds consisting of U.S. government-backed securities.Cash flowsThe following table sets forth the primary sources and uses of cash for each of the periods set forth below: Year ended December 31,(in thousands) 2015 2014 2013Net cash provided by (used in): Operating activities $23,061 $(29,760) $13,018Investing activities 14,569 (44,452) (3,637)Financing activities 41,484 77,970 (7,233)Net increase in cash and cash equivalents $79,114 $3,758 $2,148Comparison of the years ended December 31, 2015, 2014 and 2013Operating activities. The cash provided by or used for operating activities generally approximates our net income (loss) adjusted for non-cash items and changesin operating assets and liabilities. The cash provided by operating activities during fiscal year 2015 was primarily attributable to the receipt of $50.2 million fromAuspex for a change in control payment, discussed further in Note 14 in the consolidated financial statements. The cash provided by operating activities during theyear ended December 31, 2013 was primarily due to receipt of non-refundable upfront payments of $35.0 million and $4.0 related to our collaborations withCelgene and Jazz Pharmaceuticals, respectively. Excluding the cash received from Auspex in fiscal year 2015 and the upfront cash payments from Celgene andJazz Pharmaceuticals in fiscal year 2013, cash used in operating activities was primarily driven by our research and development and general and administrativeoperating expenses in the fiscal years ended December 31, 2015, 2014 and 2013. Investing activities. Net cash provided by or used for investing activities consisted of purchases of investments, purchases of fixed assets and proceeds from thematurity of investments. Net cash used to purchase investments for the years ended December 31, 2015, 2014 and 2013 was $163.0 million, $89.2 million and$29.9 million, respectively. Net cash provided by maturities of investments for the years ended December 31, 2015, 2014 and 2013 was $178.5 million, $45.5million and $26.7 million, respectively. Purchases of fixed assets for the years ended December 31, 2015, 2014 and 2013 was $0.9 million, $0.8 million and $0.4million, respectively.Financing activities. The cash provided by financing activities during fiscal year 2015 was primarily due to the receipt of net public offering proceeds of $47.0million in March 2015. The cash provided by financing activities during fiscal year 2014 was primarily due to the receipt of net IPO proceeds of $86.6 million.Cash payments of offering related expenses totaled $0.3 million, $1.4 million and $2.0 million during the years ended December 31, 2015, 2014 and 2013,respectively. Principal payments under our debt facility with Hercules totaled $7.2 million, $7.9 million and $4.9 during the years ended December 31, 2014, 2014and 2013, respectively. On October 1, 2015, we made our final payment to Hercules under the Loan and Security Agreement, discussed further in Note 15 in theconsolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.Credit FacilitiesIn December 2011, we executed a Loan and Security Agreement with Hercules, which provided for up to $20.0 million in funding, to be made available in twotranches. We borrowed the first tranche of $7.5 million in December 2011 and the second tranche of $12.5 million in March 2012. On October 1, 2015, we madeour final payment to Hercules, thereby fulfilling all obligations under the Loan and Security Agreement. Through the maturity date on October 1, 2015, eachadvance had an interest rate of 8.5%.69In connection with the December 2011 borrowing under the Loan and Security Agreement, we issued to Hercules a warrant to purchase an aggregate of 200,000shares of Series C preferred stock with an exercise price of $2.50 per share. In connection with the March 2012 borrowing under the Loan and Security Agreement,the warrant we issued to Hercules automatically became exercisable for an additional 200,000 shares of Series C preferred stock. Upon completion of our IPO inFebruary 2014 the warrant became exercisable for an aggregate of 70,796 shares of our common stock at an exercise price of $14.13 per share and the relatedwarrant liability was reclassified to additional paid-in capital.Operating capital requirementsWe do not anticipate commercializing any of our product candidates for several years. Although we generated net income in 2015 due to the one-time paymentfrom Auspex, we anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the developmentof, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products for which we retain commercialization rights. Weare subject to all of the risks incident in the development of new drug products, and we may encounter unforeseen expenses, difficulties, complications, delays andother unknown factors that may adversely affect our business, as well as additional risks stemming from the unproven nature of deuterated drugs.Based on our current expectations, including with respect to our development plans, we believe our existing cash and cash equivalents and investments as ofDecember 31, 2015, will enable us to fund our operating expenses and capital expenditure requirements into 2018. However, we will require additional capital forthe further development of our existing product candidates and may also need to raise additional funds sooner to pursue other development activities related toadditional product candidates.To date, we have not generated any revenue from product sales. We do not expect to generate significant revenue from product sales unless and until we, or ourcollaborators, obtain marketing approval of and commercialize one of our current or future product candidates. Because our product candidates are in variousstages of development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete development andcommercialization of our product candidates or whether or when we will achieve profitability. We anticipate that we will continue to generate losses for theforeseeable future, and we expect the losses to increase as we continue the development of, and seek marketing approvals for, our product candidates, and begin tocommercialize any approved products for which we retain commercialization rights.Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debtfinancings and additional collaborations, strategic alliances and licensing arrangements. Except for any obligations of our collaborators to reimburse us for researchand development expenses or to make milestone payments under our agreements with them, we do not have any additional committed external sources of funds.Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional funds when needed, we may be required to delay, limit,reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwiseprefer to develop and market ourselves. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to ourexisting stockholders, increased fixed payment obligations and these securities may have rights senior to those of our common stock. We may become subject tocovenants under any future indebtedness that could limit our ability to take specific actions, such as incurring additional debt, making capital expenditures ordeclaring dividends, which could adversely impact our ability to conduct our business.Our expectation with respect to the period of time through which our financial resources will be adequate to support our operations is a forward-looking statementand involves risks and uncertainties, and actual results could vary as a result of a number of factors, including those discussed in the “Risk Factors” section of thisAnnual Report on Form 10-K. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources soonerthan we currently expect. If we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business,financial condition and results of operations could be materially adversely affected.70Contractual obligationsThe following table summarizes our contractual obligations at December 31, 2015: (in thousands) Total Less than1 year 1 to 3years 3 to 5years More than5 yearsOperating lease obligations (1) 4,304 1,523 2,781 — —Total contractual obligations $4,304 $1,523 $2,781 $— $— (1)Consists of future lease payments under the operating lease for our office and laboratory space at 99 Hayden Avenue, Lexington, Massachusetts. Theoperating lease expires on September 30, 2018.We have an obligation to make a payment to GSK of up to $2.8 million if we commercialize CTP-499 or if, prior to a specified date in 2018, we re-license ortransfer rights to our CTP-499 program prior to a specified date in 2018.We enter into contracts in the normal course of business with contract research organizations for clinical and preclinical research studies, manufacturing, researchsupplies and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore are cancelable contractsand not included in the table of contractual obligations and commitments.OFF-BALANCE SHEET ARRANGEMENTSWe did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of theSEC.ITEM 7A.Quantitative and Qualitative Disclosures About Market RiskWe are exposed to market risk related to changes in interest rates. Our current investment policy is to maintain a diversified investment portfolio in U.S.government-backed securities and money market mutual funds consisting of U.S. government-backed securities. Our cash is deposited in and invested throughhighly rated financial institutions in North America. As of December 31, 2015 and 2014, we had $142.2 million and $79.2 million of cash, cash equivalents andinvestments, respectively. The fair value of cash equivalents and short-term investments is subject to change as a result of potential changes in market interestrates. Due to the short-term maturities of our cash equivalents and the low risk profile of these investments, an immediate 100 basis point change in interest rates atlevels as of December 31, 2015 would not have a material effect on the fair market value of our cash equivalents and short term investments.We contract with suppliers of raw materials and contract manufacturers internationally. Transactions with these providers are predominantly settled in U.S. dollarsand, therefore, we believe that we have only minimal exposure to foreign currency exchange risks. We do not hedge against foreign currency risks.Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation had a material effect on our business, financialcondition or results of operations during the years ended December 31, 2015, 2014 or 2013.71ITEM 8.Financial Statements and Supplementary DataINDEX TO FINANCIAL STATEMENTS Report of independent registered public accounting firm73Consolidated balance sheets74Consolidated statements of operations and comprehensive income (loss)75Consolidated statements of redeemable convertible preferred stock and stockholders’ equity (deficit)76Consolidated statements of cash flows78Notes to consolidated financial statements7972Report of Independent Registered Public Accounting FirmThe Board of Directors and StockholdersConcert Pharmaceuticals, Inc.We have audited the accompanying consolidated balance sheets of Concert Pharmaceuticals, Inc. (the Company) as of December 31, 2015 and 2014, and therelated consolidated statements of operations and comprehensive income (loss), redeemable convertible preferred stock and stockholders’ equity (deficit), and cashflows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged toperform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating theoverall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Concert Pharmaceuticals, Inc.at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015,in conformity with U.S. generally accepted accounting principles./s/ Ernst & Young LLPBoston, MassachusettsMarch 1, 201673CONCERT PHARMACEUTICALS, INC.CONSOLIDATED BALANCE SHEETS December 31, 2015 2014 (Amounts in thousands, exceptshare and per share data)Assets Current assets: Cash and cash equivalents $92,510 $13,396Investments, available for sale 49,680 65,836Interest receivable 181 262Accounts receivable 70 1,021Prepaid expenses and other current assets 1,667 1,205Total current assets 144,108 81,720Property and equipment, net 2,346 2,284Restricted cash 400 400Other assets 78 50Total assets $146,932 $84,454Liabilities and stockholders’ equity Current liabilities: Accounts payable $501 $560Accrued expenses and other liabilities 4,772 5,002Income taxes payable 75 —Deferred revenue, current portion 1,279 5,955Loan payable, net of discount — 7,101Total current liabilities 6,627 18,618Deferred revenue, net of current portion 8,891 9,866Deferred lease incentive, net of current portion 573 888Deferred rent, net of current portion 206 257Total liabilities 16,297 29,629Commitments (Note 12) Stockholders’ equity: Preferred stock, $0.001 par value per share; 5,000,000 shares authorized; no shares issued andoutstanding in 2015 and 2014, respectively — —Common stock, $0.001 par value per share; 100,000,000 shares authorized; 22,166,803 and18,234,068 shares issued and 22,165,166 and 18,234,068 outstanding in 2015 and 2014,respectively 22 18Additional paid-in capital 251,793 200,157Accumulated other comprehensive loss (18) (14)Accumulated deficit (121,162) (145,336)Total stockholders’ equity 130,635 54,825Total liabilities and stockholders’ equity $146,932 $84,454 See accompanying notes.74CONCERT PHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) Year endedDecember 31, 2015 2014 2013 (Amounts in thousands, except pershare data)Revenue: License and research and development revenue $6,574 $6,576 $23,408Other revenue (Note 14) 50,155 — —Milestone revenue 10,000 2,000 2,000Total revenue 66,729 8,576 25,408Operating expenses: Research and development 28,885 27,474 21,790General and administrative 13,056 11,700 8,028Total operating expenses 41,941 39,174 29,818Income (Loss) from operations 24,788 (30,598) (4,410)Investment income 124 49 21Interest and other expense (309) (1,150) (1,667)Income (Loss) before income taxes 24,603 (31,699) (6,056)Provision for income taxes 429 — —Net income (loss) $24,174 $(31,699) $(6,056)Other comprehensive income (loss): Unrealized loss on investments (4) (18) —Comprehensive income (loss) $24,170 $(31,717) $(6,056)Reconciliation of net income (loss) to net income (loss) applicable to commonstockholders: Net income (loss) $24,174 $(31,699) $(6,056)Accretion on redeemable convertible preferred stock — (55) (396)Net income (loss) applicable to common stockholders—basic and diluted $24,174$(31,754)$(6,452)Net income (loss) per share applicable to common stockholders—basic $1.14 $(2.00) $(4.99)Net income (loss) per share applicable to common stockholders—diluted $1.09 $(2.00) $(4.99)Weighted-average number of common shares used in net income (loss) per shareapplicable to common stockholders—basic 21,152 15,842 1,292Weighted-average number of common shares used in net income (loss) per shareapplicable to common stockholders—diluted 22,267 15,842 1,292 See accompanying notes.75CONCERT PHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY(DEFICIT) Redeemable convertiblepreferred stock Common Stock Additionalpaid-incapital Accumulatedothercomprehensiveincome Accumulateddeficit Totalstockholders’equity(deficit) Shares Carryingvalue Issued In Treasury Amount (in thousands, except share data)Balance atDecember 31, 2012 56,047 $111,848 1,290 — $1 $889 $4 $(107,581) $(106,687)Accretion ofredeemableconvertible preferredstock to redemptionvalue — 396 — — — (396) — — (396)Exercise of stockoptions — — 8 — — 32 — — 32Stock-basedcompensationexpense — — — — — 1,003 — — 1,003Net loss — — — — — — — (6,056) (6,056)Balance atDecember 31, 2013 56,047 $112,244 1,298 — $1 $1,528 $4 $(113,637) $(112,104)Accretion ofredeemableconvertible preferredstock to redemptionvalue — 55 — — — (55) — — (55)Proceeds from IPO,net of underwritingdiscounts andoffering expenses — — 6,650 — 7 83,112 — — 83,119Conversion ofpreferred stock intocommon stock (56,047) (112,299) 9,920 — 10 112,289 — — 112,299Reclassification ofwarrant — — — — — 581 — — 581Exercise of stockoptions — — 366 — — 1,009 — — 1,009Unrealized gain (loss)on short-terminvestments — — — — — — (18) — (18)Stock-basedcompensationexpense — — — — — 1,693 — — 1,693Net loss — — — — — — — (31,699) (31,699)Balance atDecember 31, 2014 — $— 18,234 — $18 $200,157 $(14) $(145,336) $54,825Exercise of stockoptions — — 633 2 1 1,843 — — 1,844Proceeds from publicoffering, net ofunderwritingdiscounts andoffering expenses — — 3,300 — 3 46,682 — — 46,685Unrealized gain (loss)on short-terminvestments — — — — — — (4) — (4)Stock-basedcompensationexpense — — — — — 2,981 — — 2,981Income tax benefitfrom option exercises — — — — — 130 — — 130Net income — — — — — — — 24,174 24,174Balance atDecember 31, 2015 — $— 22,167 2 $22 $251,793 $(18) $(121,162) $130,635 See accompanying notes.7677CONCERT PHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS Year endedDecember 31, 2015 2014 2013 (in thousands)Operating activities Net income (loss) $24,174 $(31,699) $(6,056)Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 785 1,052 1,346Stock-based compensation expense 2,981 1,693 1,003Accretion of premiums and discounts on investments 715 833 302Amortization of discount on loan payable 74 98 97Amortization of deferred financing costs 29 38 38Re-measurement of warrant to purchase redeemable securities — 117 4Amortization of deferred lease incentive (308) (367) (513)Loss on disposal of asset 4 — —Changes in operating assets and liabilities: Accounts receivable 951 (851) (157)Interest receivable 81 (170) 10Prepaid expenses and other current assets (491) (137) 32Restricted cash — 306 —Other assets 23 82 69Accounts payable (90) (32) 158Accrued expenses and other liabilities (223) 2,863 (15)Landlord lease incentive — 350 —Income taxes payable 75 — —Deferred rent (68) (126) (181)Deferred revenue (5,651) (3,810) 16,881Net cash provided by (used in) operating activities 23,061 (29,760) 13,018Investing activities Purchases of property and equipment (868) (804) (363)Purchases of investments (163,025) (89,188) (29,929)Maturities of investments 178,462 45,540 26,655Net cash provided by (used in) investing activities 14,569 (44,452) (3,637)Financing activities Principal payments on loan payable (7,175) (7,916) (4,909)Repayment of leasehold improvement loan — (266) (332)Proceeds from public offering of common stock, net of underwriting discounts and commissions 46,995 86,579 —Proceeds from exercise of stock options 1,844 1,009 32Income tax benefit from exercise of stock options 130 — —Payment of public offering costs (310) (1,436) (2,024)Net cash provided by (used in) financing activities 41,484 77,970 (7,233)Net increase in cash and cash equivalents 79,114 3,758 2,148Cash and cash equivalents at beginning of period 13,396 9,638 7,490Cash and cash equivalents at end of period $92,510 $13,396 $9,638Supplemental cash flow information: Cash paid for income taxes $225 $— $—Cash paid for interest 287 992 1,601Purchases of property and equipment unpaid at period end 42 60 —Initial public offering costs incurred but unpaid at period end — — 475See accompanying notes.78CONCERT PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. Nature of BusinessConcert Pharmaceuticals, Inc., or Concert or the Company, was incorporated on April 12, 2006 as a Delaware corporation with operations based in Lexington,Massachusetts. The Company is a clinical stage biopharmaceutical company that applies its extensive knowledge of deuterium chemistry to discover and developnovel small molecule drugs. The Company’s approach starts with approved drugs, advanced clinical candidates or previously studied compounds that the Companybelieves can be improved with deuterium substitution to provide better pharmacokinetic or metabolic properties, enhancing clinical safety, tolerability or efficacy.The Company believes this approach may enable drug discovery and clinical development that is more efficient and less expensive than conventional smallmolecule drug research and development. The Company’s pipeline includes multiple clinical-stage candidates and a number of preclinical compounds that it iscurrently assessing.In March 2015, the Company sold 3,300,000 shares of common stock in a public offering at a price to the public of $15.15 per share, resulting in net proceeds tothe Company of approximately $46.7 million after deducting underwriting discounts and commissions and offering expenses. In June 2015, the Company receiveda one-time payment of $50.2 million from Auspex Pharmaceuticals, Inc., or Auspex, pursuant to a patent assignment agreement between Concert and Auspex.Concert became eligible to receive the payment due to a change of control of Auspex, which was acquired by Teva Pharmaceutical Industries Ltd. in May 2015(see Note 14).The Company had cash and cash equivalents and investments of $142.2 million at December 31, 2015. The Company believes that its cash and cash equivalentsand investments at December 31, 2015 will be sufficient to allow the Company to fund its current operating plan for at least the next twelve months. The Companymay pursue additional cash resources through public or private financings and by establishing collaborations with or licensing its technology to other companies.Unless otherwise indicated, all amounts are in thousands except share and per share amounts.2. Basis of Presentation and Significant Accounting PoliciesBasis of PresentationThe consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP.Management has determined that the Company operates in one segment: the development of pharmaceutical products on its own behalf or in collaboration withothers. All long-lived assets of the Company reside in the United States.The accompanying consolidated financial statements include the accounts of Concert Pharmaceuticals, Inc. and its wholly owned subsidiary, ConcertPharmaceuticals Securities Corporation, which is a Massachusetts subsidiary created to buy, sell and hold securities. All intercompany transactions and balanceshave been eliminated. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidencerelative to certain estimates or to identify matters that require additional disclosure.Estimates and UncertaintiesThe preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect thereported amounts of assets, liabilities, equity, revenue, expenses and the disclosure of contingent assets and liabilities. In preparing the consolidated financialstatements, management used estimates in the following areas, among others: revenue recognition for multiple-element revenue arrangements; stock-basedcompensation expense; and accrued expenses. Actual results could differ from those estimates.Cash, Cash Equivalents and InvestmentsCash equivalents include all highly liquid investments maturing within 90 days from the date of purchase. Investments consist of securities with original maturitiesgreater than 90 days when purchased. The Company classifies these investments as available-for-sale and records them at fair value in the accompanyingconsolidated balance sheets. Unrealized gains or losses are included in accumulated other comprehensive income (loss). Premiums or discounts from par value areamortized to investment income over the life of the underlying investment.79CONCERT PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSAlthough available to be sold to meet operating needs or otherwise, securities are generally held through maturity. The cost of securities sold is determined basedon the specific identification method for purposes of recording realized gains and losses. During 2015 and 2014, there were no realized gains or losses on sales ofinvestments, and no investments were adjusted for other than temporary declines in fair value.Fair Value of Financial MeasurementsThe Company has certain financial assets and liabilities that are recorded at fair value which have been classified as Level 1, 2 or 3 within the fair value hierarchyas described in the accounting standards for fair value measurements:•Level 1—quoted prices for identical instruments in active markets;•Level 2—quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, andmodel-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and•Level 3—valuations derived from valuation techniques in which one or more significant value drivers are unobservable. For additional information related to fair value measurements, please read Note 3 to the consolidated financial statements.Concentrations of Credit RiskFinancial instruments that potentially subject the Company to concentration of credit risk consist principally of money market funds and investments and accountsreceivable. The Company has not experienced any credit losses in these accounts and does not believe it is exposed to any significant credit risk on these funds.The Company has no foreign exchange contracts, option contracts or other foreign exchange hedging arrangements. At December 31, 2015 and 2014, substantially all of the Company’s cash was deposited in accounts at two financial institutions, thus limiting the amount of creditexposure to any one financial institution. These amounts at times may exceed federally insured limits.Accounts receivable generally represent amounts due from collaboration partners. The Company monitors economic conditions to identify facts or circumstancesthat may indicate that any of its accounts receivable are at risk of collection.Property and EquipmentProperty and equipment are recognized at cost and depreciated over their estimated useful lives using the straight-line method. Repair and maintenance costs areexpensed as incurred, whereas major improvements are capitalized as additions to property and equipment. Potential impairment is assessed when there is evidencethat events or circumstances indicate that the carrying amount of an asset may not be recovered. No such impairment losses have been recorded throughDecember 31, 2015.Rent ExpenseThe Company’s operating lease for its Lexington, Massachusetts facility provides for scheduled annual rent increases throughout the lease term. The Companyrecognizes the effects of the scheduled rent increases on a straight-line basis over the full term of the lease, which expires in 2018 . Additionally, the Company hasreceived certain lease incentives in connection with its Lexington, Massachusetts facility lease, which are recognized as a reduction to rent expense over theremaining lease term. Refer to Note 12 for additional details regarding the Company’s operating lease.Rent expense for the years ended December 31, 2015, 2014 and 2013 was $1.2 million , $1.0 million and $0.7 million , respectively.ContingenciesThe Company records liabilities for legal and other contingencies when information available to the Company indicates that it is probable that a liability has beenincurred and the amount of loss can be reasonably estimated. Legal costs in connection with legal and other contingencies are expensed as costs are incurred.80CONCERT PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSRevenue RecognitionThe Company has primarily generated revenue through arrangements with collaborators and nonprofit organizations for the development and commercialization ofproduct candidates.The Company recognizes revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 605,Revenue Recognition (ASC 605). Accordingly, revenue is recognized when all of the following criteria are met: •Persuasive evidence of an arrangement exists;•Delivery has occurred or services have been rendered;•The seller’s price to the buyer is fixed or determinable; and•Collectability is reasonably assured.Amounts received prior to satisfying the revenue recognition criteria are recognized as deferred revenue in the Company’s consolidated balance sheets. Amountsexpected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, current portion. Amounts notexpected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion.The Company’s revenue is currently generated through collaborative research and development and licensing agreements. The terms of these agreements typicallycontain multiple elements, or deliverables, which may include licenses, or options to obtain licenses, to product candidates, referred to as exclusive licenses, aswell as research and development activities to be performed by the Company on behalf of the collaboration partner related to the licensed product candidates. Theterms of these agreements may include payments to the Company of one or more of the following: a nonrefundable, upfront payment; milestone payments;payment of license exercise or option fees with respect to product candidates; fees for research and development services rendered; and royalties on commercialsales of licensed product candidates, if any. To date, the Company has received upfront payments, several milestone payments and certain research anddevelopment service payments but has not received any license exercise or option fees or earned royalty revenue as a result of product sales.When evaluating multiple element arrangements, the Company considers whether the deliverables under the arrangement represent separate units of accounting.This evaluation requires subjective determinations and requires management to make judgments about the individual deliverables and whether such deliverablesare separable from the other aspects of the contractual relationship. In determining the units of accounting, management evaluates certain criteria, includingwhether the deliverables have standalone value, based on the consideration of the relevant facts and circumstances for each arrangement. The considerationreceived is allocated among the separate units of accounting using the relative selling price method, and the applicable revenue recognition criteria are applied toeach of the separate units.The Company determines the estimated selling price for deliverables within each agreement using vendor-specific objective evidence, or VSOE, of selling price, ifavailable, third-party evidence, or TPE, of selling price if VSOE is not available, or best estimate of selling price, or BESP, if neither VSOE nor TPE is available.Determining the BESP for a deliverable requires significant judgment. The Company has used its BESP to estimate the selling price for licenses to the Company’sproprietary technology, since the Company does not have VSOE or TPE of selling price for these deliverables. In those circumstances where the Company utilizesBESP to determine the estimated selling price of a license to the Company’s proprietary technology, the Company considers market conditions as well as entity-specific factors, including those factors contemplated in negotiating the agreement, estimated development costs, and the probability of success and the timeneeded to commercialize a product candidate pursuant to the license. In validating the Company’s BESP, the Company evaluates whether changes in the keyassumptions used to determine the BESP will have a significant effect on the allocation of arrangement consideration between multiple deliverables.The Company’s multiple-element revenue arrangements may include the following:Exclusive Licenses . The deliverables under the Company’s collaboration agreements generally include exclusive licenses to develop, manufacture andcommercialize one or more deuterated compounds. To account for this element of the arrangement, management evaluates whether the exclusive license hasstandalone value from the undelivered elements based on the consideration of the relevant facts and circumstances of each arrangement, including the research anddevelopment capabilities of the collaboration partner. The Company may recognize the arrangement consideration allocated to licenses upon delivery of the licenseif facts and circumstances indicate that the license has standalone value from the undelivered elements, which generally include research and development services.The Company defers arrangement consideration allocated to licenses if facts and circumstances indicate that the delivered license does not have standalone valuefrom the undelivered elements. 81CONCERT PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSWhen management believes the license does not have stand-alone value from the other deliverables to be provided in the arrangement, the Company generallyrecognizes revenue attributed to the license on a straight-line basis over the Company’s contractual or estimated performance period, which is typically the term ofthe Company’s research and development obligations. If management cannot reasonably estimate when the Company’s performance obligation ends, then revenueis deferred until management can reasonably estimate when the performance obligation ends. The periods over which revenue should be recognized are subject toestimates by management and may change over the course of the research and development and licensing agreement. Such a change could have a material impacton the amount of revenue the Company records in future periods.Research and Development Services . The deliverables under the Company’s collaboration and license agreements may include deliverables related to research anddevelopment services to be performed by the Company on behalf of the collaboration partner.Payments or reimbursements resulting from the Company’s research and development efforts are recognized as the services are performed and presented on a grossbasis because the Company is the principal for such efforts, so long as there is persuasive evidence of an arrangement, the fee is fixed or determinable, andcollection of the related amount is reasonably assured. If there is no discernible pattern of performance and/or objectively measurable performance measures do notexist, then the Company recognizes revenue on a straight-line basis over the period it is expected to complete its performance obligations. Conversely, if thepattern of performance in which the service is provided to the customer can be determined and objectively measurable performance measures exist, then theCompany recognizes revenue under the arrangement using the proportional performance method. Revenue recognized is limited to the lesser of the cumulativeamount of payments received or the cumulative amount of revenue earned as of the period end date.Option Agreements . The Company’s arrangements may provide a collaborator with the right to select a deuterated compound for licensing within an initial pre-defined selection period. Under these agreements, a fee would be due to the Company upon the exercise of an option to acquire a license. The accounting foroption arrangements is dependent on the nature of the option granted to the collaboration partner. An option is considered substantive if, at the inception of thearrangement, the Company is at risk as to whether the collaboration partner will choose to exercise the option to secure exclusive licenses. Factors that theCompany considers in evaluating whether an option is substantive include the overall objective of the arrangement, the benefit the collaborator might obtain fromthe arrangement without exercising the option, the cost to exercise the option relative to the total upfront consideration and the additional financial commitments oreconomic penalties imposed on the collaborator as a result of exercising the option. For arrangements under which an option to secure a license is consideredsubstantive, the Company does not consider the license underlying the option to be a deliverable at the inception of the arrangement. For arrangements under whichthe option to secure a license is not considered substantive, the Company considers the license underlying the option to be a deliverable at the inception of thearrangement and, upon delivery of the license, would apply the multiple-element revenue arrangement criteria to the license and any other deliverables todetermine the appropriate revenue recognition. A significant and incremental discount included in an otherwise substantive option is considered to be a separatedeliverable at the inception of the arrangement.Milestone Revenue . The Company’s collaboration agreements generally include contingent milestone payments related to specified development milestones,regulatory milestones and sales-based milestones. Development milestones are typically payable when a product candidate initiates or advances in clinical trialphases or achieves defined clinical events such as proof-of-concept. Regulatory milestones are typically payable upon submission for marketing approval withregulatory authorities or upon receipt of actual marketing approvals for a compound, approvals for additional indications, upon commercial launch or upon the firstcommercial sale. Sales-based milestones are typically payable when annual sales reach specified levels.At the inception of each arrangement that includes milestone payments, the Company evaluates whether each milestone is substantive and at risk to both parties onthe basis of the contingent nature of the milestone. This evaluation includes an assessment of whether (a) the consideration is commensurate with either (i) theentity’s performance to achieve the milestone or (ii) the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from theentity’s performance to achieve the milestone; (b) the consideration relates solely to past performance; and (c) the consideration is reasonable relative to all of thedeliverables and payment terms within the arrangement. The Company evaluates factors such as the scientific, regulatory, commercial and other risks that must beovercome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether the milestoneconsideration is reasonable relative to all deliverables and payment terms in the arrangement in making this assessment. Milestones that are not consideredsubstantive are accounted for as license payments and recognized on a straight-line basis over the remaining period of performance.82CONCERT PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSResearch and Development CostsResearch and development costs are expensed as incurred.Research and development expenses are comprised of costs incurred in providing research and development activities, including salaries and benefits, facilitiescosts, overhead costs, contract research and development services, and other outside costs. Nonrefundable advance payments for goods and services that will beused in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when thepayment is made.External research and development expenses associated with the Company’s programs include clinical trial site costs, clinical manufacturing costs, costs incurredfor consultants and other outside services, such as data management and statistical analysis support, and materials and supplies used in support of the clinical andpreclinical programs. Internal costs of the Company’s clinical program include salaries, stock based compensation, and an allocation of the Company’s facilitycosts. When third-party service providers’ billing terms do not coincide with the Company’s period-end, the Company is required to make estimates of itsobligations to those third parties, including clinical trial and pharmaceutical development costs, contractual services costs and costs for supply of its drugcandidates, incurred in a given accounting period and record accruals at the end of the period. The Company bases its estimates on its knowledge of the researchand development programs, services performed for the period, past history for related activities and the expected duration of the third-party service contract, whereapplicable.Accounting for Stock-Based CompensationThe Company issues stock options to certain employees, officers and directors. The Company accounts for stock compensation using the fair value method, whichresults in the recognition of compensation expense over the vesting period of the awards. See Note 9 for additional information.Prior to the Company’s IPO, the estimated fair value of its common stock on each stock option grant date was determined by the Company’s board of directorsbased on contemporaneous and retrospective valuation estimates provided by management and prepared in accordance with the framework of the AmericanInstitute of Certified Public Accountants’ Technical Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation , as well asindependent third-party valuations. The Company’s valuations of its common stock were based on a number of objective and subjective factors, including externalmarket conditions affecting the biotechnology industry sector and the prices at which it sold shares of preferred stock, the superior rights and preferences ofsecurities senior to its common stock at the time of each grant and the likelihood of achieving a liquidity event such as an IPO. Following the Company’s IPO, thefair value of the shares of common stock underlying stock options has been the closing price on the option grant date. Income TaxesThe Company provides deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the Company’s financialstatement carrying amounts and the tax basis of assets and liabilities using enacted tax rates expected to be in effect in the years in which the differences areexpected to reverse. A valuation allowance is provided to reduce the deferred tax assets to the amount that will more likely than not be realized.The Company evaluates tax positions taken, or expected to be taken, in the course of preparing its tax returns to determine whether the tax positions are “morelikely than not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recognized as atax expense.GuaranteesAs permitted under Delaware law, the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was,serving at the Company’s request in such capacity. The term of the indemnification is for the officer’s or director’s lifetime. The maximum potential amount offuture payments the Company could be required to make is unlimited; however, the Company has directors’ and officers’ insurance coverage that limits itsexposure and enables it to recover a portion of any future amounts paid.The Company leases office space under a non-cancelable operating lease which is further described in Note 12, Commitments. The Company has a standardindemnification arrangement under the lease that requires it to indemnify the landlord against all83CONCERT PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTScosts, expenses, fines, suits, claims, demands, liabilities, and actions directly resulting from any breach, violation, or non-performance of any covenant or conditionof the Company’s lease.As of December 31, 2015 and 2014, the Company had not experienced any material losses related to these indemnification obligations, and no material claims withrespect thereto were outstanding. The Company does not expect significant claims related to these indemnification obligations and, consequently, concludedthat the fair value of these obligations is negligible, and no related reserves were established.Comprehensive Income (Loss)Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income or loss. Other comprehensive income or loss consists ofunrealized gains and losses on investments.Recent Accounting PronouncementsIn May 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers (Topic 606) , or ASU 2014-09,which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects theconsideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, ASU 2014-09 provides that an entityshould apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transactionprice, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performanceobligation. This update will be effective for the Company beginning in the first quarter of fiscal 2018 as a result of the FASB’s one year deferral of the effectivedate for this standard. Early adoption is permitted, however not before the original effective date of annual periods beginning on or after December 15, 2016. TheCompany is currently assessing the impact of this ASU on its financial statements.In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern , or ASU 2014-15ASU 2014-15 amends FASB Accounting Standards Codification, or ASC, 205-40, Presentation of Financial Statements – Going Concern, by providing guidanceon determining when and how reporting entities must disclose going-concern uncertainties in their financial statements, including requiring management toperform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financialstatements and providing certain disclosures if there is substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 will be effective forthe Company’s fiscal year 2016 and for interim periods beginning in the first quarter of fiscal 2017. The adoption of this accounting standard may affect theCompany’s financial statement disclosures in future periods.3. Fair Value MeasurementsThe tables below present information about the Company’s financial assets and liabilities that are measured and carried at fair value as of December 31, 2015 and2014 (in thousands) and indicate the level within the fair value hierarchy where each measurement is classified. Level 1 Level 2 Level 3 TotalDecember 31, 2015 Cash equivalents: Money market funds 52,221 — — 52,221U.S. Treasury obligations 5,001 — — 5,001Government agency securities — 34,390 — 34,390Investments, available for sale: U.S. Treasury obligations 9,781 — — 9,781Government agency securities 19,578 20,321 — 39,899Total $86,581 $54,711 $— $141,29284CONCERT PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Level 1 Level 2 Level 3 TotalDecember 31, 2014 Money market funds, included in cash equivalents $11,904 $— $— $11,904Investments, available for sale: U.S. Treasury obligations 12,035 — — 12,035Government agency securities 35,808 17,993 — 53,801Total $59,747 $17,993 $— $77,740 The Company has reclassified $18.0 million of government agency securities that were previously classified as Level 1 securities at December 31, 2014 to Level2 securities to conform to the current classification policy for such securities.The carrying amount of financial instruments not carried at fair value, including the loan payable, approximate fair value. The carrying value of the Company’sloan payable approximated fair value at December 31, 2014 because the interest rate yields for the loan approximated the current market yields at December 31,2014. The disclosed fair value of the Company’s loan payable is a Level 3 measurement within the fair value hierarchy.4. Cash, Cash Equivalents and Investments, Available for SaleCash, cash equivalents and investments, available for sale included the following at December 31, 2015 and December 31, 2014 (in thousands): Averagematurity Amortizedcost Unrealizedgains Unrealizedlosses FairvalueDecember 31, 2015 Cash $898 $— $— $898Money market funds 52,221 — — 52,221U.S. Treasury obligations 31 days 5,002 — (1) 5,001Government agency securities 41 days 34,389 1 — 34,390Cash and cash equivalents $92,510 $1 $(1) $92,510 U.S. Treasury obligations 42 days $9,785 $— $(4) $9,781Government agency securities 104 days 39,913 1 (15) 39,899Investments, available for sale $49,698 $1 $(19) $49,680 Averagematurity Amortizedcost Unrealizedgains Unrealizedlosses FairvalueDecember 31, 2014 Cash $1,492 $— $— $1,492Money market funds 11,904 — — 11,904Cash and cash equivalents $13,396 $— $— $13,396 U.S. Treasury obligations 171 days $12,037 $(2) $— $12,035Government agency securities 194 days 53,813 3 (15) 53,801Investments, available for sale $65,850 $1 $(15) $65,8365. Restricted CashAt December 31, 2015 and 2014, $0.4 million of the Company’s cash is restricted by a bank as collateral for a stand-by letter of credit issued by the Company to itslandlord in connection with the lease of the Company’s Lexington, Massachusetts facility. 85CONCERT PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS6. Property and EquipmentProperty and equipment consists of the following at December 31, 2015 and 2014 (in thousands): Estimated useful life(in years) December 31,2015 December 31, 2014Laboratory equipment 5 $1,769 $1,544Computer, telephone and office equipment 3 211 175Software 3 84 88Leasehold improvements Lesser of useful lifeor remaining lease term 6,496 6,392 8,560 8,199Less accumulated depreciation and amortization (6,214) (5,915) $2,346 $2,284Depreciation and amortization expense was charged to operations in the amounts of $0.8 million , $1.1 million and $1.3 million for the years ended December 31,2015, 2014 and 2013, respectively.7. Accrued Expenses and Other LiabilitiesAccrued expenses and other liabilities consist of the following (in thousands): December 31,2015 December 31, 2014Accrued professional fees and other $732 $916Employee compensation and benefits 2,503 1,606Research and development expenses 1,171 2,104Deferred lease incentive, current portion 315 308Deferred rent, current portion 51 68 $4,772 $5,0028. Redeemable Convertible Preferred StockFrom time to time prior to the Company’s IPO, the Company issued Series A, Series B, Series C and Series D redeemable convertible preferred stock, orcollectively, the Convertible Preferred Stock. In connection with the closing of the Company’s IPO on February 19, 2014, all of the outstanding ConvertiblePreferred Stock converted into 9,919,821 shares of common stock.9. Stock CompensationStock incentive plansThe Company previously sponsored an Amended and Restated 2006 Stock Option and Grant Plan, or the 2006 Plan, which provided for the issuance of shares ofcommon stock in the form of incentive stock options, nonstatutory stock options, awards of stock and direct stock purchase opportunities to directors, officers,employees and consultants of the Company. The 2006 Plan was replaced by the Company’s 2014 Stock Incentive Plan, or the 2014 Plan, which became effectivein February 2014. The 2014 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards, restricted stock units, stockappreciation rights and other stock-based awards. In addition, the 2014 Plan includes an “evergreen provision” that allows for an annual increase in the number ofshares of common stock available for issuance under the 2014 Plan. Effective January 1, 2016, 886,606 shares were added to the 2014 Plan for future issuancepursuant to this evergreen provision.86CONCERT PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSThe 2006 Plan has no shares remaining available for grant, although existing stock options granted under the 2006 Plan remain outstanding. As of December 31,2015, 1,677,342 shares were available for future grant under the 2014 Plan, prior to taking into account the additional shares authorized for issuance as of January1, 2016, as described above.Stock optionsStock options are granted with an exercise price equal to the closing market price of the Company’s common stock on the date of grant. Stock options generallyvest ratably over three or four years and have contractual terms of ten years. Stock options are valued using the Black-Scholes-Merton option valuation model andcompensation cost is recognized based on such fair value over the period of vesting.The following table provides certain information related to the Company's outstanding stock options: Year ended December 31, 2015 2014 2013 (in thousands, except per share data)Weighted average fair value of options granted, per option $10.27 $6.69 $13.77Aggregate grant date fair value of options vested during the year $3,470 $629 $869Total cash received from exercises of stock options $1,844 $1,009 $32Total intrinsic value of stock options exercised $9,126 $2,363 $149The weighted average fair value of options granted in the years ended December 31, 2015, 2014 and 2013, reflect the following weighted-average assumptions: Year ended December 31, 2015 2014 2013Expected volatility 73.38% 80.94% 70.10%Expected term 6.0 years 6.0 years 6.0 yearsRisk-free interest rate 1.69% 1.90% 1.69%Expected dividend yield —% —% —%Expected volatility. Because there had been no public market for the Company’s common stock prior to its IPO, the Company believes that it has insufficient datafrom its limited public trading history to appropriately utilize company-specific historical and implied volatility information. Accordingly, the Company utilizesdata from a representative group of publicly traded companies to estimate expected stock price volatility. The Company selected representative companies from thebiopharmaceutical industry with similar characteristics as the Company, including stage of product development and therapeutic focus.Expected term. The expected term of awards represents the period of time that the awards are expected to be outstanding. The expected term was determined usingthe simplified method as prescribed by the Securities and Exchange Commission Staff Accounting Bulletin No. 107, Share-Based Payment as the Company doesnot have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of stock options granted to employees.Risk-free interest rate. For the years ended December 31, 2015, 2014 and 2013, the risk-free interest rate was estimated using an average of treasury bill interestrates over a period commensurate with the expected term of the option at the time of grant.Expected dividend yield. The expected dividend yield is zero as the Company has not paid any dividends to date and has no current intention of paying cashdividends.Forfeiture rate. The Company is required to estimate potential forfeiture of stock grants and adjust compensation cost recorded accordingly. The estimate offorfeitures is adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes inestimated forfeitures are recognized through a cumulative catch-up in the period of change and impact the amount of stock compensation expense to be recognizedin future periods. For the years ended December 31, 2015, 2014 and 2013, the Company assumed forfeiture rates of approximately 6% , 5% and 5% , respectively.87CONCERT PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a summary of option activity under the 2006 Plan and 2014 Plan: Number ofOption Shares WeightedAverageExercisePrice perShare WeightedAverageRemainingContractualTerm AggregateIntrinsicValue (In years) (In thousands)Outstanding at December 31, 2014 2,688,937 $6.04 Granted 300,850 $15.79 Exercised (632,735) $2.97 Forfeited or expired (112,875) $8.34 Outstanding at December 31, 2015 2,244,177 $8.10 6.84 24,433Exercisable at December 31, 2015 1,320,448 $5.83 5.54 17,345Vested and expected to vest at December 31, 2015 (1) 2,175,249 $7.99 6.78 23,905 (1)Options expected to vest consist of options scheduled to vest in the future less expected forfeitures.Stock-based compensation expenseTotal compensation cost recognized for all stock-based compensation awards in the consolidated statements of operations and comprehensive income (loss) is asfollows (in thousands): For the Year Ended December 31, 2015 2014 2013Research and development $1,251 $802 $583General and administrative 1,730 891 420Total stock-based compensation expense $2,981 $1,693 $1,003As of December 31, 2015 there was $6.5 million of total unrecognized compensation cost related to unvested options. Total unrecognized compensation cost willbe adjusted for future changes in forfeitures. The Company expects to recognize that cost over a weighted-average period of 2.5 years .10. Earnings (Loss) Per ShareBasic net earnings (loss) per common share is calculated by dividing net earnings (loss) allocable to common stockholders, computed as the sum of net earnings(loss) and accretion on the Company’s redeemable convertible preferred stock, by the weighted-average common shares outstanding during the period, withoutconsideration of common stock equivalents. Diluted net earnings per share is calculated by adjusting the weighted-average shares outstanding for the dilutive effectof common stock equivalents, including stock options and warrants, outstanding for the period as determined using the treasury stock method. For purposes of thediluted net loss per share calculation, common stock equivalents are excluded from the calculation because their effect would be anti-dilutive. Therefore, basic anddiluted net loss per share applicable to common stockholders is the same for periods with a net loss.88CONCERT PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Year Ended December 31, 2015 2014 2013 (in thousands, expect per share amounts)Numerator: Net income (loss) applicable to common stockholders—basic and diluted$24,174 $(31,754) $(6,452)Denominator: Weighted average shares outstanding - basic21,152 15,842 1,292Dilutive stock options1,105 — —Dilutive warrants10 — —Weighted average shares outstanding - diluted22,267 15,842 1,292Net income (loss) per share applicable to common stockholders: Basic$1.14 $(2.00) $(4.99)Diluted$1.09 $(2.00) $(4.99)Anti-dilutive potential common stock equivalents excluded from the calculation ofnet income (loss) per share: Stock options429 1,174 1,349Warrants61 71 71Redeemable convertible preferred stock— — 9,92089CONCERT PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS11. Income TaxesDuring the year ended December 31, 2015, the Company recorded net income before income taxes of $24.6 million . The Company’s ability to use its operatingloss carryforwards and tax credit carryforwards to offset taxable income is subject to restrictions under Sections 382 and 383 of the United States Internal RevenueCode (the “Internal Revenue Code”). Net operating loss and tax credit carryforwards are subject to an annual limitation in the event of certain cumulative changesin the ownership interest of significant shareholders over a three-year period in excess of 50 percent, as defined under Sections 382 and 383 of the InternalRevenue Code. Such changes would limit the Company’s use of its operating loss and tax credit carryforwards. In such a situation, the Company may be requiredto pay income taxes, even though significant operating loss and tax credit carryforwards exist. Additionally, any future financing could result in a change incontrol, as defined by Sections 382 and 383, which could further limit the Company's use its operating loss and tax credit carryforwards.The Company records a provision or benefit for income taxes on pre-tax income or loss based on its estimated effective tax rate for the year. The Companyrecorded $0.4 million in income tax expense during the year ended December 31, 2015. The tax expense is the result of alternative minimum tax (“AMT”) which,in accordance with the U.S. federal tax code, limits the use of net operating loss carryforwards to ninety percent of AMT income resulting in an effective tax rate ofapproximately two percent .During fiscal years 2014 and 2013, the Company did not record a benefit for income taxes related to its operating losses.A reconciliation of the federal statutory income tax rate and the Company’s effective income tax rate is as follows: Year ended December 31, 2015 2014 2013Federal statutory income tax rate (34.0)% 34.0 % 34.0 %State income taxes (5.3)% 5.3 % 5.3 %Change in valuation allowance 32.6 % (41.0)% (43.3)%Research and development and other credits 7.8 % 4.5 % 31.7 %Permanent items (0.3)% (0.7)% (5.9)%Alternative minimum tax (1.7)% — % — %Other (0.8)% — % — %Expiring state net operating loss carryforward — % (2.1)% (21.8)%Effective income tax rate (1.7)% — % — %The significant components of the Company’s net deferred tax assets consist of the following (in thousands): December 31, 2015 2014Net operating loss carryforwards $35,511 $44,186Deferred revenue 3,995 6,215Research and development and other credit carryforwards 9,666 7,728Other 2,769 1,863 51,941 59,992Valuation allowance (51,941) (59,992)Net deferred tax assets $— $—Subject to the limitations described above, at December 31, 2015, the Company had federal net operating loss carryforwards of $105.2 million and state netoperating loss carryforwards of $52.3 million available to reduce future taxable income, which expire at various dates beginning in 2026. Included in the federaland state net operating loss carryforwards are approximately $7.6 million of deductions related to the exercise of stock options which represent an excess taxbenefit which will be realized when it results in the reduction of cash income tax. The Company also had federal and state tax credit carryforwards of $7.3 millionand $3.6 million , respectively, available to reduce future tax liabilities, which expire at various dates through 2035. Realization of the future tax benefits is dependent on many factors, including the Company’s ability to generate taxable income within the carryforward period.The Company has evaluated the positive and negative evidence bearing upon the realizability90CONCERT PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSof its deferred tax assets and concluded that it is more likely than not that the Company will not realize the benefit of its deferred tax assets. As a result, thedeferred tax assets have been fully reserved at December 31, 2015 and 2014.At December 31, 2015, the Company had no unrecognized tax benefits. The Company has not conducted a study of its research and development creditcarryforwards. A study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is completed and anyadjustment is known, no amounts will be presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s research anddevelopment credit carryforwards and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there wouldbe no impact to the consolidated balance sheet or statement of operations if an adjustment were required.Interest and penalty charges, if any, related to unrecognized tax benefits would be classified as income tax expense in the accompanying statement of operations.As of December 31, 2015, the Company had no accrued interest related to uncertain tax positions.The Company is currently open to examination under the statute of limitations by the Internal Revenue Service and state jurisdictions for the tax years ended 2012through 2014 . Carryforward tax attributes generated in years prior to 2011 may still be adjusted upon future examination if they have or will be used in a futureperiod. The Company is currently not under examination by the Internal Revenue Service or any other jurisdictions for any tax years. Since the Company is in aloss carryforward position, the Company is generally subject to examination by the U.S. federal, state and local income tax authorities for all tax years in which aloss carryforward is available.12. CommitmentsThe Company leases approximately 50,000 square feet of office and laboratory space in Lexington, Massachusetts under a non-cancelable operating leaseagreement, or the 2008 Lease Agreement, as amended. The term continues through September 30, 2018. The 2008 Lease Agreement, and the subsequent amendment in August 2014, provided for tenant improvement allowances. Certain tenant improvement allowanceswere required to be repaid to the landlord monthly over the lease term, plus interest at a 10% annual rate. As such, the Company classified the portion of theallowance subject to repayment as a "leasehold improvement loan" on the Company's consolidated balance sheet. Other tenant improvement allowances not subjectto repayment were classified in the accompanying balance sheet under the caption “deferred lease incentive.” As of December 31, 2015, the Company's repaymentobligations for its tenant improvement allowances were fulfilled.The Company is amortizing all leasehold improvement assets and deferred incentives over the remaining lease term, as amended, and is recognizing rental expenseon a straight-line basis over the respective lease term including any free rent periods.The future minimum lease payments under the 2008 Lease Agreement, as amended, is as follows (in thousands): Base rent obligationsAt December 31, 2015 20161,52320171,57320181,208Total minimum lease payments$4,30413. Collaboration AgreementsCelgeneIn April 2013, the Company entered into a master development and license agreement with Celgene Corporation and Celgene International Sàrl, referred totogether as Celgene, which is primarily focused on the research, development and commercialization of specified deuterated compounds targeting inflammation orcancer.91CONCERT PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSThe initial program in the collaboration is CTP-730, a deuterium-modified analog of apremilast. Celgene has an exclusive worldwide license to develop,manufacture and commercialize deuterated analogs of apremilast and certain close chemical derivatives thereof. The Company further granted Celgene licenseswith respect to two additional programs and an option with respect to a third additional program.The Company was responsible for conducting and funding research and early development activities for the CTP-730 program at its own expense pursuant tomutually agreed upon development plans. This included the completion of single and multiple ascending dose Phase 1 clinical trials.Under the terms of the agreement, the Company received a non-refundable upfront payment of $35.0 million . In October 2015, the Company earned andrecognized as milestone revenue an $8.0 million development milestone payment upon completion of Phase 1 clinical evaluations for CTP-730. In addition, theCompany is eligible to earn an additional $15.0 million development milestone payment, up to $247.5 million in regulatory milestone payments and up to $50.0million in sales-based milestone payments related to products within the CTP-730 program. The next milestone payment the Company may be entitled to achieveunder the CTP-730 program is $15.0 million related to the first actual dosing in a Phase 3 clinical trial or, if earlier, acceptance for filing of a NDA. If Celgeneexercises its rights with respect to either of the two additional license programs, the Company will receive a license exercise fee for the applicable program of$30.0 million and will also be eligible to earn up to $23.0 million in development milestone payments and up to $247.5 million in regulatory milestone paymentsfor that program. Additionally, with respect to one of the additional license programs, the Company is eligible to receive up to $100.0 million in milestonepayments based on net sales of products, and with respect to the other additional license program, the Company is eligible to receive up to $50.0 million inmilestone payments based on net sales of products. If Celgene exercises its option with respect to the option program, in respect of a compound to be identified at alater time, the Company will receive an option exercise fee of $10.0 million and will be eligible to earn up to $23.0 million in development milestone payments andup to $247.5 million in regulatory milestone payments.In addition, with respect to each program, Celgene is required to pay the Company royalties on worldwide net sales of each licensed product at defined percentagesranging from the mid-single digits to low double digits below 20% . The royalty rate is reduced on a country-by-country basis during any period within the royaltyterm when there is no patent claim or regulatory exclusivity covering the licensed product in the particular country.The Company’s arrangement with Celgene contains the following deliverables: (i) an exclusive worldwide license to develop, manufacture and commercializedeuterated analogs of apremilast related to the CTP-730 program, or the License Deliverable, (ii) obligations to perform research and development servicesassociated with the CTP-730 program, or the R&D Services Deliverable, (iii) obligation to supply preclinical and clinical trial material related to the CTP-730program, or the Supply Deliverable, (iv) participation on the JSC during the term of the CTP-730 program, or the JSC Deliverable, (v) significant and incrementaldiscount related to the first additional license program for which the non-deuterated compound has been selected, or the First Discount Deliverable and(vi) significant and incremental discount related to the second additional license program for which the non-deuterated compound has been selected, or the SecondDiscount Deliverable.Allocable arrangement consideration at inception was limited to the $35.0 million non-refundable upfront payment. The Company allocated the arrangementconsideration for the collaboration among the separate units of accounting using the relative selling price method. The arrangement consideration allocated to theLicense Deliverable was recognized upon delivery, amounts allocated to the R&D Services Deliverable and Supply Deliverable are recognized under theproportional performance method over the expected period of performance, or 39 months and the amount allocated to the JSC Deliverable is recognized ratablyover the expected period of performance, or 39 months . Arrangement consideration allocable to the First and Second Discount Deliverables will be recognizedwhen, or if, Celgene exercises its rights under the option program, or the rights to these licenses lapse in 2020.During the years ended December 31, 2015, 2014 and 2013, the Company recognized revenue of $5.1 million , $1.8 million and $0.7 million for theR&D Services Deliverable and $0.5 million , $1.9 million and $0.6 million for the Supply Deliverable, respectively. Additionally, the Company recognizedrevenue of $32 thousand , $32 thousand and $24 thousand related to the JSC deliverable during the years ended December 31, 2015, 2014 and 2013, respectively.The revenue was classified as license and research and development revenue in the accompanying consolidated statement of operations and comprehensive income(loss).As of December 31, 2015, there was $7.3 million of deferred revenue related to the Company’s collaboration with Celgene, $1.2 million of which relates to theSupply Deliverable and R&D Services Deliverable and was classified as a current liability and $6.1 million of which relates to the First and Second DiscountDeliverables and was classified as a noncurrent liability, in the accompanying consolidated balance sheet.92CONCERT PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSJazz PharmaceuticalsIn February 2013, the Company entered into a development and license agreement with Jazz Pharmaceuticals, Inc., or Jazz Pharmaceuticals, to research, developand commercialize products containing a deuterated sodium oxybate analog, or D-SXB. Jazz Pharmaceuticals is initially focusing on one analog, designated asJZP-386. Under the terms of the agreement, the Company granted Jazz Pharmaceuticals an exclusive, worldwide, royalty-bearing license under intellectualproperty controlled by the Company to develop, manufacture and commercialize D-SXB products including, but not limited to, JZP-386.The Company, together with Jazz Pharmaceuticals, has conducted certain development activities for Phase 1 clinical trials with respect to JZP-386 pursuant to anagreed upon development plan. The Company was responsible under the development plan for conducting the Phase 1 clinical trials with respect to JZP-386. TheCompany’s obligations to conduct further development activities are subject to mutual agreement. Jazz Pharmaceuticals has assumed all manufacturing anddevelopment responsibilities relating to JZP-386. Pursuant to the agreement, the Company’s costs for activities under the development plan were reimbursed byJazz Pharmaceuticals, except for the costs of a Phase 1 clinical trial that was conducted in the first half of 2015, which was shared between Jazz Pharmaceuticalsand the Company.Under the agreement, the Company received a non-refundable upfront payment of $4.0 million and is eligible to earn an aggregate of up to $8.0 million indevelopment milestone payments, up to $35.0 million in regulatory milestone payments and up to $70.0 million in sales-based milestone payments based on netproduct sales of licensed products. The next milestone payment that the Company may be entitled to receive is $4.0 million related to initiation of the first Phase 2clinical trial of JZP-386.In addition, Jazz Pharmaceuticals is required to pay the Company royalties at defined percentages ranging from the mid-single digits to low double digits below20% on worldwide net sales of licensed products. The royalty rate is lowered, on a country-by-country basis, under certain circumstances as specified in theagreement.The Company determined that there were three deliverables under the agreement: (i) an exclusive, royalty-bearing, sub-licensable worldwide license to developand commercialize D-SXB compounds, or the License Deliverable, (ii) participation on a joint steering committee, or the JSC Deliverable, and (iii) a deliverable todirect external patent activities and bear a portion of the external patent fees, or the Patent Support Deliverable.The Company allocated arrangement consideration of $3.7 million to the License Deliverable, $0.1 million to the JSC Deliverable and $0.2 million to the PatentSupport Deliverable. The Company recognized the arrangement consideration allocated to the License Deliverable upon delivery and will recognize revenuerelated to the JSC Deliverable and the Patent Support Deliverable over the respective periods of performance, which are each estimated to be 58 months .For the years ended December 31, 2015, 2014 and 2013, the Company recognized revenue of $0.8 million , $2.6 million and $1.1 million , respectively, related tothe performance of development support services. For the year ended December 31, 2013 the Company recognized revenue of $3.7 million upon delivery of theLicense Deliverable. Additionally, for the years ended December 31, 2015, 2014 and 2013, the Company recognized revenue of $57 thousand , $56 thousand and$61 thousand , respectively, related to the JSC and Patent Support deliverables.AvanirIn February 2012, the Company entered into a development and license agreement with Avanir Pharmaceuticals, Inc., or Avanir, under which the Companygranted Avanir an exclusive worldwide license to develop, manufacture and commercialize deuterated dextromethorphan containing products. Avanir is currentlyfocused on developing AVP-786, which is a combination of a deuterated analog of dextromethorphan and a low dose of quinidine. Subsequent to the Company’sagreement, Avanir was acquired by Otsuka Pharmaceutical Co., Ltd. and it is now a wholly owned subsidiary of Otsuka America, Inc.Since June 2012, Avanir has elected to conduct all research and development activities, including manufacturing activities; however, the Company has receivedintellectual property cost reimbursements.Under the agreement, the Company received a non-refundable upfront payment of $2.0 million and has received milestone payments of $6.0 million . TheCompany is also eligible to earn, with respect to licensed products comprising a combination of deuterated dextromethorphan and quinidine, up to $37.0 million inregulatory and commercial launch milestone payments and up to $125.0 million in sales-based milestone payments. The next milestone payment that the Companymay be entitled to receive is $5.0 million upon acceptance for filing of a NDA. In addition, the Company is eligible for higher development milestones, up to anadditional $43.0 million , for licensed products that do not require quinidine. Avanir is currently only developing deuterated dextromethorphan in combination withquinidine.93CONCERT PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSAvanir also is required to pay the Company royalties at defined percentages ranging from the mid-single digits to low double digits below 20% on net sales oflicensed products on a country-by-country basis. The royalty rate is reduced, on a country-by-country basis, during any period within the royalty term when there isno patent claim covering the licensed product in the particular country.During the year ended December 31, 2015, the Company recognized as revenue a $2.0 million milestone payment received from Avanir based on the initiation ofdosing in a Phase 3 clinical trial of AVP-786. During the year ended December 31, 2014, the Company recognized as revenue a $2.0 million milestone paymentreceived from Avanir based on the initiation of dosing in a Phase 2 clinical trial of AVP-786. During the year ended December 31, 2013, the Company recognizedas revenue a $2.0 million milestone payment received from Avanir based on positive data from Avanir’s Phase 1 clinical trial of AVP-786.Additionally, the Company recognized revenue of $0.1 million , $0.2 million and $0.2 million for intellectual property cost reimbursements during the years endedDecember 31, 2015, 2014 and 2013, respectively.GSKIn May 2009, the Company entered into a research and development collaboration and license agreement with Glaxo Group Limited, or GSK, to research, developand commercialize multiple products containing deuterated compounds, including CTP-499. The agreement with GSK, as subsequently amended, expired in May2012 after GSK opted out of further development under the agreement and made a $2.8 million payment to the Company. The rights to the product candidatesdeveloped under the agreement have reverted to the Company and it is free to pursue them without further obligation to GSK other than to repay GSK an amountof up to $2.8 million if the Company commercializes CTP-499 or if, prior to a specified date in 2018, the Company re-licenses or transfers rights to CTP-499 to athird party. The $2.8 million payment was classified as deferred revenue and will not be recognized as revenue until all repayment obligations lapse.14. Patent AssignmentIn September 2011, the Company entered into a patent assignment agreement with Auspex Pharmaceuticals, Inc., or Auspex, pursuant to which the Companyassigned to Auspex a U.S. patent application relating to deuterated pirfenidone analogs. Under the terms of the agreement, the Company is eligible to receivecertain royalty payments, or the Royalty Payments, equal to a percentage in the low single digits of net sales in the United States invoiced by Auspex or any of itsaffiliates, with respect to certain pharmaceutical products containing a deuterated pirfenidone analog. The patent assignment agreement further provides that ifAuspex sells to another party all of its U.S. rights to certain deuterated pirfenidone products, or if Auspex grants to another party a license to sell certain deuteratedpirfenidone products in the United States, the Company will receive an amount, or the Sublicense/Sale Payments, equal to a percentage in the teens of any proceedsAuspex receives therefrom that are attributable to the rights to such deuterated pirfenidone products in the United States. In addition, the patent assignmentagreement provides that if Auspex is acquired in a change in control transaction at any time while it, or any of its affiliates, own certain patents or patentapplications related to deuterated pirfenidone, the Company will receive within a specified period following the closing of the transaction 1.44% of any proceedspayable as consideration for the change in control transaction, including any amounts paid to stockholders and certain equity holders of Auspex. Any such changein control payment to the Company is credited to Auspex as a deduction against any future Royalty Payments and Sublicense/Sale Payments that may become dueunder the agreement, such that Auspex will not be required to make further Royalty Payments and Sublicense/Sale Payments to the Company until the aggregateamount of such Royalty Payments and Sublicense/Sale Payments exceeds the amount of such change in control payment. The patent assignment agreement expiresupon the earlier to occur of (1) receipt by the Company of the final Sublicense/Sale Payment arising from (a) the sale of Auspex’s U.S. rights to certain deuteratedpirfenidone products or (b) Auspex’s grant of an exclusive license to sell certain deuterated pirfenidone products in the United States in all indications and fields,or (2) the expiration of the last claim owned by Auspex or any of its affiliates in certain patents or patent applications related to deuterated pirfenidone analogs.Under the agreement, Concert became eligible to receive a one-time payment of $50.2 million , which was received in June 2015, due to Teva PharmaceuticalIndustries Ltd.’s acquisition of Auspex in May 2015. Due to the stage of development of any deuterated pirfenidone products and the considerable uncertaintyassociated with the receipt of any Royalty Payments and Sublicense/Sale Payments under the agreement, the payment of $50.2 million was recorded as otherrevenue in the consolidated statement of operations and comprehensive income (loss) for the year ended December 31, 2015.15. Loan Payable and Warrant to Purchase Redeemable SecuritiesOn December 22, 2011, the Company entered into a Loan and Security Agreement, or the Loan and Security Agreement, with Hercules Technology GrowthCapital, Inc., or Hercules. The Loan and Security Agreement provides for aggregate advances of94CONCERT PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSup to $20 million in two tranches. Under the first tranche, the Company obtained an advance on December 22, 2011 totaling $7.5 million , or the December 2011Advance. Under the second tranche, the Company obtained an advance on March 29, 2012 totaling $12.5 million , or the March 2012 Advance. Each advancemade under the Loan and Security Agreement had an interest rate of 8.5% .On October 1, 2015, the Company made its final payment to Hercules, thereby fulfilling all obligations under the Loan and Security Agreement.In connection with the Loan and Security Agreement, the Company granted Hercules a warrant, the Warrant, to purchase up to 200,000 shares of Series CPreferred Stock at an exercise price of $2.50 per share which vested immediately upon the December 2011 Advance. Upon the draw of the March 2012 Advance,the Warrant became exercisable for an additional 200,000 shares of Series C Preferred Stock at an exercise price of $2.50 per share. Upon completion of theCompany’s IPO in February 2014 the Warrant became exercisable for an aggregate of 70,796 shares of the Company’s common stock at an exercise price of$14.13 per share.Pursuant to ASC Topic 480, Distinguishing Liabilities from Equity , for periods prior to the Company’s IPO the Warrant was classified as a liability and was re-measured to the-then current value at each balance sheet date. The Warrant liability was determined based on Level 3 inputs utilizing the Black-Scholes-Mertonoption pricing model. On February 19, 2014, upon completion of the IPO, the Warrant converted into a warrant to purchase common stock and the Companyreclassified the fair value of the Warrant as of February 19, 2014 to additional paid-in capital and will not be subject to remeasurement in future periods. 16. 401(k) Retirement PlanIn January 2008, the Company established the Concert Pharmaceuticals 401(k) Retirement Plan (the 401(k) Plan) in which substantially all of its permanentemployees are eligible to contribute a percentage of base wages up to an amount not to exceed an annual statutory maximum. The Company matches 50% of thefirst 6% of an employee’s contributions subject to statutory limits.The Company made matching contributions under the 401(k) Plan of $0.2 million , $0.2 million and $0.2 million for the years ended December 31, 2015, 2014 and2013, respectively.17. Quarterly Financial Information (unaudited) Three Months Ended March 31,2015 June 30,2015 September 30,2015 December 31,2015 (in thousands, except per share data)(unaudited)Revenue $1,306 $53,409 $1,709 $10,305Operating expenses 10,177 11,719 10,403 9,642Income (loss) from operations (8,871) 41,690 (8,694) 663Other (expense) income, net (131) (77) (21) 44(Provision) Benefit for income taxes — (567) 161 (23)Net income (loss) $(9,002) $41,046 $(8,554) $684Net loss per share - basic $(0.48) $1.89 $(0.39) $0.03Net loss per share - diluted $(0.48) $1.80 $(0.39) $0.0395CONCERT PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three Months Ended March 31, 2014 June 30, 2014 September 30, 2014 December 31, 2014 (in thousands, except per share data)(unaudited)Revenue $1,613 $1,235 $4,418 $1,310Operating expenses 8,132 8,961 12,026 10,055Loss from operations (6,519) (7,726) (7,608) (8,745)Other expense, net (431) (264) (224) (182)Net loss $(6,950) $(7,990) $(7,832) $(8,927)Net loss per share—basic and diluted $(0.76) $(0.45) $(0.43) $(0.49)96ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone. ITEM 9A.Controls and ProceduresEvaluation of Disclosure Controls and ProceduresThe term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or theExchange Act, refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files orsubmits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’srules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to bedisclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, includingits principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding requireddisclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance ofachieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Ourdisclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives.Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controlsand procedures as of December 31, 2015, the end of the period covered by this Annual Report on Form 10-K. Based upon such evaluation, our Chief ExecutiveOfficer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of such date.Management’s Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting isdefined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive officerand principal financial officer, or persons performing similar functions, and effected by a company’s board of directors, management, and other personnel, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles and includes those policies and procedures that: •pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of a company’s assets;•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that a company’s receipts and expenditures are being made only in accordance with authorizations of the company’smanagement and directors; and•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have amaterial effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectivenessto 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 orprocedures may deteriorate.Under the supervision of and with the participation of our principal executive officer and principal financial officer, our management assessed the effectiveness ofour internal control over financial reporting as of December 31, 2015 based on the criteria set forth by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO) in Internal Control—Integrated Framework (2013 framework). Based on this assessment, management concluded that our internal controlover financial reporting was effective as of December 31, 2015.Changes in Internal Control over Financial ReportingThere was no change in our internal control over financial reporting that occurred during the three months ended December 31, 2015 that has materiallyaffected, or is reasonably likely to materially affect, our internal control over financial reporting.97 ITEM 9B.Other InformationNone.PART IIIPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceThe information regarding our directors and executive officers required by this item will be included in either an amendment to this Annual Report on Form 10-Kor in our definitive proxy statement for our 2016 annual meeting of stockholders to be filed with the Commission not later than 120 days after the end of the fiscalyear covered by this Annual Report on Form 10-K and is incorporated herein by reference.Item 11. Executive CompensationThe information regarding our directors and executive officers required by this item will be included in either an amendment to this Annual Report on Form 10-Kor in our definitive proxy statement for our 2016 annual meeting of stockholders to be filed with the Commission not later than 120 days after the end of the fiscalyear covered by this Annual Report on Form 10-K and is incorporated herein by reference.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information regarding our directors and executive officers required by this item will be included in either an amendment to this Annual Report on Form 10-Kor in our definitive proxy statement for our 2016 annual meeting of stockholders to be filed with the Commission not later than 120 days after the end of the fiscalyear covered by this Annual Report on Form 10-K and is incorporated herein by reference.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information regarding our directors and executive officers required by this item will be included in either an amendment to this Annual Report on Form 10-Kor in our definitive proxy statement for our 2016 annual meeting of stockholders to be filed with the Commission not later than 120 days after the end of the fiscalyear covered by this Annual Report on Form 10-K and is incorporated herein by reference.Item 14. Principal Accountant Fees and Services The information regarding our directors and executive officers required by this item will be included in either an amendment to this Annual Report on Form 10-Kor in our definitive proxy statement for our 2016 annual meeting of stockholders to be filed with the Commission not later than 120 days after the end of the fiscalyear covered by this Annual Report on Form 10-K and is incorporated herein by reference.Part IVITEM 15.Exhibits and Financial Statement Schedules (1)Financial StatementsOur consolidated financial statements are set forth in Part II, Item 8 of this Annual Report on Form 10-K and are incorporated herein by reference. (2)Financial Statement SchedulesSchedules have been omitted since they are either not required or not applicable or the information is otherwise included herein. 98(3)ExhibitsThe exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index immediately preceding such Exhibits, which Exhibit Index isincorporated herein by reference.SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, on March 1, 2016. CONCERT PHARMACEUTICALS, INC. By: /s/ Roger D. Tung Roger D. Tung, Ph.D. President and Chief Executive OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrantand in the capacities and on the dates indicated:99 Signature Title Date /s/ Roger D. Tung Director, President and Chief Executive Officer(Principal Executive Officer) March 1, 2016Roger D. Tung, Ph.D. /s/ Ryan Daws Chief Financial Officer (Principal Financial Officer) March 1, 2016Ryan Daws /s/ Pauline McGowan Vice President, Finance and Corporate Controller(Principal Accounting Officer) March 1, 2016Pauline McGowan /s/ Richard H. Aldrich Chairman March 1, 2016Richard H. Aldrich /s/ Thomas G. Auchincloss Director March 1, 2016Thomas G. Auchincloss /s/ Ronald W. Barrett Director March 1, 2016Ronald W. Barrett, Ph.D. /s/ Peter Barton Hutt Director March 1, 2016Peter Barton Hutt /s/ Wilfred E. Jaeger Director March 1, 2016Wilfred E. Jaeger, M.D. /s/ Helmut M. Schuhsler Director March 1, 2016Helmut M. Schühsler, Ph.D. /s/ Wendell Wierenga Director March 1, 2016Wendell Wierenga, Ph.D. 100Exhibit Index Exhibitnumber Description 3.1 Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s currentreport on Form 8-K (File No. 001-36310) filed with the SEC on February 20, 2014) 3.2 Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s current report onForm 8-K (File No. 001-36310) filed with the SEC on February 20, 2014) 4.1 Specimen certificate evidencing shares of common stock (incorporated by reference to Exhibit 4.1 to the Registrant’sregistration statement on Form S-1 (File No. 333-193335), filed with the SEC on February 3, 2014) 10.1 Third Amended and Restated Registration Rights Agreement, dated as of June 1, 2009, as amended (incorporated by referenceto Exhibit 10.1 to the Registrant’s registration statement on Form S-1 (File No. 333-193335), filed with the SEC onJanuary 13, 2014) 10.2 Warrant to purchase shares of Series C Convertible Preferred Stock issued by the Registrant to Hercules Technology GrowthCapital, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’s registration statement on Form S-1 (File No. 333-193335), filed with the SEC on January 13, 2014) 10.3 # Amended and Restated 2006 Stock Option and Grant Plan, as amended (incorporated by reference to Exhibit 10.3 to theRegistrant’s registration statement on Form S-1 (File No. 333-193335), filed with the SEC on January 13, 2014) 10.4 # Form of Incentive Stock Option Agreement under 2006 Stock Option and Grant Plan (incorporated by reference to Exhibit10.4 to the Registrant’s registration statement on Form S-1 (File No. 333-193335), filed with the SEC on January 13, 2014) 10.5 # Form of Nonstatutory Stock Option Agreement under 2006 Stock Option and Grant Plan (incorporated by reference to Exhibit10.5 to the Registrant’s registration statement on Form S-1 (File No. 333-193335), filed with the SEC on January 13, 2014) 10.6 # 2014 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s registration statement on Form S-1(File No. 333-193335), filed with the SEC on February 3, 2014) 10.7 # Form of Incentive Stock Option Agreement under 2014 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 to theRegistrant’s registration statement on Form S-1 (File No. 333-193335), filed with the SEC on February 3, 2014) 10.8 # Form of Nonstatutory Stock Option Agreement under 2014 Stock Incentive Plan (incorporated by reference to Exhibit 10.8 tothe Registrant’s registration statement on Form S-1 (File No. 333-193335), filed with the SEC on February 3, 2014) 10.9 # Amended and Restated Employment Agreement, dated as of June 13, 2014, by and between the Registrant and Roger D.Tung, (incorporated by reference to Exhibit 99.1 to the Registrant’s current report on Form 8-K (File No. 001-36310) filedwith the SEC on June 16, 2014) 10.10 # Amended and Restated Employment Agreement, dated as of January 13, 2014, by and between the Registrant and NancyStuart (incorporated by reference to Exhibit 99.2 to the Registrant’s current report on Form 8-K (File No. 001-36310), filedwith the SEC on June 16, 2014) 10.11 #* Amended and Restated Employment Agreement, dated as of June 16, 2014, by and between the Registrant D. Ryan Daws(incorporated by reference to Exhibit 10.11 to the Registrant’s annual report on Form 10-K (File No. 001-36310), filed withthe SEC on March 2, 2015)101Exhibitnumber Description 10.12 # Form of Director and Officer Indemnification Agreement by and between the Registrant and each of Roger D. Tung, NancyStuart, D. Ryan Daws, Ian Robert Silverman, Pauline McGowan, Richard H. Aldrich, Thomas Auchincloss, Jr. Ronald W.Barrett, John G. Freund, Peter Barton Hutt, Wilfred E. Jaeger, Helmut M. Schühsler and Wendell Wierenga (incorporated byreference to Exhibit 10.13 to the Registrant’s registration statement on Form S-1 (File No. 333-193335), filed with the SECon January 13, 2014) 10.13 Lease Agreement, dated as of February 12, 2008, by and between the Registrant and One Ledgemont LLC (incorporated byreference to Exhibit 10.15 to the Registrant’s registration statement on Form S-1 (File No. 333-193335), filed with the SECon January 13, 2014) 10.14 Amendment of Lease, dated as of August 6, 2014, by and between the Registrant and 128 Spring Street Lexington, LLC(incorporated by reference to Exhibit 10.4 to the Registrant’s quarterly report on Form 10-Q (File No. 001-36310), filed withthe SEC on August 12, 2014) 10.15 † Development and License Agreement, dated as of February 24, 2012, between the Registrant and Avanir Pharmaceuticals,Inc. (incorporated by reference to Exhibit 10.16 to the Registrant’s registration statement on Form S-1 (File No. 333-193335), filed with the SEC on February 3, 2014) 10.16 † Development and License Agreement, dated as of February 26, 2013, between the Registrant and Jazz PharmaceuticalsIreland Limited (incorporated by reference to Exhibit 10.17 to the Registrant’s registration statement on Form S-1 (File No.333-193335), filed with the SEC on February 3, 2014) 10.17 † Amendment No. 1, dated February 26, 2015, to Development and License Agreement dated February 26, 2013 by andbetween the Registrant and Jazz Pharmaceuticals Ireland Limited (incorporated by reference to Exhibit 10.1 to theRegistrant’s quarterly report on Form 10-Q (File No. 001-36310), filed with the SEC on May 11, 2015) 10.18 † Master Development and License Agreement, dated as of April 4, 2013, among the Registrant, Celgene International Sàrland Celgene Corporation (incorporated by reference to Exhibit 10.18 to the Registrant’s registration statement on Form S-1(File No. 333-193335), filed with the SEC on February 3, 2014) 10.19 † Patent Assignment Agreement, dated September 8, 2011, by and between the Registrant and Auspex Pharmaceuticals, Inc.(incorporated by reference to Exhibit 10.1 to the Registrant’s quarterly report on Form 10-Q (File No. 001-36310), filed withthe SEC on May 11, 2015) 10.20 # Summary of Executive Bonus Program (incorporated by reference to Exhibit 10.19 to the Registrant’s registration statementon Form S-1 (File No. 333-193335), filed with the SEC on January 13, 2014) 10.21 #* Summary of Director Compensation Program Program (incorporated by reference to Exhibit 10.20 to the Registrant’s annualreport on Form 10-K (File No. 001-36310), filed with the SEC on March 2, 2015) 21.1* Subsidiaries of the Registrant 23.1* Consent of Ernst & Young LLP 31.1* Chief Executive Officer—Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Chief Financial Officer—Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1* Chief Executive Officer—Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002 32.2* Chief Financial Officer—Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002 102101.INS* XBRL Instance Document 101.SCH* XBRL Taxonomy Extension Schema Document 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* XBRL Taxonomy Extension Label Linkbase Document 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document *Filed herewith.†Confidential treatment requested as to certain portions, which portions have been omitted and filed separately with the Securities and ExchangeCommission.#Management contracts or compensatory plans or arrangements required to be filed as an exhibit hereto pursuant to Item 15(a) of Form 10-K.103Exhibit 10.21S UMMARY OF D IRECTOR C OMPENSATION P ROGRAMThe board of directors (the “ Board ”) of Concert Pharmaceuticals, Inc. (the “ Company ”) has approved the following director compensation program. Underthis director compensation program, the Company will pay its non-employee directors retainers in cash. Each non-employee director will receive a cash retainer forservice on the Board and for service on each committee of which the director is a member. The chairmen of the Board and of each committee will receive higherretainers for such service. These fees are payable quarterly in arrears. The fees paid to non-employee directors for service on the Board and for service on eachcommittee of the Board of which the director is a member are as follows: Member Annual Fee Chairman Annual Fee Board of Directors30,000 60,000 Audit Committee7,500 15,000 Compensation Committee5,000 10,000 Nominating and Corporate Governance Committee3,000 7,000 The Company will also reimburse its non-employee directors for reasonable travel and out-of-pocket expenses incurred in connection with attending Boardand committee meetings.In addition, under the Company’s director compensation program, each non-employee director elected to the Board after the closing of the Company’s initialpublic offering will receive an option to purchase 25,000 shares of the Company’s common stock. Each of these options will vest in equal quarterly installmentsover a three-year period measured from the date of grant, subject to the director’s continued service as a director, and will become exercisable in full upon a changein control of the Company. Further, on the date of the first Board meeting held after each annual meeting of stockholders, each non-employee director that hasserved on the Board for at least six months will receive an option to purchase 10,000 shares of the Company’s common stock. Each of these options will vest inequal quarterly installments over a one-year period measured from the date of grant, subject to the director’s continued service as a director, and will becomeexercisable in full upon a change in control of the Company. The exercise price of these options will equal the fair market value of the Company’s common stockon the date of grant.Exhibit 21.1Subsidiaries of the Registrant Name Jurisdiction of Organization Concert Pharmaceuticals Securities Corporation MassachusettsExhibit 23.1Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-195125) pertaining to the Amended and Restated 2006 StockOption and Grant Plan and 2014 Stock Incentive Plan of Concert Pharmaceuticals, Inc. and the Registration Statement (Form S-8 No. 333-202453) pertaining tothe 2014 Stock Incentive Plan of Concert Pharmaceuticals, Inc. of our report dated March 1, 2016, with respect to the consolidated financial statements of ConcertPharmaceuticals, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2015./s/ Ernst & Young LLPBoston, MassachusettsMarch 1, 2016Exhibit 31.1CERTIFICATION PURSUANT TO RULE 13a-14(a)OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Roger D. Tung, certify that:1.I have reviewed this Annual Report on Form 10-K of Concert Pharmaceuticals, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likelyto adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. Date: March 1, 2016 /s/ Roger D. TungRoger D. TungPresident and Chief Executive OfficerExhibit 31.2CERTIFICATION PURSUANT TO RULE 13a-14(a)OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Ryan Daws, certify that:1.I have reviewed this Annual Report on Form 10-K of Concert Pharmaceuticals, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likelyto adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. Date: March 1, 2016 /s/ Ryan DawsRyan DawsChief Financial OfficerExhibit 32.1CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Concert Pharmaceuticals, Inc. (the “Company”) for the year ended December 31, 2015 as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), I, Roger D. Tung, President and Chief Executive Officer of the Company, herebycertify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 1, 2016 /s/ Roger D. Tung Roger D. Tung President and Chief Executive OfficerA signed original of this written statement required by Section 906 has been provided to Concert Pharmaceuticals, Inc. and will be retained by ConcertPharmaceuticals, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.Exhibit 32.2CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Concert Pharmaceuticals, Inc. (the “Company”) for the year ended December 31, 2015 as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), I, Ryan Daws, Chief Financial Officer of the Company, hereby certify, pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 1, 2016 /s/ Ryan Daws Ryan Daws Chief Financial OfficerA signed original of this written statement required by Section 906 has been provided to Concert Pharmaceuticals, Inc. and will be retained by ConcertPharmaceuticals, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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