2018 ANNUAL REPORT
Stellar Science, Breakthrough Medicine
April 26, 2019
Dear Shareholders of Constellation Pharmaceuticals,
Our team at Constellation Pharmaceuticals has developed a pipeline of product candidates that all
emerged from our integrated epigenetics platform. Each of our product candidates—CPI-0610,
CPI-1205, and CPI-0209—has the potential to address serious unmet medical needs in patients with
cancer.
2018 was a transformative year at Constellation. We executed on our existing development plans to
address the needs of patients with myelofibrosis (MF), prostate cancer, and potentially other cancers.
We also raised over $160 million, completed an initial public offering, and expanded our leadership
team. In 2018, we planted the seeds that we are seeking to harvest in 2019 as we have several
potential catalysts for value creation.
CPI-0610 and CPI-1205 are each in Phase 2 clinical trials, and a third program, CPI-0209, is expected
to begin a Phase 1 clinical trial in mid-2019. We are also exploring other novel cancer epigenetics
targets in preclinical testing to fuel a sustainable pipeline of innovative small-molecule product
candidates.
Product Candidates
Indications
Preclinical Phase 1 Phase 2 Phase 3
Milestones
BET Inhibitor
CPI-0610
EZH2 Franchise
2L Myelofibrosis
1L Myelofibrosis
MANIFEST Trial
Interim data update on ˜18-20 2L
patients in Q2 2019 at ASCO
CPI-1205
2L mCRPC*
ProSTAR Trial
CPI-0209
(2nd Generation)
Preclinical
Solid Tumors
Tumor Microenvironment
(Undisclosed)
Innate Immunity
(Undisclosed)
Solid Tumors /
Heme Malignancies
Solid Tumors
* Metastatic castration-resistant prostate cancer
Phase 1b data at AACR
Initial Phase 2 data in 2H 2019
Initiate Phase 1 in mid-2019
In 2018, we generated substantial momentum across our entire pipeline.
CPI-0610—BET inhibitor for myelofibrosis (MF)
• Received preliminary data from our first four MF patients from the MANIFEST* clinical trial,
each showing one or more of the following: conversion from transfusion dependence to
transfusion independence, hemoglobin increases, improvements in bone marrow fibrosis
scores, spleen reductions, and symptom improvements. These results taken together suggest
that CPI-0610 may have disease-modifying effects in MF patients.
• Enhanced and expanded MANIFEST to stratify the second-line arm for transfusion
dependence and to initiate a first-line arm, actions intended to broaden our understanding of
the compound and open up new potential pathways to regulatory success.
• Received Fast Track status from the FDA for CPI-0610 in MF, a designation intended to
facilitate the development and expedite the review of drugs to treat serious or life-threatening
diseases and fill unmet medical needs.
CPI-1205— EZH2 inhibitor for metastatic castration-resistant prostate cancer (mCRPC)
• Determined that CPI-1205 was generally well tolerated in combination with enzalutamide or
abiraterone in the Phase 1b portion of the ProSTAR* clinical trial.
• Observed clinical activity in ProSTAR Phase 1b in subsets of a heterogeneous population of
advanced mCRPC patients in combination with either abiraterone or enzalutamide, including
≥80% PSA reductions and an objective response by RECIST 1.1 criteria.
Initiated the Phase 2 portion of ProSTAR with a randomized trial of enzalutamide + CPI-1205
versus enzalutamide alone to better define the mCRPC patient populations most likely to
benefit from CPI-1205.
Initiated a single arm of abiraterone + CPI-1205 in ProSTAR Phase 2.
•
•
CPI-0209—2nd generation EZH2 inhibitor
• Advanced CPI-0209 into IND-enabling development.
Corporate
• Raised $160 million in a crossover financing and IPO.
• Strengthened our management team by appointing Karen Valentine as Chief Legal Officer and
General Counsel and Dr. Patrick Trojer as Chief Scientific Officer. In 2019, we appointed
Jessica Christo as Chief Product Development Officer.
• Expanded the Board of Directors by appointing two new members—Dr. Elizabeth Tréhu and
Steven Hoerter—with extensive industry experience in prostate cancer and MF. In 2019, we
added a third new member—Dr. Scott Braunstein—with an impressive track record of helping
biopharmaceutical companies as an investor and a pharmaceutical executive.
2018 was a year of execution for Constellation, preparing us well for 2019, which we expect to be a
year of data. Our clinical programs are making significant progress and approaching important
readouts. With positive momentum from these catalysts, our vision is to transition into a late-stage
oncology development company, with an exciting pipeline of development and discovery programs.
Yours sincerely,
Jigar Raythatha
President and CEO
* Please refer to our Form 10-K and other filings at http://ir.constellationpharma.com/financial-information/sec-filings
for a more detailed description of our MANIFEST and ProSTAR clinical trials.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
(cid:4) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission File Number 001-38584
CONSTELLATION PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
215 First Street, Suite 200
Cambridge, Massachusetts
(Address of principal executive offices)
26-1741721
(I.R.S. Employer
Identification No.)
02142
(Zip Code)
Registrant’s telephone number, including area code: (617) 714-0555
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.0001 par value per share
(Title of each class)
Nasdaq Global Select Market
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES (cid:4) NO (cid:3)
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES (cid:4) NO (cid:3)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES (cid:3) NO (cid:4)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit such files). YES (cid:3) NO (cid:4)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be
contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. (cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
(cid:4)
(cid:3)
Accelerated filer
(cid:4)
Smaller reporting company (cid:3)
Emerging growth company (cid:3)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:4)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES (cid:4) NO (cid:3)
As of June 30, 2018, the last day of the registrant’s most recently completed second fiscal quarter, there was no public market for the registrant’s
Common Stock. The registrant’s Common Stock began trading on the Nasdaq Global Select Market on July 19, 2018. As of March 7, 2019, the
aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximate $133,554,829, based on the
closing price of the registrant’s common stock on March 7, 2019.
The number of shares of Registrant’s Common Stock outstanding as of March 7, 2019 was 25,805,729.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to Regulation 14A relating to the 2019 Annual Meeting of Stockholders within
120 days of the end of the registrant’s fiscal year ended December 31, 2018. Portions of such definitive proxy statement are incorporated by
reference into Part III of this Annual Report on Form 10-K to the extent stated herein.
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Business ......................................................................................................................................................
Risk Factors.................................................................................................................................................
Unresolved Staff Comments .......................................................................................................................
Properties ....................................................................................................................................................
Legal Proceedings .......................................................................................................................................
Mine Safety Disclosures .............................................................................................................................
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities .....................................................................................................................................................
Selected Financial Data...............................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations .....................
Quantitative and Qualitative Disclosures About Market Risk....................................................................
Financial Statements and Supplementary Data...........................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....................
Controls and Procedures .............................................................................................................................
Other Information .......................................................................................................................................
Directors, Executive Officers and Corporate Governance..........................................................................
Executive Compensation.............................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters...
Certain Relationships and Related Transactions, and Director Independence ...........................................
Principal Accounting Fees and Services .....................................................................................................
Exhibits, Financial Statement Schedules ....................................................................................................
Form 10-K Summary ..................................................................................................................................
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References to Constellation
Throughout this Annual Report on Form 10-K, the “Company,” “Constellation,” “Constellation Pharmaceuticals,” “we,”
“us,” and “our,” except where the context requires otherwise, refer to Constellation Pharmaceuticals, Inc. and “our board of
directors” refers to the board of directors of Constellation Pharmaceuticals, Inc.
Special Note Regarding Forward-Looking Statements and Industry Data
This Annual Report on Form 10-K contains forward-looking statements regarding, among other things, our future discovery
and development efforts, our future 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 all forward-looking
statements contain these identifying words. There are a number of important risks and uncertainties that could cause our
actual results to differ materially from those indicated by forward-looking statements. We may not actually achieve the plans,
intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our
forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations
disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements
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 to differ 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.
You should read this Annual Report on Form 10-K and the documents that we have filed as exhibits to this Annual Report on
Form 10-K completely and with the understanding that our actual future results may be materially different from what we
expect. The forward-looking statements contained in this Annual Report on Form 10-K are made as of the date of this Annual
Report on Form 10-K, and we do not assume any obligation to update any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required by applicable law.
This Annual Report on Form 10-K includes statistical and other industry and market data, which we obtained from our own
internal estimates and research, as well as from industry and general publications and research, surveys, and studies
conducted by third parties. Industry publications, studies, and surveys generally state that they have been obtained from
sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we
believe that each of these studies and publications is reliable, we have not independently verified market and industry data
from third-party sources. While we believe our internal company research is reliable and the market definitions are
appropriate, neither such research nor these definitions have been verified by any independent source.
ii
PART I
Item 1. Business.
Overview
We are a clinical-stage biopharmaceutical company using our expertise in epigenetics to discover and develop novel
therapeutics that address serious unmet medical needs in patients with cancers associated with abnormal gene expression or
drug resistance. Our integrated epigenetics platform enables us to validate targets and generate small molecules against these
targets that selectively modulate gene expression in tumor and immune cells to drive anti-tumor activity. This platform
reflects our deep understanding of the biology of regulation of gene expression by epigenetic regulatory proteins, or
epigenetic regulators, the development of small-molecule product candidates that selectively modulate their activity, and the
design of clinical development programs supported by novel biomarker strategies. We are able to target a broad variety of
epigenetic regulators using our platform and have generated development candidates acting against distinct classes of those
regulators.
We utilized our epigenetics platform to discover and design our wholly owned product candidates CPI-0610, CPI-1205, and
CPI-0209. We continue to leverage this platform and our clinical experience to develop these product candidates and to
discover and develop additional product candidates. CPI-0610 inhibits bromodomain and extra terminal domain, or BET,
proteins. CPI-1205 and CPI-0209 inhibit the enhancer of zeste homolog 2, or EZH2, protein. We believe that our approach to
targeting these central gene regulatory mechanisms associated with cancer proliferation may enable us to provide therapeutic
benefits to cancer patients. We have observed clinical activity in patients treated with CPI-0610 in an ongoing Phase 2 trial in
patients with myelofibrosis, or MF, and with CPI-1205 in an ongoing Phase 1b/2 trial in patients with metastatic castration-
resistant prostate cancer, or mCRPC, in combination with androgen receptor signaling, or ARS, inhibitors. We aim to provide
data from the Phase 1b portion of ProSTAR, our clinical trial of CPI-1205 in patients with mCRPC, at the American
Association for Cancer Research meeting, referred to as the AACR meeting, on April 1, 2019, and data from approximately
18-20 evaluable patients from MANIFEST, our Phase 2 trial of CPI-0610 in patients with MF, at another medical meeting in
the second quarter of 2019. We also aim to provide additional data updates on CPI-0610 and CPI-1205 in the second half of
2019. If we meet our primary endpoints in our ongoing clinicals trials of CPI-0610 and CPI-1205 and after consultation with
the U.S. Food and Drug Administration, or the FDA, regarding acceptable endpoints, we plan to advance these product
candidates into pivotal clinical trials in MF and mCRPC, respectively. We expect to initiate a Phase 1 clinical trial for our
third product candidate, the second-generation EZH2 inhibitor CPI-0209, in mid-2019.
BET Inhibitor
CPI-0610, one of our two lead product candidates, is a small molecule designed to promote anti-tumor activity by specifically
inhibiting the function of BET proteins, which normally enhance target gene expression. We are currently conducting
MANIFEST, a Phase 2 clinical trial of CPI-0610 as a monotherapy and in combination with ruxolitinib (marketed as
Jakafi®/Jakavi®) in patients with MF, a progressive hematological cancer. We are enrolling MF patients in both a second-line
and a first-line setting. In the second-line setting (patients who have already been treated with ruxolitinib), we are stratifying
patients for dependence on red-blood-cell, or RBC, transfusions. In transfusion-dependent patients, we aim to measure
conversion to transfusion independence. In non-transfusion-dependent patients, we aim to measure spleen volume reduction
and symptom improvement, among other relevant parameters of antitumor activity, such as erythroid response. An erythroid
response is defined as an increase in hemoglobin levels from baseline in the absence of RBC transfusions. We are also testing
CPI-0610 in combination with ruxolitinib in a first-line setting (ruxolitinib-naïve patients) with the aim of measuring spleen
volume reduction and symptom improvement, among other relevant parameters.
We believe there is a significant opportunity to improve treatment of MF patients. Ruxolitinib is the only approved drug
therapy and is the standard of care for MF. In clinical trials, ruxolitinib has been shown to reduce spleen volume and improve
patient-reported symptoms in a minority of patients. However, ruxolitinib has been associated with worsening hematological
parameters, including anemia and transfusion dependence. The product also has not demonstrated the ability to improve bone
marrow fibrosis, which has been documented as a primary cause of morbidity and mortality in MF. Some patients cannot
start treatment with ruxolitinib, in some cases because of low platelet levels, low hemoglobin levels or RBC transfusion
dependence. Some other patients treated with ruxolitinib do not achieve the targeted clinical outcomes, such as a 35%
reduction in spleen volume or improvement in symptom scores. Some patients in clinical trials discontinued use of ruxolitinib
within three to five years due to side effects or relapse / recurrence of their disease.
1
Preliminary data from MANIFEST suggest that CPI-0610 has the potential to offer meaningful benefits beyond the current
standard of care in MF. We have observed preliminary evidence of activity of CPI-0610 as a monotherapy and in
combination with ruxolitinib across a range of parameters in MF. They include reduction in spleen volume as measured by
magnetic resonance imaging, or MRI; improvements in patient-reported symptoms; improvements in anemia and conversion
from transfusion dependence to transfusion independence; and improvements in bone marrow fibrosis. While these
preliminary data need to be confirmed in a larger dataset, we believe that these results suggest that CPI-0610 may have
disease-modifying effects. Enrollment is on track in this trial. We now have approximately 20 clinical trial sites in U.S.,
Canada and Europe. We aim to provide an interim update of data from MANIFEST at a medical meeting in the second
quarter of 2019 and to provide an additional data update in the second half of 2019. Assuming that the clinical data are
sufficiently positive and after consultation with FDA regarding acceptable endpoints, we would expect to initiate a pivotal
Phase 3 clinical trial of CPI-0610 in MF.
We believe that CPI-0610 may have a differentiated safety profile compared with some other BET inhibitors. Prior to
initiating the MANIFEST study, we demonstrated that CPI-0610 was well tolerated across three Phase 1 clinical trials in
which we treated a total of 138 patients with a variety of hematological malignancies. In a Phase 1 trial in lymphoma, we
identified the maximum tolerated dose of 225 mg per day. We have seen clinical activity at a range of doses below this
maximum tolerated dose, including the 125 mg starting dose being used in the MANIFEST clinical trial. We can titrate the
dose upward to 225 mg per day and have done so without additional toxicity. We believe this favorable therapeutic window
may differentiate CPI-0610 from some other BET inhibitors. The dose-limiting toxicity for other BET inhibitors, which is
thrombocytopenia, has been shown to be dose-dependent, non-cumulative and reversible at the maximum tolerated CPI-0610
dose of 225 mg in MF patients treated to date.
EZH2 Franchise
CPI-1205, our other lead product candidate, is a small molecule designed to promote anti-tumor activity by specifically
inhibiting EZH2, an enzyme that suppresses target gene expression. Based on insights from our platform and the advancing
body of scientific literature supporting the role of EZH2 in certain tumor types, including prostate cancer, we prioritized
clinical development of CPI-1205 as a combination therapy for mCRPC. We are currently conducting an open-label Phase
1b/2 clinical trial of CPI-1205 for the treatment of mCRPC in combination with the ARS inhibitors enzalutamide (marketed
as Xtandi®) or abiraterone acetate (marketed as Zytiga®), a clinical trial that we refer to as the ProSTAR trial. Abiraterone
acetate is dosed with prednisone, which is the current clinical practice. Preliminary data to date from this trial suggest CPI-
1205 has the potential to offer meaningful benefits beyond the current standard of care. We have seen preliminary evidence
of reductions in prostate-specific antigen, or PSA, reductions in circulating tumor cells, or CTCs, tumor shrinkages, and
extended duration of response in ProSTAR. We aim to disclose Phase 1b data from ProSTAR at the AACR meeting on April
1, 2019 and an interim update on Phase 2 data in the second half of 2019. If the ProSTAR trial is successful, we expect to
initiate a pivotal Phase 3 clinical trial of CPI-1205 in combination with either enzalutamide or abiraterone acetate for the
treatment of mCRPC.
We believe that targeting EZH2 has the potential for broad therapeutic application in a variety of tumor types, and we have
taken a franchise approach to targeting EZH2. We believe that CPI-0209, our second-generation and potentially best-in-class
EZH2 inhibitor, may enable us to address additional patient populations beyond those that have been targeted by first-
generation EZH2 inhibitors. Based on this belief, we designed CPI-0209 to achieve comprehensive coverage of EZH2. We
have seen evidence of preclinical activity of CPI-0209 both as a single agent and in combination with other agents. We
believe this compound has broad application in large patient populations across several solid tumors. We are currently
advancing CPI-0209 in IND-enabling studies and expect to initiate a Phase 1 clinical trial in solid tumors in mid-2019.
2
Our Pipeline
The following table summarizes key information about our most advanced programs:
We have retained global development and commercial rights to all of our product candidates. Our goal is to become a fully
integrated biopharmaceutical company with the ability to commercialize our products. Our management team has extensive
experience, including senior roles at leading pharmaceutical companies in the discovery, development, regulatory review, and
commercialization of cancer therapeutics.
In addition, we have a preclinical pipeline of compounds that target the microenvironment of solid tumors and hematological
malignancies, as well as compounds that target innate immunity in solid tumors. We aim to test these molecules in clinical
trials in indications with a defined biological rationale, utilizing trial designs that are supported by biomarkers for patient
enrichment.
Our Strategy
Our objective is to discover, develop, and commercialize innovative drugs that address the serious unmet medical needs of
patients with cancers that are associated with abnormal gene expression or drug resistance. To achieve our objective, we aim
to:
• Demonstrate the safety and efficacy of our two lead clinical programs necessary to advance them into pivotal
trials. Building off the clinical activity that we have observed with CPI-0610 in a Phase 2 trial in patients with MF and
with CPI-1205 in a Phase 1b/2 trial in patients with mCRPC, we aim in 2019 to demonstrate the safety and efficacy of
each of these product candidates necessary to advance them into pivotal studies.
• Enable pivotal trial with CPI-0610 in MF and CPI-1205 in prostate cancer. Assuming we demonstrate safety and
efficacy for our lead compounds necessary to advance them into pivotal trials, we aim to build the organization and
other capabilities needed to initiate pivotal clinical trials with each product candidate.
• Rapidly advance CPI-0209 through IND-enabling studies and into clinical trials to determine efficacy and safety.
We believe that targeting EZH2 has the potential for broad therapeutic application in a variety of tumor types and have
taken a franchise approach to targeting EZH2. Leveraging our translational insights, we will prioritize solid tumor
indications for biomarker-supported clinical trials. We believe CPI-0209 could achieve more comprehensive coverage
of EZH2 than first-generation EZH2 inhibitors and enable us to address additional patient populations beyond those
that have been targeted by first-generation EZH2 inhibitors. We are currently advancing CPI-0209 in IND-enabling
studies and expect to initiate a Phase 1 clinical trial of this product candidate in solid tumors in 2019.
• Advance our preclinical portfolio to generate additional assets with compelling clinical development paths. We are
leveraging our platform to discover and develop programs focused on the inhibition of epigenetic regulators of tumor
and/or immune cells that may lead to the killing or reprogramming of cancer cells and/or result in anti-tumor immune
activity.
• Maximize the global commercial potential of our product candidates. We currently plan to retain commercial rights to
our product candidates in the United States while selectively evaluating strategic partnerships that could maximize their
commercial potential by expanding our geographic reach or by development in additional indications.
3
Cancer and Epigenetics
Cancer is a heterogeneous group of diseases characterized by uncontrolled cell division and growth. Cancer can arise when
the dysregulation of the affected cell’s gene expression program alters the identity and function of normal cells. This
dysregulation can arise when there are changes in genes that control signaling pathways governing cell differentiation and
function. Cancer cells can utilize this abnormal gene expression by using epigenetic regulators to activate pro-tumor genes or
deactivate tumor suppressor genes. Furthermore, cancer cells can also use epigenetic regulators to activate resistance
mechanisms against cancer treatments, including chemotherapy, targeted therapy, and immunotherapy, and render the
treatments less effective.
Epigenetics Background
Epigenetics refers to a broad regulatory system that controls gene expression by modifying chromatin, which consists of
DNA wrapped around an assembly of proteins called histones. The DNA included in chromatin is identical in each cell in the
body. The identity and function of each cell is determined by the specific set of genes that are expressed, or turned on or off,
in a given cell. Whether a specific set of genes is turned on or off depends on the action of epigenetic regulators.
Epigenetic regulators change the architecture of chromatin, allowing it to adopt an open configuration to facilitate gene
expression or, conversely, a closed configuration to suppress gene expression. An open chromatin configuration turns on a
gene by allowing access and readout of the genetic information stored in DNA. A closed chromatin configuration turns off a
gene by preventing access to DNA and results in silencing of gene expression.
We have focused our discovery and development efforts on three distinct classes of epigenetic regulators:
• Epigenetic writers, which are enzymes that add chemical modifications onto chromatin
• Epigenetic readers, which are protein families that recognize chemical modifications on chromatin and bind to these
modifications using specialized protein domains
• Epigenetic erasers, which are enzymes that remove chemical modifications from chromatin
The action of each class of epigenetic regulators can alter chromatin configuration and control the expression of certain genes
in different ways.
As illustrated below, epigenetic regulators within the writer, reader, and eraser classes modify chromatin and affect gene
expression by either adding, binding to or removing chemical tags, which are indicated by dots, on chromatin. In normal
cells, these epigenetic mechanisms are tightly regulated so that genes are turned on or turned off as appropriate.
4
Abnormal cells, such as proliferating cancer cells, can usurp these epigenetic mechanisms, ultimately leading to disease. In
certain contexts, the activity of an epigenetic regulator may be altered due to a genetic mutation, which may make certain
cancer cells dependent on the activity of an individual epigenetic regulator for cancer cell growth. In other contexts, cancer
cells may use the activity of an epigenetic regulator cooperatively with other cellular factors to exacerbate disease-promoting
mechanisms and suppress the effectiveness of drug therapies, including chemotherapeutic agents, targeted agents (e.g.,
tyrosine kinase inhibitors) and immune-modulating agents (e.g., immune checkpoint inhibitors).
Epigenetics regulators also play a significant role in the differentiation of immune cell populations. The various immune cells
in a human body arise from blood progenitor cells, or hematopoietic stem cells, through differentiation processes. Epigenetic
regulators govern these differentiation processes by promoting and suppressing certain genes that are specific to each type of
immune cell. Cancer cells can use epigenetic regulators to cause the differentiation process to produce or program immune
cells that promote tumor immunity. The selective inhibition of these epigenetic regulators may alter this differentiation
process and re-program immune cells that increase tumor immunity into immune cells that drive an anti-tumor response. This
approach may allow immune cells to overcome resistance to immune checkpoint inhibitors.
Epigenetic Inhibitor Approaches
Epigenetic inhibition is particularly attractive as a therapeutic approach for several reasons:
•
•
small-molecule inhibitors can block the abnormal function of epigenetic regulators that cancer cells depend on for
growth and can potentially restore normal gene expression;
the large number of epigenetic regulators utilized by cells in the body to control gene expression represents a large
number of potential drug targets; and
• biomarkers can be used to enrich for patients who are most likely to respond to epigenetic inhibition.
The early epigenetic inhibitors—such as histone deacetylase inhibitors and DNA methyltransferase inhibitors—have not
delivered on the full potential of the inhibition of epigenetic regulators as a class of cancer therapy. These drugs cause broad
changes to gene expression across thousands of genes. This broad inhibition, as opposed to more selective inhibition,
generally resulted in unintended effects accompanying the desired effect. Moreover, early epigenetic inhibitors were solely
designed to alter gene expression in cancer cells to induce cancer cell death. This approach did not consider the importance of
the cells surrounding the cancer cells, referred to as the tumor microenvironment, and the supporting role that epigenetic
regulators play in sustaining the tumor microenvironment for cancer cell growth.
Since these early epigenetic drugs, biopharmaceutical development has focused on therapies targeting epigenetic regulators in
genetically defined cancer contexts, and specifically in mutated epigenetic regulators with abnormal function that cancer cells
depend on for growth. This approach has identified a small number of epigenetic targets and development opportunities for
certain targets, including EZH2. Given that the abnormal function of epigenetic regulators can arise for reasons other than
genetic mutations, we believe that these genetically defined approaches, while valuable, underestimate the potential of
identifying and specifically targeting epigenetic regulators in cancer.
Our Approach
We are a pioneer in the discovery and development of novel therapeutics that target the writer, reader, and eraser classes of
epigenetic regulators and modulate gene expression in a more selective manner than early epigenetic drugs. Our efforts have
demonstrated that these distinct classes of epigenetic regulators are broadly druggable and that selective reprogramming of
gene expression is a promising therapeutic approach not only to induce cancer cell killing but also to enhance anti-tumor
immunity.
Integrated Platform
Our integrated epigenetics platform includes a deep understanding of the biological context in which epigenetic regulators
operate, the development of small-molecule product candidates that selectively modulate their activity and the design of
clinical development programs supported by novel biomarker strategies.
Understanding the biological context. We have built a suite of tools that enables us to identify and validate epigenetic target
biology. Specifically, we have built a chemical probe library comprising selective and potent small molecules that each
inhibit the activity of a specific epigenetic regulator. In addition, we have also built libraries of genetic tools that help us
understand the function of specific genes that encode epigenetic regulators. We routinely screen these small molecules and
genetic tools across cellular and animal models of disease to identify and validate potential epigenetic targets. We have
utilized these tools to identify epigenetic targets that, when inhibited, induce cancer cell death, sensitize tumor cells to an
immune response and reprogram immune-suppressive immune cells to enhance anti-tumor activity.
5
Development of small-molecule product candidates. Our small-molecule drug discovery engine is supported by our deep
understanding of the writer, reader, and eraser classes of epigenetic regulators. We have spent over ten years developing this
understanding, and that expertise, combined with our capabilities in assay development, biochemistry, compound screening,
medicinal chemistry, and structural biology, provides a strong platform to continue to develop small-molecule epigenetic
inhibitors. As a result, we have been able to develop multiple product candidates across our target classes, and we expect to
continue to do so in the future.
Design of clinical development programs. We believe that our ability to link biological and clinical development to identify a
path to registration for each of our product candidates is a crucial component of our platform. We prioritize indications based
on the importance of a specific epigenetic target as a driver of a specific cancer. We also evaluate in vivo models, cancer cell
line panels, and human tumor samples to identify biomarkers that can be used to identify patient populations that may be
most likely to respond to treatment with our product candidates. We create and use a range of assays in our preclinical and
early clinical testing to validate hypotheses that we may use in later-stage testing to target specific patient populations.
Our approach to therapeutic agents is focused on epigenetic targets:
• whose inhibition modulates gene expression in a highly selective manner;
• with broad development opportunities, including biomarker-defined contexts, which we believe may expand the
applicability of our product candidates to cancers with immune evasion or acquired drug resistance; or
• whose inhibition may reprogram immune-suppressive immune cells in the tumor microenvironment to enhance anti-
tumor activity.
Our epigenetics platform allows us to intervene in diseases by targeting distinct classes of epigenetic regulators, including the
following examples:
• EZH2—an epigenetic writer—is an enzyme that suppresses target gene expression by adding modifications to
chromatin. Certain cancer and immune cells can use EZH2 to promote growth of cancer cells or suppress an anti-tumor
immune response;
• BET proteins—a group of epigenetic readers—are proteins that bind to chromatin and enhance target gene expression.
Certain cancer cells can use BET proteins to promote growth of cancer cells and inflammatory disorders; and
• LSD1—an epigenetic eraser—is an enzyme that suppresses target gene expression by removing modifications from
chromatin. Certain cancer cells and immune cells can utilize lysine-specific demethylase 1A, or LSD1, to promote
growth of cancer cells or suppress an anti-tumor immune response.
We believe that we can leverage our epigenetic platform to expand our discovery and development efforts into additional
classes of epigenetic targets. We are also currently advancing several discovery programs against undisclosed epigenetic
regulators focused on the tumor microenvironment and the immune microenvironment.
Our Product Candidates
CPI-0610—BET Inhibitor
Overview
BET proteins are epigenetic readers that turn on specific genes by binding unique regions of the genome through their ability
to read specific chemical tags on chromatin. In some instances, BET proteins turn on genes that are abnormally expressed in
a variety of human cancers. BET inhibitors downregulate the expression of oncogenes, which are key genes that have the
potential to cause cancer, such as MYC or NF-(cid:6)B target genes, and effectively kill many cancer cell lines in in vitro models.
These observations resulted in the generation and clinical investigation of BET inhibitors in several cancer subtypes. We
have observed clinical activity in cancer subtypes that are driven by NF-(cid:6)B signaling.
CPI-0610 is a potent and selective small molecule designed to promote anti-tumor activity by selectively inhibiting the
function of BET proteins to decrease the expression of abnormally expressed genes in cancer. Our epigenetics platform
reflects our deep understanding of the biological contexts in which BET proteins operate, including cancer pathways that are
highly sensitive to CPI-0610. A combination of our preclinical studies, as well as translational insights from our first-in-
human study of CPI-0610, led us to prioritize the clinical development of CPI-0610 in MF.
6
We are currently enrolling patients in an open-label Phase 2 clinical trial, which we refer to as the MANIFEST trial, of CPI-
0610 as a first-line or second-line treatment for MF, a progressive hematological cancer. There are no approved products for
patients with MF whose disease progresses after treatment with ruxolitinib. In the second-line setting in patients who are
refractory to, have an inadequate response to, or are intolerant of ruxolitinib, we are testing CPI-0610 as a monotherapy and
in combination with ruxolitinib treatment. Preliminary data from the second-line portion of this Phase 2 trial suggest that
CPI-0610 has the potential to offer disease-modifying effects. We have observed evidence of activity of CPI-0610 both as a
monotherapy and in combination with ruxolitinib, including a reduction in spleen volume and symptom improvement. We
have also observed improvements in hemoglobin and platelet counts in three of the first four enrolled monotherapy patients
and improvement of bone marrow fibrosis score in the first two evaluable patients. We are also testing CPI-0610 in
combination with ruxolitinib in the first-line setting in ruxolitinib-naïve patients, and data are not yet available. Enrollment is
on track in this trial. We now have approximately 20 clinical trial sites in U.S., Canada and Europe. We aim to provide an
interim update on data from the MANIFEST trial from approximately 18-20 evaluable patients at a medical meeting in the
second quarter of 2019 and an additional update in the second half of 2019. If the data are sufficiently positive, and after
consultation with the FDA regarding acceptable endpoints, we aim to initiate a pivotal clinical trial or trials of CPI-0610 in
MF.
We believe that CPI-0610 may have a differentiated safety profile compared to some other BET inhibitors. CPI-0610 was
well tolerated across three Phase 1 clinical trials in which we treated a total of 138 patients who had a variety of
hematological malignancies. In Phase 1 trials we identified the maximum tolerated dose of 225 mg per day. We have seen
clinical activity at a range of doses below this maximum tolerated dose, including the 125 mg per day starting dose being
used in the MANIFEST clinical trial. We believe this favorable therapeutic window may differentiate CPI-0610 from some
other BET inhibitors. The common on-target, dose-limiting toxicity for BET inhibitors is thrombocytopenia, which has been
shown to be dose-dependent, non-cumulative and reversible with CPI-0610 in patients treated to date.
BET Inhibition in Cancer
Abnormal BET function has been implicated in cancer through several means, including chromosomal translocation and gene
amplification and overexpression whereby oncogenic and inflammatory signals are turned on in cancer cells through altered
BET activity.
Of note, BET proteins control the expression of the target genes of NF-(cid:6)B, a key immune signaling pathway that is
abnormally activated in various diseases, including cancer and immune disorders. NF-(cid:6)B signaling has been shown to be
abnormally high in some hematological malignancies, such as MF and activated B cell-like diffuse large B-cell lymphoma, or
ABC-DLBCL. In preclinical studies in MF, animals treated with BET inhibitors alone or in combination with a JAK2
inhibitor displayed a reduction in NF-(cid:6)B target gene expression, improvement in bone marrow fibrosis, and reduced disease
burden.
In addition, BET proteins promote the generation of megakaryocytes from hematopoietic stem cells. We believe that the
blood cells most responsible for bone marrow scarring in MF are dysfunctional megakaryocytes, which proliferate and
produce inflammatory molecules in part through elevated NF-(cid:6)B signaling.
Myelofibrosis
MF is part of a collection of progressive blood cancers known as myeloproliferative neoplasms and is associated with
significantly reduced quality of life and shortened survival. As the disease progresses, the bone marrow produces fewer red
blood cells. Within one year of diagnosis, the incidence of thrombocytopenia increases significantly. Thrombocytopenia is a
condition characterized by low platelet counts in the blood, severe anemia (a condition characterized by low red-blood-cell
counts), and red-blood-cell transfusion requirements. Among other complications, most patients with MF have enlarged
spleens as well as many other physical symptoms, including abdominal discomfort, bone pain and extreme fatigue.
There are limited treatment options for patients with MF. Ruxolitinib is the current standard of care and the only approved
drug treatment for intermediate- and high-risk MF patients. Ruxolitinib inhibits dysregulated janus kinase 1 and 2, or
JAK1/JAK2, signaling that is associated with MF. Ruxolitinib produces spleen reduction and symptom improvement in MF
patients. However, its side effects include increased anemia and transfusion dependence. In the SIMPLIFY-1 clinical trial of
ruxolitinib in JAK-naïve patients, transfusion dependence increased from 24.0% to 40.1% after 24 weeks of treatment with
ruxolitinib. Ruxolitinib has not been shown to have a significant effect on bone marrow fibrosis reversion, which has been
documented as a primary cause of morbidity and mortality in MF. Many patients cannot initiate ruxolitinib therapy. Many
other patients may not tolerate treatment with ruxolitinib or will have an insufficient response. Patients generally have poor
prospects for survival following discontinuation of therapy with ruxolitinib.
7
Data from the MANIFEST trial as of December 10, 2018, show preliminary evidence of improved hemoglobin and platelet
levels, conversion to transfusion independence (which we believe, based on clinical feedback, rarely happens spontaneously
in MF patients) and improved bone marrow fibrosis, suggesting that CPI-0610 may have disease-modifying effects in MF.
We believe that there are no disease-modifying drugs as first or subsequent lines of therapy approved for treatment of patients
suffering from MF.
We believe that at least two-thirds of the 17,000 to 20,000 of the MF patients in the United States are intermediate- or / high-
risk patients and are therefore eligible for systemic treatment, including ruxolitinib. Incyte Corporation, or Incyte, which
markets ruxolitinib, has estimated that 40% of these eligible patients receive treatment with ruxolitinib. We believe that CPI-
0610 may provide a treatment option for patients who cannot be treated with, or who receive an inadequate response to,
ruxolitinib.
Clinical Development
Phase 2 Clinical Trial. We are evaluating CPI-0610 in an open-label Phase 2 clinical trial as a second-line treatment for MF.
In this trial, we are enrolling patients in a combination arm of CPI-0610 with ruxolitinib or in a monotherapy arm. In the
combination arm, we are enrolling patients who have an inadequate response or lack of response while being treated with
ruxolitinib, but who remain on ruxolitinib treatment. In this arm, we add on CPI-0610 to ruxolitinib treatment. In the
monotherapy arm, we are enrolling patients who had disease progression despite prior treatment with ruxolitinib or
discontinued ruxolitinib due to toxicity or certain patients who are not eligible for treatment with ruxolitinib. We have
stratified patients for dependence on red-blood-cell transfusion in both the combination and monotherapy arms with a goal to
better understand the impact of CPI-0610 on both transfusion-dependent and transfusion-independent patients. We begin
treatment with each patient at a dose of 125 mg of CPI-0610 once per day in each arm of the trial and may titrate up to 225
mg, which was the maximum tolerated dose in our Phase 1 trial in patients with lymphoma. We are evaluating safety,
pharmacokinetics, spleen size measured by MRI and palpation, patient-reported symptom assessment, and red-blood-cell and
platelet counts. We are also testing CPI-0610 in combination with ruxolitinib in ruxolitinib-naïve patients (first-line setting).
We are also collecting and analyzing biomarkers to assess molecular features of the biology of BET proteins and myeloid
cells, which may allow us to enrich for patients who are most likely to respond to treatment with CPI-0610.
Note: CPI-0610 is dosed in 21-day cycles, with 14 days on treatment and 7 days off treatment.
Enrollment is on track in this trial. We now have approximately 20 clinical trial sites in U.S., Canada and Europe. As of
February 28, 2019, we had enrolled 28 patients in the second-line arms. As of the last data cutoff on December 10, 2018, two
of these patients in the combination arm had been treated for longer than 16 months and two of these patients in the
monotherapy arm had been treated for longer than 12 months. The primary endpoints of this trial are the reduction in spleen
volume from baseline measured by MRI after 24 weeks of treatment and the red-blood-cell transfusion independence rate in
patients who are transfusion dependent at baseline. Red-blood-cell transfusion independence is defined as absence of red-
blood-cell transfusions. Secondary endpoints of the trial include change in patient-reported outcomes and the frequency of
red-blood-cell transfusions.
8
We have observed preliminary evidence of clinical activity from the four patients that have been treated in the trial for more
than one year. Specifically, as of December 10, 2018, we observed spleen volume reduction from baseline measured by MRI
in each patient. The figure below shows the best spleen volume response as measured by MRI for each of the four patients as
of December 10, 2018.
We also observed symptom improvement in each of these four patients. We have also observed improvements in red-blood-
cell counts in three of four patients, indicating a possible improvement in bone marrow function. One patient who required
regular red-blood-cell transfusions prior to treatment has been transfusion independent for more than 52 weeks as of
December 10, 2018. Additionally, despite not receiving red-blood-cell transfusions, the patient’s hemoglobin levels have
increased substantially, and the patient’s platelet counts also improved during this period. The figure below presents, as of
December 10, 2018, the hemoglobin levels and platelet counts during the trial of this patient, including both the transfusion-
dependent and transfusion-independent periods.
Transfusion-Dependent Patient Treated with CPI-0610 and Ruxolitinib
9
We saw trends of increasing hemoglobin levels in each of the four patients treated for more than one year in the MANIFEST
trial, as seen below:
We observed evidence of bone marrow improvement in the first two patients evaluable for this condition. These patients
were treated with CPI-0610 as a monotherapy. As of December 10, 2018, each of these patients experienced an improvement
of one grade (on a scale of 3-0) in bone marrow fibrosis, as seen in the images below obtained from reticulin staining:
The safety profile of CPI-0610 in the MANIFEST trial as of December 10, 2018, has generally been consistent with that
observed in Phase 1 clinical trials, which is discussed below. The patient population being tested includes several patients
with multiple mutations that we believe may indicate a poor prognosis.
In October 2018, the FDA granted Fast Track designation to CPI-0610 in treatment of myelofibrosis. The FDA grants Fast
Track designation to facilitate the development and expedite the review of drugs to treat serious or life-threatening diseases
and fill unmet medical needs. A drug that receives Fast Track designation is eligible for more frequent meetings with the
FDA to discuss the drug’s development plan and ensure collection of appropriate data needed to support drug approval, more
frequent written communication about the design of the proposed clinical trials and use of biomarkers, eligibility for
accelerated approval and priority review, and rolling review.
Phase 1 Clinical Trial. We evaluated CPI-0610 in three Phase 1 clinical trials in an aggregate of 138 patients with
hematological malignancies. We treated 64 patients with lymphoma, 44 patients with acute myelogenous leukemia and
myelodysplastic syndromes, and 30 patients with multiple myeloma. In each trial, we evaluated CPI-0610 administered daily
for two weeks followed by one week with no treatment. CPI-0610 was well tolerated in each trial.
The primary endpoint of each trial was to establish the safety of CPI-0610 as a single agent by evaluating the frequency of
dose-limiting toxicities associated with treatment with CPI-0610 in a 21 days’ cycle, consisting of 14 days on and 7 days off
the drug. In our trial in patients with lymphoma, we determined 225 mg of CPI-0610 once daily to be the maximum tolerated
dose, with the dose-limiting toxicity being thrombocytopenia, which is an on-target dose-dependent toxicity generally
associated with BET inhibition. Grade 3/4 thrombocytopenia was reported in 17% of the patients treated across three Phase 1
trials of CPI-0610. The platelet count recovered in most patients who experienced thrombocytopenia after one week off
10
treatment of CPI-0610. One case of thrombocytopenia was determined to be a treatment-related serious adverse event. There
were 29 treatment-related serious adverse events in the three trials, consisting of diarrhea (five cases), vomiting (two cases),
hypertension (two cases), pleuritic pain (two cases), and one case each of abdominal pain, abnormal liver function test,
adrenal hemorrhage, adrenal insufficiency, chills, colitis, confusion, dehydration, fatigue, febrile neutropenia, genital herpes,
hyponatremia, hypotension, increase in blood creatine, lung infection, mania, nausea, and thrombocytopenia. The most
frequently reported treatment-related adverse events included nausea, fatigue, decreased appetite, diarrhea, vomiting,
dysgeusia, and anemia.
In the dose-seeking trial of CPI-0610 in patients with lymphoma, there were 38 evaluable patients, and we observed four
objective responses, consisting of two complete responses and two partial responses under the 2007 Revised Response
Criteria for Malignant Lymphoma (Cheson criteria) by investigator assessment. We also observed reductions in tumor size in
patients that did not qualify as objective responses. One patient who had a complete response underwent curative bone
marrow transplantation after treatment with CPI-0610. Moreover, three patients with ABC-DLBCL, a cancer subtype
characterized by high levels of NF-(cid:6)B signaling, who were treated at therapeutic levels (at least 125 mg of CPI-0610)
experienced an objective response, consisting of one complete response and two partial responses.
CPI-1205—EZH2 Inhibitor
Overview
Historically, the primary focus of EZH2 as a drug target has been the role of EZH2 mutations or overexpression in cancer.
We believe these genetically defined approaches to EZH2 inhibition may underestimate the broader therapeutic potential of
the target in cancer. EZH2 genomic aberrations and overexpression are frequently correlated with late-stage cancer and a
poor prognosis for a wide variety of cancers, including prostate cancer. Furthermore, EZH2 also cooperates with other
cancer-promoting pathways, such as androgen receptor signaling and immune signaling. Therefore, we believe EZH2
inhibition can synergistically enhance the effectiveness of existing cancer therapies.
CPI-1205, one of our two lead product candidates, is a small molecule designed to promote anti-tumor activity by specifically
inhibiting EZH2, an enzyme that suppresses target gene expression. In in vitro and in vivo models, we observed a dose-
proportional inhibition of EZH2 by CPI-1205 that correlated with the tumor-growth-inhibiting activity. We completed a
Phase 1 clinical trial of CPI-1205 as a monotherapy in 32 patients with relapsed B-cell lymphoma in which CPI-1205
demonstrated clinical activity and was well tolerated.
We also observed in preclinical studies that CPI-1205 inhibited tumor growth as a single agent and synergistically enhanced
the efficacy of cancer therapies, including ARS inhibitors, in a prostate cancer model. Based on these observations and the
limited options for patients who progress on ARS inhibitors, we prioritized clinical development of CPI-1205 as a
combination therapy with ARS inhibitors in mCRPC.
There is a significant need for new therapies in mCRPC, particularly in a second-line setting. Approximately 60-80% of
patients taking an ARS inhibitor (enzalutamide or abiraterone acetate) first-line achieve PSA reductions of 50% or more, with
PSA progression-free survival generally ranging from 9 to 15 months. When patients’ response to this first-line therapy
becomes inadequate, second-line therapy generally consists of switching patients to the other approved ARS inhibitor. Data
from a third-party study presented at the 2018 meeting of the American Society of Clinical Oncology, or the Chi study,
showed the following PSA responses and time to progression for abiraterone acetate use as a second-line treatment after
enzalutamide and enzalutamide use as a second-line treatment after abiraterone acetate:
11
Thirty-six patients were enrolled in the Phase 1b portion of the ProSTAR trial of CPI-1205 in mCRPC in combination with
either abiraterone acetate or enzalutamide. This clinical trial established the safety, pharmacokinetics and pharmacodynamics
of CPI-1205 combined with the standard dose of either enzalutamide or abiraterone acetate. We observed evidence of clinical
activity in both arms of the trial. We observed evidence of clinical activity as measured by each of the parameters evaluated
in the trial —PSA reductions, CTC reductions and objective responses by RECIST. The patient population in ProSTAR
Phase 1b differed from that in the Chi study mentioned above in several respects, such as that the ProSTAR Phase 1b trial
included patients who had received prior chemotherapy treatments and patients with worse prognosis than those in the Chi
study.
Based on the clinical observations in the Phase 1b portion of ProSTAR trial and the determination of the recommended dose
in combination with abiraterone acetate or enzalutamide, we initiated the Phase 2 portion of the trial. We are studying CPI-
1205 in combination with both enzalutamide and abiraterone acetate based on the clinical activity and safety profile
demonstrated by CPI-1205 with either of these two ARS inhibitors in the Phase 1b portion. The Phase 2 portion consists of a
randomized trial of CPI-1205 + enzalutamide versus enzalutamide alone, as well as a single arm evaluating CPI-1205 +
abiraterone acetate / prednisone. The abiraterone acetate arm of the Phase 2 study was designed as a single arm given the
very low response rate and short duration of response observed in abiraterone acetate treatment in clinical trials of second-
line treatment of mCRPC, including the Chi study. We have initiated dosing in the Phase 2 portion in both the enzalutamide
and abiraterone acetate arms. In addition, as a result of encouraging results observed in a heavily pretreated compassionate-
use patient, we have also added an arm to the ProSTAR trial for heavily pretreated patients who have progressed on
abiraterone acetate, enzalutamide, and chemotherapy and have measurable soft-tissue metastatic disease.
Enrollment is on track in the Phase 2 portion of this trial. We aim to present data from the Phase 1b portion of ProSTAR at
the AACR meeting on April 1, 2019, and an update on initial Phase 2 data in the second half of 2019. Preliminary data from
this trial suggest CPI-1205 has the potential to offer benefits beyond the current standard of care. If the ProSTAR trial is
successful, we expect to initiate a pivotal Phase 3 clinical trial of CPI-1205 in combination with enzalutamide or abiraterone
acetate for the treatment of mCRPC.
EZH2 Inhibition in Cancer
EZH2 acts as an epigenetic writer and normally regulates gene expression by placing one or more methyl groups on a histone
protein leading to the suppression of gene expression programs. While this effect of EZH2 on gene expression is a normal
part of cellular development, some cancers depend on an abnormal pattern of gene expression and re-direct EZH2 to genes
that become abnormally repressed. Cancer cells with these abnormal gene expression programs may be more resistant to anti-
cancer therapies.
Abnormal EZH2 function has been implicated in cancer in a number of ways:
• Cancer genetics: mutations in the gene encoding EZH2 result in the altered enzymatic activity of EZH2, and cancer
cells become dependent on this abnormal activity for tumor growth. Alternatively, mutations in other epigenetic
regulators can change the genes expressed by cancer cells and indirectly create a dependence on EZH2 for cancer cell
growth;
• Acquired drug resistance: therapeutic agents promote EZH2-mediated gene silencing that may lead to acquired
resistance to these agents; and
•
Immune suppression: EZH2 mediates reprogramming of immune cells within the tumor, e.g., T-cells, and tumor cells
to create an immune-suppressive tumor microenvironment.
There is a strong association between EZH2 expression and disease progression in mCRPC. A therapeutic approach that
targets EZH2 may result in better outcomes than those achieved with approved therapeutic agents that treat mCRPC.
In prostate cancer, the androgen receptor is a key regulator of gene expression and acts as the mediator of androgen signaling
in prostate cells. The AR signaling pathway is the primary pathway used by prostate cancer cells to promote tumor growth.
As shown below, we believe that EZH2, by suppressing certain gene sets, enhances AR signaling, which can lead to
increased tumor growth.
12
In preclinical studies, we observed enhanced gene expression changes in prostate cancer cells treated with a combination of
enzalutamide and CPI-1205 as compared to enzalutamide treatment alone. As seen below, the increases or decreases in gene
expression with enzalutamide depicted by red and blue bars in the left column are generally the same in color and greater in
intensity with the enzalutamide + CPI-1205 combination in the right column.
13
This corroborates our hypothesis that EZH2 functionally cooperates with androgen receptor signaling to promote prostate
cancer growth. Preclinical studies have also found that the concentrations of the combinations of enzalutamide and CPI-1205
necessary to kill 90% of prostate cancer cells is much lower than that theoretically predicted if no synergistic activity
occurred, as seen below.
We also believe that EZH2 is utilized by prostate cancer cells to establish resistance to ARS inhibitors. We have observed in
preclinical studies that EZH2 inhibitors, such as CPI-1205, in combination with ARS inhibitors synergistically killed tumor
cells and demonstrated activity in models that are resistant to ARS inhibitors.
Metastatic Castration-Resistant Prostate Cancer
According to the American Cancer Society, or ACS, prostate cancer is the second most common type of cancer among men
in the United States and the second leading cause of cancer death in this population. In 2018, the ACS estimated that in the
United States approximately 165,000 men will be diagnosed with prostate cancer per year and that there will be
approximately 29,000 deaths per year due to prostate cancer.
The growth and survival of prostate cancer cells depend primarily on the androgen receptor signaling pathway. Cancer cells
can use the binding of androgens to androgen receptors to trigger abnormal cell growth and tumor progression. The standard
of care for the treatment of advanced prostate cancer is androgen deprivation therapy, or ADT, which induces medical
castration or surgical castration to achieve reduced testosterone levels. Medical castration involves gonadotropin-releasing
hormone antagonists, alone or in combination with first-generation anti-androgen therapy. Most men with prostate cancer
treated with ADT respond, as measured by tumor regression, relief of symptoms, and reductions in serum prostate-specific
antigen, or PSA, levels and are considered to have hormone-sensitive prostate cancer. However, almost all prostate cancer
patients eventually experience a recurrence in tumor growth despite ADT. These patients are diagnosed with castration-
resistant prostate cancer, or CRPC, which refers to prostate cancer that progresses despite ADT and is characterized by low
serum testosterone levels. The development of CRPC following ADT is due in part to tumor cells that adapt to the hormone-
deprived environment of the prostate.
Castration-resistant prostate cancer that spreads, or metastasizes, to other parts of the body is diagnosed as mCRPC and may
be characterized by increasing PSA levels, elevated CTC counts, bone metastases, and soft tissue disease. CTCs are cells that
have been shed from a primary tumor and are carried around the body in the blood and may lead to metastases. According to
a meta-analysis of Phase 3 clinical trials published in a peer-reviewed third-party scientific publication, elevated CTC counts
have been demonstrated to be an indicator of poor prognosis for overall survival in patients with mCRPC. According to the
published analysis, a 30% decline in CTC counts as early as four weeks after treatment initiation suggests that advanced
prostate cancer patients may benefit from treatment.
Patients with mCRPC have an average survival of approximately 30 months and experience a deterioration in quality of life
despite treatment with the available therapeutic options. The standard practice is to treat mCRPC with an ARS inhibitor,
including abiraterone acetate or enzalutamide. These products are approved in the United States for first-line therapy in
chemotherapy-naïve patients with mCRPC as well as for second-line treatment in patients who have received prior
chemotherapy.
14
We believe that there are approximately 140,000 men in the United States living with castration-resistant prostate cancer and
that the majority of those patients will develop mCRPC. Based on third-party data, we estimate that there are approximately
30,000 to 50,000 new mCRPC patients per year in the United States. Most patients progress from earlier prostate cancer
stages, while some patients are initially diagnosed with metastatic disease. We believe that most patients with mCRPC
receive treatment with at least one ARS inhibitor. According to published literature, approximately 60-80% of patients with
mCRPC respond to first-line treatment with either abiraterone acetate or enzalutamide, with nine to 15 months of PSA
progression-free survival. Of those who have a PSA response, a large majority eventually develop resistance to ARS
inhibitors. Resistance mechanisms to ARS inhibitors include AR amplification and overexpression and circulating androgen
receptor splice variant-7, or ARV7, which is a constitutively active version of the AR that is no longer inhibited by ARS
inhibitors. ARV7 is a marker for aggressive mCRPC.
If patients with mCRPC have disease progression after treatment with an ARS inhibitor, they may be treated with either
chemotherapy or a different ARS inhibitor. Experts that treat mCRPC patients estimated that only 10-30% of patients will
respond to the second-line treatment with a different ARS inhibitor and that the response achieved is typically less than half
as durable, with two to three months of PSA progression-free survival, as compared to the response observed with first-line
ARS inhibitor treatment. These estimates have recently been corroborated by the Chi study at ASCO in 2018. After treatment
and progression with a second ARS inhibitor or chemotherapy, patients with mCRPC have very limited treatment options
other than pain management and other palliative care options. We believe patients who have received either abiraterone
acetate or enzalutamide as a first- or second-line therapy would be candidates for combination therapy with these therapies
and CPI-1205.
Clinical Development
ProSTAR Trial: Phase 1b/2 Clinical Trial in Combination with ARS Inhibitors. We are currently conducting an open-label
Phase 1b/2 clinical trial of CPI-1205 in combination with either abiraterone acetate or enzalutamide in patients with mCRPC
who had previously progressed on treatment with the other ARS inhibitor. The design of the ProSTAR trial is depicted
below.
In the Phase 1b portion of the trial, 36 mCRPC patients were treated with CPI-1205 in combination with either abiraterone
acetate or enzalutamide. Patients who experienced disease progression on treatment with abiraterone acetate were treated
with a combination of enzalutamide and CPI-1205, and patients who experienced disease progression on treatment with
enzalutamide were treated with a combination of abiraterone acetate and CPI-1205. The Phase 1b portion of this trial
established the safety, pharmacokinetics, pharmacodynamics, maximum tolerated dose, and a recommended Phase 2 dose of
CPI-1205 with these agents. The Phase 1b portion of the trial also observed evidence of clinical activity in both arms and in
each of the parameters measured—PSA reductions, CTC reductions, and objective responses by RECIST. We intend to
present data from the Phase 1b portion of the trial at the AACR meeting on April 1, 2019.
In the Phase 1b portion of ProSTAR as of February 6, 2019, the enzalutamide + CPI-1205 combination and the abiraterone
acetate + CPI-1205 combination were both generally well-tolerated. The most frequent side effects were diarrhea, fatigue,
and nausea of mild severity. There were no treatment-related serious adverse events reported. One patient treated with the
combination of CPI-1205 and abiraterone acetate discontinued treatment prior to completing one cycle (28 days) due to
elevated liver enzymes, or transaminases. The elevated transaminases were asymptomatic and reversible. This patient also
had clinical disease progression. No other dose-limiting toxicities were observed. One patient treated with the combination of
CPI-1205, abiraterone acetate, and a co-medication that inhibits the enzyme CYP3A4 involved in drug metabolism had
evidence of progression and died due to complications of pneumonia after two cycles of treatment in the trial. The clinical
investigator concluded that the fatal event was not related to treatment with the trial combination.
15
Based on preliminary results in the enzalutamide arm of the Phase 1b portion of ProSTAR, we initiated dosing in a
randomized Phase 2 portion evaluating CPI-1205 in combination with enzalutamide versus enzalutamide alone. While we
previously planned to test CPI-1205 in combination with only one ARS inhibitor in the Phase 2 portion of the trial, based on
promising data in the abiraterone acetate arm of the Phase 1b we decided to expand the Phase 2 portion of the study by
adding an arm evaluating CPI-1205 in combination with abiraterone acetate in mCRPC patients who progressed on prior
enzalutamide therapy. This arm will not be randomized against a control arm due to the low response rate and lack of
durability seen with abiraterone acetate in the second-line setting. We have initiated dosing in both the enzalutamide arms
and the abiraterone acetate arm. We also plan to collect and analyze biomarkers to assess molecular features of AR- and
EZH2-related biology, which may allow us to enrich for patients who are most likely to respond to treatment with CPI-1205.
Enrollment is on track in the Phase 2 portion of this trial. We intend to present an interim update of data of the Phase 2
portion of the ProSTAR trial at a medical meeting in the second half of 2019.
Compassionate Use. Two patients have been treated with a combination of CPI-1205 and enzalutamide under a
compassionate-use protocol based on the preliminary anti-tumor activity observed in our Phase 1b clinical trial and because
these patients did not meet the eligibility criteria for the ProSTAR trial. The first patient’s cancer previously progressed on
treatment with both abiraterone acetate and enzalutamide as well as multiple chemotherapy treatments, treatment with
immune checkpoint inhibitors, treatment with a tyrosine kinase enzyme inhibitor, and radium regimens. Shortly after first
dosing with CPI-1205 and enzalutamide, treatment was interrupted for approximately four days due to non-treatment-
associated pneumonia. Based on an assessment taken two weeks after initiation of therapy, this patient was observed to have
an 80% reduction in PSA levels and showed evidence of tumor size reduction in the neck by palpation. Subsequently, the
patient was found to have progressive disease in the liver, stopped therapy, and died shortly thereafter due to disease
progression. The second patient was heavily pretreated with abiraterone acetate, enzalutamide, and docetaxel. This patient
stopped chemotherapy without evidence of progressive disease and began treatment with CPI-1205 and enzalutamide,
rendering us unable to evaluate the results of treatment. This patient discontinued the experimental combination due to
disease progression. Based on the encouraging results in the first patient, we initiated an expansion arm in the ProSTAR trial
of up to 30 heavily pretreated patients to determine whether the combination of CPI-1205 and enzalutamide could provide
them with a meaningful benefit.
ORIOn-E Trial: Phase 1b/2 Clinical Trial in Combination with Immune Checkpoint Inhibitors. We initiated ORIOn-E, a
Phase 1b/2 clinical trial of CPI-1205 in combination with ipilimumab or pembrolizumab for the treatment of patients with
solid tumors who have previously progressed on treatment with an immune checkpoint inhibitor that inhibits programmed
death-ligand 1, (PD-L1), or programmed cell death protein 1 (PD-1). Similar to the ProSTAR trial, patients were given an
800 mg dose of CPI-1205 three times per day, and we also explored the use of the same co-medication mentioned above to
boost the exposure and lower the dose of CPI-1205 in this trial. The primary endpoint of the Phase 1b trial was to establish
the maximum tolerated dose and the recommended Phase 2 dose of CPI-1205 with these agents. We assessed any dose-
limiting toxicities according to CTCAE.
As of February 6, 2019, 24 patients in the Phase 1b trial had been treated with CPI-1205, consisting of 12 patients treated
with the combination of CPI-1205 and ipilimumab and 12 patients treated with the combination of CPI-1205 and
pembrolizumab. We observed preliminary evidence of activity. Three patients reported treatment-related serious adverse
events, as follow: One patient experienced nausea and vomiting that resolved after treatment. Two patients experienced
autoimmune hepatitis / transaminase elevations, including one taking the ipilimumab + CPI-1205 combination and one taking
the pembrolizumab + CPI-1205 combination. Both cases had complete resolution of transaminases after steroid treatment. In
addition, 14 patients discontinued treatment due to disease progression, consisting of seven patients taking the ipilimumab +
CPI-1205 combination and seven patients taking the pembrolizumab + CPI-1205 combination.
In the second half of 2018, we decided not to proceed with the Phase 2 portion of ORIOn-E. The decision was based on
prioritization to focus on CPI-1205 development efforts in metastatic castration-resistant prostate cancer and on other
priorities. We may consider exploring combinations of CPI-1205 with checkpoint inhibitors as part of a broader clinical
development strategy in the future.
Phase 1 Monotherapy Studies. We have evaluated CPI-1205 as monotherapy in a Phase 1 clinical trial in 32 patients with
progressive / relapsed lymphoma, including 22 patients in the dose-escalation portion of the trial and ten patients in the
expansion portion of the trial. We evaluated escalating doses of CPI-1205 administered on a continuous twice-daily dosing
basis. Patients in the dose-escalation portion of the trial received CPI-1205 doses of 200, 400, 800, and 1,600 mg. The
primary endpoint of the trial was to establish the safety of CPI-1205 as a single agent by evaluating the frequency of dose-
limiting toxicities associated with treatment with CPI-1205 during the first 28 days of treatment. CPI-1205 was well tolerated
at all dose levels with no dose-limiting toxicities reported during the dose-escalation phase. The most frequent adverse events
in the Phase 1 trial were diarrhea, nausea, fatigue, a decrease in lymphocyte count, and muscle spasms, which were mostly
grade 1 and grade 2. The most common study drug-related event experienced was diarrhea, which was reported by
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nine (28.1%) patients, followed by nausea reported by eight (25.0%) patients and fatigue by four (12.5%) patients. These
events were mainly mild in severity and manageable with adequate supportive care. Only 5 (15.6%) patients had study-drug-
related treatment-emergent adverse events, or TEAEs, of Grade 3 or higher. Decreased lymphocyte count was the only drug-
related TEAE, with severity of Grade 3 or higher reported by more than two patients. At least one serious TEAE was
reported by 15 (46.9%) patients. There were two possibly treatment-related serious adverse events, consisting of nausea and
toxic epidermal necrolysis. The secondary endpoints of the trial were to characterize the safety and tolerability of CPI-1205,
the pharmacokinetics of CPI-1205, the pharmacodynamic effects of CPI-1205 in lymphoma biopsy tissue, bone marrow, and
skin biopsy tissue, and circulating subsets of normal immune cells and any anti-lymphoma activity that may be associated
with CPI-1205
Patients in the dose-escalation portion of the trial were not selected on the basis of an EZH2 mutation. We observed dose-
dependent increases in CPI-1205 exposure and evidence of target engagement at multiple dose levels. As of January 2018,
two of the lymphoma patients treated with CPI-1205 as a monotherapy had objective partial metabolic responses to treatment
by independent central review under the 2014 Lugano Response Criteria for Hodgkin and Non-Hodgkin lymphoma, or
Lugano criteria, and one patient had durable stable disease. Under the Lugano criteria, responses are assessed using a
PET/CT scan and are scored on a five-point scale. A partial metabolic response has a score of four or five with reduced tumor
glucose uptake and suggests responding disease at interim and residual disease at end of treatment. Stable disease has a score
of four or five with no significant change in tumor glucose uptake from baseline at interim or end of treatment. Both patients
with partial metabolic responses were enrolled in the 1,600 mg cohort, one with germinal center-B-cell-like diffuse large B-
cell lymphoma and one with follicular lymphoma. Both patients had progressive reductions in tumor volume. In addition, as
of May 25, 2018, one patient with small lymphocytic lymphoma enrolled in the 200 mg cohort who remained on treatment
has had stable disease for more than 32 treatment cycles. This patient transitioned to a single patient IND. The patient
discontinued treatment and had stable disease in her last assessment.
We made a strategic decision to prioritize development of CPI-1205 in solid tumors, despite encouraging clinical data in our
Phase 1 trial in patients with refractory lymphoma, primarily due to our evaluation of the potential pathway to regulatory
approval and the potential commercial opportunities in solid tumors.
Preclinical Studies. We have conducted preclinical studies using in vitro prostate cancer cell models in which our
observations suggested that CPI-1205 affected the viability of androgen-receptor-dependent prostate cancer cells in a
concentration-dependent manner. These results were achieved consistently throughout the preclinical studies using in vitro
prostate cancer cell models. We also observed that CPI-1205 affected the viability of two different established prostate cancer
cell models of ARS inhibitor resistance: cell models that expressed ARV7 and cell models with engineered overexpression of
the androgen receptor, which are resistant to bicalutamide, an ARS inhibitor. In addition, we observed that CPI-1205
enhanced the activity of ARS inhibitors in androgen-receptor-dependent prostate cancer cell models. We observed synergy
with each combination of CPI-1205 and enzalutamide and of CPI-1205 and abiraterone acetate, and we believe that each
agent enhanced the activity of the other agent.
As shown below, we observed that CPI-1205 inhibited tumor growth in vivo as a single agent in a lymphoma xenograft
mouse model and may enhance the effectiveness of cancer therapies, including ARS inhibitors in a prostate cancer xenograft
mouse model and immune checkpoint inhibitors in a breast cancer mouse model.
CPI-1205 Monotherapy in Pfeiffer
Lymphoma Xenograft Mouse Model
Combination with ARS Inhibitor in
Prostate Cancer Xenograft
Mouse Model
Combination with Immune
Checkpoint Inhibitor in Breast Cancer
Mouse Model
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The results in the lymphoma xenograft model presented above are consistent with similar studies of CPI-1205 as a
monotherapy in that and other lymphoma xenograft models. The lymphoma xenograft model was powered for statistical
significance. We used a conventional method of assessing statistical significance known as a one-way analysis of variance, or
ANOVA, and the p-value for this study was less than 0.0001. p-value is a conventional method for measuring the statistical
significance of experimental results. A p-value of less than 0.05 is generally considered to represent statistical significance,
meaning that there is a less than five percent likelihood that the observed results occurred by chance. We have not conducted
additional studies in the other two models presented above. These two models were not powered for statistical significance.
We also conducted additional preclinical studies of CPI-1205 in models of tumor types other than those discussed above.
Depending on the tumor type, we observed varied levels of tumor growth inhibition at a given CPI-1205 dosing regimen, and
the results of those studies helped inform our clinical development strategy.
CPI-0209—Second-Generation EZH2 Inhibitor
We designed CPI-0209, our second-generation EZH2 inhibitor, to achieve comprehensive coverage of EZH2 to potentially
enable rapid and durable tumor regression. We believe that such a product would enable us to expand the addressable patient
populations beyond those that have been targeted by first-generation EZH2 inhibitors. We are currently advancing CPI-0209
in IND-enabling studies and plan to initiate a Phase 1 clinical trial in solid tumors in mid-2019.
In preclinical studies, we observed that CPI-0209 bound to EZH2 more durably and with higher affinity when compared to
first-generation EZH2 inhibitors. We believe that these characteristics may enable CPI-0209 to increase the level and
duration of EZH2 inhibition compared to that of CPI-1205. Product candidates that provide more comprehensive and longer
inhibition of EZH2 may treat certain cancer types requiring that effect. We believe that the level of EZH2 inhibition
necessary to produce a therapeutic effect varies across cancer types based on our preclinical studies where we have observed
that the dose required to affect tumor growth is higher in certain cancer types. As illustrated below, we have also observed
that CPI-0209 produced tumor regression beginning after five days of initiation of treatment in a lymphoma xenograft mouse
model. In an ARV7+ prostate cancer model, a disease type for which ARS inhibitors have not been found to be effective, we
observed that CPI-0209 stopped tumor growth after 21 days of treatment. Based on this, we hypothesize that CPI-0209 can
potentially be effective in other tumor models where first-generation EZH2 inhibitors would be less effective.
Rapid and Durable Tumor Regression in Lymphoma Xenograft Mutated EZH2 Model (left) and Prostate Cancer Xenograft
ARV7+ Model (right)
We plan to develop CPI-0209 for the treatment of solid tumors. We believe that mutations can render these tumor cells
dependent on the activity of EZH2 and that cancer cells can use EZH2 as a resistance mechanism against therapeutic agents.
We are considering developing CPI-0209 in one or more of these contexts.
Discovery Programs
We are currently advancing several programs against additional epigenetic regulators focused on the tumor and the immune
microenvironment. Our immuno-epigenetics efforts are focused on pathways relevant for immune cell re-programming or
increasing tumor immunogenicity to drive tumor rejection. We remain committed to advancing programs that normalize
abnormal cell gene expression within cancer cells.
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Sales and Marketing
In light of our stage of development, we have not yet established a commercial organization or distribution capabilities. We
have retained worldwide commercial rights for our product candidates. If our product candidates receive marketing approval,
we plan to commercialize them in the United States with our own focused specialty sales force.
Manufacturing
We do not have any manufacturing facilities or personnel. We currently rely on, and expect to continue to rely on, third
parties for the manufacture of our product candidates for preclinical and clinical testing, as well as for commercial
manufacture if our product candidates receive marketing approval. We have entered into clinical supply agreements with
contract manufacturers.
We obtain materials for CPI-1205 and CPI-0610 from multiple third-party manufacturers. We engage separate third-party
manufacturers for the finish-and-fill services for CPI-1205 and CPI-0610. For CPI-0209, we have engaged a third-party
manufacturer to produce the active pharmaceutical ingredient and another third-party manufacturer for the finish-and-fill
services.
All of our product candidates are small molecules and are manufactured in reliable and reproducible synthetic processes from
readily available starting materials. The chemistry is amenable to scale up and does not require unusual equipment. We
expect to continue to develop product candidates that can be produced cost-effectively at contract manufacturing facilities.
Competition
The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition,
and a strong emphasis on proprietary products. While we believe that our technologies, knowledge, experience, and scientific
resources provide us with competitive advantages, we face competition from many sources, including major pharmaceutical,
specialty pharmaceutical, and biotechnology companies, academic institutions and governmental agencies, and public and
private research institutions. Any product candidates that we successfully develop and commercialize will compete with
existing therapies and new therapies that may become available in the future.
There are a large number of companies developing or marketing treatments for cancer, including many large pharmaceutical
and biotechnology companies. In addition, many companies are developing cancer therapies that work by targeting epigenetic
mechanisms, including through EZH2 and BET inhibition.
Many of the companies against which we are competing or against which we may compete in the future have significantly
greater financial resources and expertise in research and development, manufacturing, preclinical testing, clinical testing,
regulatory review, and marketing than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industry
may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early-stage
companies may also prove to be significant competitors, particularly through collaborative arrangements with large and
established companies. These competitors also compete with us in recruiting and retaining qualified scientific and
management personnel, establishing clinical trial sites, and enrolling patients in clinical trials, as well as in acquiring
technologies complementary to, or necessary for, our programs.
The key competitive factors affecting the success of all of our therapeutic product candidates, if approved, are likely to be
their efficacy, safety, convenience, and price, the availability and effectiveness of related companion diagnostics in guiding
the use of related therapeutics, the level of generic competition, and the availability of reimbursement from government and
other third-party payers.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are
safer or more effective, have fewer or less severe side effects, are more convenient, or are less expensive than any products
that we may develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than
we can for ours, which could result in our competitors establishing a strong market position before we can enter the market.
In addition, our ability to compete may be affected in many cases by insurers or other third-party payers seeking to encourage
the use of generic products. Generic products that broadly address these indications are currently on the market for the
indications that we are pursuing, and additional products are expected to become available on a generic basis over the coming
years. If our product candidates achieve marketing approval, we expect that they will be priced at a significant premium over
competitive generic products.
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The most common methods of treating patients with cancer are surgery, radiation, and drug therapy. There are a variety of
available drug therapies marketed for cancer. In many cases, these drugs are administered in combination to enhance
efficacy. While our product candidates may compete with many existing drug and other therapies, to the extent they are
ultimately used in combination with or as an adjunct to these therapies our product candidates will not compete with them.
Some of the currently approved drug therapies are branded and subject to patent protection, and others are available on a
generic basis. Many of these approved drugs are well established therapies and are widely accepted by physicians, patients,
and third-party payers.
In addition to currently marketed therapies, there are also a number of products in late-stage clinical development to treat
cancer. These products in development may provide efficacy, safety, convenience, and other benefits that are not provided by
currently marketed therapies. As a result, they may provide significant competition for any of our product candidates for
which we obtain marketing approval.
If our lead product candidates are approved for the indications for which we are currently undertaking clinical trials, they will
compete with the therapies and currently marketed drugs discussed below.
CPI-0610 / Myelofibrosis
Ruxolitinib, a JAK1/JAK2 inhibitor developed and marketed by Incyte, was approved by the FDA in 2011 as a first-line
treatment for high- and intermediate-risk myelofibrosis patients. There are no products approved by the FDA or regulatory
authorities outside the United States as a second-line treatment for patients who no longer respond to or tolerate treatment
with ruxolitinib. Many companies are developing product candidates or combination regimens that may compete with CPI-
0610, if approved, as a combination regimen with ruxolitinib or as monotherapy in patients who have received prior
ruxolitinib therapy.
Incyte is developing treatments for second-line therapy in patients with MF that combine ruxolitinib with PI3 kinase
inhibitors and provirus integration site for moloney murine leukemia virus kinase inhibitors. Incyte may develop these
combinations in a co-formulated oral dosage form, which could increase the convenience of these combination regimens.
There are several other companies developing JAK1/JAK2 inhibitors as a first-line and second-line treatment of patients with
MF. Celgene Corporation, or Celgene, acquired fedratinib in January 2018 as part of its acquisition of Impact Biosciences,
Inc. In January 2019, Bristol-Myers Squibb proposed acquiring Celgene. Fedratinib has been evaluated in clinical trials as
first- and second-line treatments for MF. Celgene has disclosed that an NDA was filed for regulatory approval of fedratinib in
myelofibrosis at the end of 2018. Celgene has also disclosed the potential to combine fedratinib with other products, such as
the erythroid maturation agent luspatercept. CTI Biopharma Corp. is conducting a Phase 3 trial of pacritinib in MF patients
with thrombocytopenia in the United States. Nippon Shinyaku is conducting a Phase 2 trial with NS-018 in patients with MF.
Sierra Oncology is developing momelotinib, a JAK1/ACVR1 inhibitor for MF and associated anemia.
CPI-0610 could face competition from products with different biological targets that are in development as a therapeutic
option for patients with MF with prior exposure to ruxolitinib, including as a monotherapy or in combination with ruxolitinib.
These products include kinase inhibitors, telomerase inhibitors, and other epigenetic inhibitors. Geron Corporation is
conducting a Phase 2 trial evaluating imetelstat, a telomerase inhibitor, in patients with MF who have relapsed after or are
refractory to prior treatment with a JAK inhibitor. Imago BioSciences, Inc., is conducting a Phase 1 trial of IMG-7289 with
an inhibitor of LSD1, which is an epigenetic target, in patients with MF. MEI Pharma, Inc., and Helsinn are conducting a
Phase 2 trial of pracinostat, a histone deacetylase inhibitor in MF patients on treatment with ruxolitinib.
We are aware of several companies that are developing BET inhibitors, including AbbVie, Bristol-Myers Squibb, Celgene,
GlaxoSmithKline, F. Hoffmann-La Roche, or Roche, Pfizer, Boehringer Ingelheim, SignalRx and Zenith Epigenetics.
CPI-1205 / mCRPC
CPI-1205 could face competition from ARS inhibitors, chemotherapies, and products with alternative mechanisms.
Competing ARS inhibitors include enzalutamide (Xtandi®), which is marketed by Pfizer and Astellas, and abiraterone acetate
(Zytiga®), which is marketed by Janssen. In February 2018, the FDA approved apalutamide (Erleada®), an ARS inhibitor
developed by Janssen for the treatment of non-metastatic CRPC, a disease state when the cancer no longer responds to
medical or surgical treatments that lower testosterone but has not yet been discovered in other parts of the body. In late 2018,
generic versions of abiraterone acetate were launched. Bayer is conducting Phase 3 clinical trials with darolutamide, an ARS
inhibitor in non-metastatic CRPC and in metastatic hormone-sensitive prostate cancer. Additionally, each of these products is
a potential alternative for CPI-1205-based combination therapy for patients whose disease has progressed after initial
treatment with an ARS inhibitor.
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Janssen received regulatory approval for abiraterone acetate in combination with androgen deprivation therapy in hormone-
naïve metastatic prostate cancer in February 2018. Pfizer and Astellas completed a Phase 3 trial with enzalutamide in non-
metastatic castration-resistant prostate cancer, and the FDA granted Priority Review of a Supplemental New Drug
Application based on these data in March 2018. Bayer reported in February 2019 the successful completion of a Phase 3
clinical trial with darolutamide plus androgen deprivation therapy (ADT) in non-metastatic castration-resistant prostate
cancer.
Competing chemotherapies include docetaxel (Taxotere), cabazitaxel (Jevtana), and sipuleucel-T (Provenge), which each
provide an option for patients who may not wish to continue treatment with an ARS inhibitor. Product candidates targeting
prostate-specific membrane antigen (PSMA) include the radioligand Lu-177-PSMA-617 (Endocyte, acquired in 2019 by
Novartis), AMG160 (Amgen), and HPN424 (Harpoon).
CPI-1205 may also face competition from products with alternative mechanisms of action including poly-ADP-ribose
polymerase, or PARP, inhibitors, targeted therapies including polo-like kinase inhibitors and protein kinase B, or AKT,
inhibitors, immune checkpoint inhibitors and other immunotherapy-based mechanisms. Several companies are conducting
clinical development of PARP inhibitors in prostate cancer, including AstraZeneca, Clovis Oncology, Pfizer, AbbVie and
Janssen/Tesaro (Glaxo SmithKline acquired Tesaro in 2019).
CPI-1205 could also face competition from products targeting similar or alternative epigenetic mechanisms. Zenith
Epigenetics and GlaxoSmithKline are each testing BET inhibitors (ZEN-3694 and GSK 525762, respectively) in Phase 1
trials in patients with mCRPC. Pfizer initiated clinical development of an EZH2 inhibitor, PF-06821497, in a Phase 1b/2 trial
that includes a combination arm with enzalutamide in mCRPC. Jiangsu HengRui is conducting a Phase 1/2 clinical trial of
SHR2554, an EZH2 inhibitor, alone or in combination with SHR3680, an androgen receptor antagonist, in mCRPC.
CellCentric. is developing CCS1477, a P300/CBP inhibitor, and is conducting Phase 1 clinical trials in prostate cancer.
Epizyme, Inc. is conducting Phase 2 clinical trials of tazemetostat, an EZH2 inhibitor, in solid tumors and hematological
malignancies and has announced plans to develop the compound in prostate cancer. Merck is conducting Phase 3 clinical
trials of pembrolizumab in combination with chemotherapy, enzalutamide, and olaparib in prostate cancer.
Intellectual Property
We strive to protect and enhance the proprietary technology, inventions and improvements that are commercially important
to the development of our business, including by seeking, maintaining and defending patent rights, whether developed
internally or licensed from third parties. We also rely on trade secrets, know-how, continuing technological innovation and
in-licensing opportunities to develop, strengthen and maintain our proprietary position in the field of epigenetic small
molecule drug discovery.
Our future commercial success depends, in part, on our ability to: obtain and maintain patent and other proprietary protection
for commercially important technology, inventions and know-how related to our business; defend and enforce our patents;
preserve the confidentiality of our trade secrets; and operate without infringing, misappropriating or violating the valid and
enforceable patents and proprietary rights of third parties. Our ability to stop third parties from making, using, selling,
offering to sell or importing our products may depend on the extent to which we have rights under valid and enforceable
patents or trade secrets that cover these activities. With respect to both our owned and licensed intellectual property, we
cannot be sure that patents will issue with respect to any of our owned or licensed pending patent applications or with respect
to any patent applications that we or our licensors may file in the future, nor can we be sure that any of our owned or licensed
patents or any patents that may be issued in the future to us or our licensors will be commercially useful in protecting our
product candidates and methods of manufacturing the same. Moreover, other than for CPI-1205 and CPI-0610, we have
generally not sought, and may be unable to obtain, patent protection for certain of our product candidates generally as well as
with respect to certain indications. See “Risk factors—Risks related to our intellectual property” for a more comprehensive
description of risks related to our intellectual property. We generally file patent applications directed to our key programs,
including CPI-1205, CPI-0209 and CPI-0610, in an effort to establish our intellectual property positions regarding new
compositions relating to these programs as well as uses of these and similar compositions in the treatment of relevant
diseases. We also seek patent protection with respect to methods of making these compositions and to biomarkers that may
be useful in establishing or monitoring the efficacy of these compositions in patients. As of January 17, 2019, we owned 19
issued or allowed U.S. patents, six U.S. pending non-provisional patent applications, one pending reissue application (which
has now been allowed), 141 issued or allowed foreign patents, 20 foreign pending patent applications, 10 pending Patent
Cooperation Treaty, or PCT, application and seven U.S. provisional patent applications. The foreign issued patents and patent
applications are in a number of jurisdictions, including Australia, Brazil, Canada, Chile, Colombia, Eurasia, Europe, Hong
Kong, India, Indonesia, Israel, Japan, Korea, Malaysia, Mexico, New Zealand, Philippines, Singapore, and South Africa for
CPI-1205 and including Australia, Brazil, Canada, Eurasia, Europe, Hong Kong, India, Israel, Japan, Korea, Mexico, New
Zealand, Singapore, and South Africa for CPI-0610. Additionally, our epigenetics platform is not protected by any patented
intellectual property.
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The intellectual property portfolios for our most advanced programs as of January 17, 2019, are summarized below.
Prosecution is a lengthy process, during which the scope of the claims initially submitted for examination by the USPTO can
be significantly narrowed by the time they issue, if they issue at all. We expect this could be the case with respect to some of
our pending patent applications referred to below.
CPI-0610 / BET Inhibitor Program
The intellectual property portfolio for our CPI-0610 program includes patents and applications directed to compositions of
matter generically and specifically covering CPI-0610 and related BET inhibitors, as well as to methods for using and
making these novel compositions. As of January 17, 2019, we owned three issued or allowed U.S. patents, two issued or
allowed European Patent Office patents, and approximately 57 foreign patents and patent applications in a number of other
jurisdictions relating to our CPI-0610 program. The U.S. or ex-U.S. issued patents or patents issuing from these pending
applications, if any, for our CPI-0610 program are projected to have a statutory expiration date from December 2031 to June
2035, excluding any additional term for patent term adjustments or patent term extensions.
In addition to patent protection, we rely upon unpatented trade secrets and confidential know-how and continuing
technological innovation to develop and maintain our competitive position. However, trade secrets and confidential know-
how are difficult to protect. We seek to protect our proprietary information, in part, using confidentiality agreements with any
future collaborators, scientific advisors, employees and consultants, and invention assignment agreements with our
employees. We also have agreements requiring assignment of inventions with selected consultants, scientific advisors and
collaborators. These agreements may not provide meaningful protection. These agreements may also be breached, and we
may not have an adequate remedy for any such breach. In addition, our trade secrets and/or confidential know-how may
become known or be independently developed by a third party or misused by any collaborator to whom we disclose such
information. Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy
aspects of our products or to obtain or use information that we regard as proprietary. Although we take steps to protect our
proprietary information, third parties may independently develop the same or similar proprietary information or may
otherwise gain access to our proprietary information. As a result, we may be unable to meaningfully protect our trade secrets
and proprietary information. See “Risk factors—Risks related to our intellectual property” for a more comprehensive
description of risks related to our intellectual property.
CPI-1205 / EZH2 Inhibitor Program
The intellectual property portfolio for our CPI-1205 program includes patents and applications directed to compositions of
matter generically and specifically covering CPI-1205 and related EZH2 inhibitors, as well as to methods for using and
making these novel compositions. As of January 17, 2019, we owned five issued or allowed U.S. patents, two issued or
allowed European Patent Office patents, five U.S. pending non-provisional patent applications, one pending U.S. reissue
application (which has been now allowed), approximately 80 foreign patents and patent applications in a number of other
jurisdictions, and six pending PCT applications relating to our CPI-1205 program. Of our owned U.S. patents, three are
issued U.S. composition of matter patents that contain claims covering CPI-1205 specifically and generically. We are aware
of prior art that may invalidate some but not all of the generic claims included in one of the composition of matter patents.
While we believe that the specific claims and the other generic claims contained in our issued U.S. composition of matter
patents provide protection for the composition of matter of CPI-1205 and are not implicated by such prior art, third parties
may nevertheless challenge such claims and if such specific claims, or any such other generic claims on which we may rely,
are invalidated or rendered unenforceable for any reason, we will lose valuable intellectual property rights and our ability to
prevent others from competing with us would be impaired. The U.S.- or ex-U.S.-issued patents or patents issuing from these
pending applications, if any, for our CPI-1205 program are projected to have statutory expiration dates between February
2033 and December 2039, excluding any additional term for patent term adjustments or patent term extensions.
CPI-0209 / Second-Generation EZH2 Inhibitor Program
We own one pending U.S. provisional patent application covering the composition of matter and methods of use of CPI-
0209. However, we do not currently own or in-license any issued patents or non-provisional patent applications covering our
CPI-0209 product candidate. Our provisional patent application is not eligible to become an issued patent until, among other
things, we file a non-provisional patent application within 12 months of filing the provisional application. If we do not timely
file any non-provisional patent applications, we may lose our priority date with respect to our provisional patent application
and any patent protection on the inventions disclosed in our provisional patent application. While we intend to timely file
non-provisional patent applications relating to our provisional patent application, we cannot predict whether any of our future
patent applications for CPI-0209 or any other future product candidates will result in the issuance of patents that effectively
protect CPI-0209 and any other future product candidates, or if any of our or our licensors’ issued patents will effectively
22
prevent others from commercializing competitive products. Publications of discoveries in the scientific literature often lag
behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published
until 18 months after filing or in some cases not at all until they are issued as a patent. Therefore, we and our licensors cannot
be certain that we were the first to make the inventions claimed in our licensed patents, patents we own in the future, or
pending patent applications, or that we or our licensors were the first to file for patent protection of such inventions.
License and Collaboration Agreements
License and Collaboration Agreement with Genentech
In January 2012, we entered into a license and collaboration agreement with Genentech, Inc., and F. Hoffmann-La Roche
Ltd, collectively referred to as Genentech. We refer to this agreement as the collaboration agreement. Our performance
obligations under the collaboration agreement are complete.
Under the collaboration agreement, we and Genentech conducted a three-year research collaboration program to discover and
validate certain epigenetic targets, or the Targets, and to discover and develop compounds suitable for clinical development
that bind to and modulate those Targets. Genentech had the right to obtain the exclusive right to develop product candidates
that target certain of the Targets. We refer to any such licensed product as a Genentech Licensed Product. In December 2014,
Genentech selected three Targets and acquired such exclusive rights with respect to these Targets. In August 2018,
Genentech terminated its exclusive rights to two of the three selected Targets. Following this termination, we have been
conducting and are permitted to conduct research and development activities with respect to those two Targets. We refer to
the remaining Target for which Genentech holds exclusive rights as the Genentech Target. The Genentech Target is not
currently a target that is part of our clinical, preclinical or discovery programs. Genentech is obligated to use commercially
reasonable efforts to develop at least one product for the Genentech Target.
Under the collaboration agreement, we granted an exclusive, sublicensable license to Genentech under certain of our
intellectual property to make, have made, use, sell, offer for sale, import, research, discover and develop the Genentech
Target and certain compounds and products that bind to and modulate the Genentech Target. We refer to this license as the
Genentech Target License. We also granted Genentech a non-exclusive license under certain of our intellectual property in
order for Genentech to make, use and import compounds created during the research collaboration or provided by us to
Genentech during the research collaboration, for Genentech’s internal research purposes relating to biological targets that are
not Targets.
Genentech paid us $40 million as an upfront payment under the collaboration agreement and provided additional funds for
our research activities under the research collaboration. With respect to the Genentech Target, the collaboration agreement
provides for milestone payments and future sales-based milestones and royalties payable to us by Genentech upon
achievement of specified milestones and sales targets by Genentech. Specifically, for the first Genentech Licensed Product to
achieve a milestone for the Genentech Target, Genentech has agreed to pay us up to an aggregate of $208 million for certain
preclinical and clinical milestones, regulatory approval and sales milestones, and certain other sales milestones if the
Genentech Licensed Product is covered by a valid claim of an issued patent in certain of our intellectual property. To date,
Genentech has paid us $0.8 million for the achievement of a preclinical milestone with respect to one Genentech Target. We
did not receive any milestone payments or royalties in the years ended December 31, 2018 and 2017.
Genentech is also obligated to pay us tiered royalties ranging from mid-single-digit to low-teen percentages on net sales of
Genentech Licensed Products if covered by a valid claim of an issued patent in certain of our intellectual property in the
country of sale, and a low-single digit royalty on net sales of Genentech Licensed Products if covered only by certain pending
patent applications in certain of our intellectual property in the country of sale. These royalties are subject to reduction or
elimination in certain circumstances. Genentech’s royalty obligations continue on a Genentech Licensed Product on a
country-by-country basis until, as applicable, (i) the expiration of the last-to-expire valid claim covering the Genentech
Licensed Product in the country of sale if the Genentech Licensed Product is covered by a valid issued claim of a license
patent, or (ii) , the date on which the Genentech Licensed Product is no longer covered by such a pending licensed patent
application in the country of sale, if the Genentech Licensed Product is covered only by a valid pending claim of a licensed
patent application. Based on the current status of the licensed patents and patent applications, any such payments are not
likely to extend beyond May 2037. Following Genentech’s termination of its exclusive rights to two of the three selected
Targets in August 2018, we are obligated to pay Genentech a low-single-digit royalty on net sales of any licensed products
we develop that target such terminated Targets and are covered by a valid issued claim in the intellectual property jointly
developed by us and Genentech during the research collaboration.
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The collaboration agreement will expire when all the payment obligations under the collaboration agreement expire. We and
Genentech may each terminate the collaboration agreement in whole or with respect to a country for a Genentech Target or a
Genentech Licensed Product if the other party materially breaches the collaboration agreement and does not cure the breach
within a specified time period. Genentech may terminate the collaboration agreement for convenience in whole or with
respect to a country for a Genentech Target or Genentech Licensed Product on 90 days’ prior written notice. We and
Genentech may each terminate the collaboration agreement if the other party undergoes certain bankruptcy events. If
Genentech terminates the collaboration agreement as a whole or with respect to a Genentech Target, Genentech Licensed
Product or country for our uncured material breach or bankruptcy event, the licenses we granted to Genentech would become
irrevocable and, instead of paying the milestones and royalties described above, Genentech would pay us a low-single-digit
royalty on net sales of the Genentech Licensed Products with respect to which the collaboration agreement was terminated if
such Genentech Licensed Products are covered by a valid claim of an issued patent in certain of our intellectual property in
the terminated countries, which royalties are subject to reduction or elimination in certain circumstances.
In January 2012, we entered into an option agreement with Genentech under which we granted Genentech an option to
acquire all of our equity interests. In August 2015, Genentech notified us that it elected not to exercise the option, and the
option is no longer exercisable.
Research, Development and Commercialization Agreement with the Leukemia & Lymphoma Society
In July 2012, we entered into a research, development and commercialization agreement with the Leukemia & Lymphoma
Society, or LLS. We refer to the agreement as the LLS Agreement. Under the LLS Agreement, LLS agreed to provide
funding for the development of a compound targeted toward certain tandem bromodomain-containing proteins, designed for
and researched for use in the treatment of lymphoma, myelodysplastic syndrome, acute myelogenous leukemia or multiple
myeloma, or the Field, in accordance with an agreed-upon budget and milestones, which we call the research program. The
LLS Agreement initially required us to perform the development activities on a compound that we are no longer developing.
We and LLS amended the LLS Agreement in April 2013 to allow us to propose alternative compounds to LLS and for LLS
to decide whether it would fund the research program for an alternative compound. We proposed CPI-0610, and LLS agreed
to fund CPI-0610 as the alternative compound in June 2013. We and LLS further amended the LLS Agreement in June 2013,
June 2014 and March 2016 to reflect changes to the research program milestones.
LLS has agreed to pay us up to $7.5 million, or the LLS Funding, toward the costs of the research program. We may use such
funding solely to pay or reimburse expenses of the research program in accordance with an agreed-upon budget. As of
December 31, 2018, LLS has paid us $7.3 million in aggregate, and we expect that the milestones which would trigger the
remaining $0.2 million will be achieved in 2019. We are obligated, and have to date provided funding, to match LLS’s
funding to support the research program.
We are obligated to use commercially reasonable efforts to conduct the research program substantially in accordance with an
agreed-upon research plan with the goal of developing an LLS Product for commercial sale. Once the research program is
complete, we are obligated to use, at our own expense, commercially reasonable efforts to develop at least one LLS Product
in the Field in the United States, France, Germany, Italy, Spain, the United Kingdom or Japan, or the major market countries,
and, following receipt of regulatory approval for at least one LLS Product in any major market country, to commercialize the
LLS Product in the Field in such country. If we fail to meet the foregoing obligation, then, under certain circumstances, LLS
may terminate the agreement and LLS may exercise the exclusive, sublicensable, worldwide license we granted LLS in
certain of our intellectual property to develop and commercialize CPI-0610.
We are obligated to pay to LLS up to $25 million, which would be payable in variable portions based on our execution of any
agreement to license or permanently transfer rights to CPI-0610 or an LLS Product to an unaffiliated third party, on the
closing of a change of control of our company, or on the receipt of regulatory approval in certain of the major market
countries, which we refer to as the Payment Cap Payments. Our payment obligations to LLS continue until satisfied and
otherwise only terminate upon a termination of the LLS Agreement by us in the event of a material breach by LLS. The LLS
Agreement expires when there are no longer any payment obligations owing from one party to the other with respect to any
of these provisions.
We and LLS may terminate the LLS agreement for a material breach by the other party that is not cured within a specified
period. LLS may terminate the LLS Agreement if we are debarred by the FDA or excluded from health care programs, or if
we knowingly use for any services under the LLS Agreement any individual or entity who is debarred or excluded, or if we
undergo certain bankruptcy events. If LLS terminates the LLS Agreement because we are debarred by the FDA or excluded
from health care programs, or knowingly use the services of any individual or entity who is debarred or excluded for any
services under the LLS Agreement, or we materially breach the LLS Agreement and do not cure within the specified time
period, we are obligated to repay LLS the LLS Funding and, if we continue development of the LLS Product thereafter, we
also must pay LLS the Payment Cap Payments.
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Government Regulation and Product Approvals
Government authorities in the United States at the federal, state and local level, and in other countries and jurisdictions,
including the European Union, extensively regulate, among other things, the research, development, testing, manufacture,
pricing, reimbursement, quality control, approval, packaging, storage, recordkeeping, labeling, advertising, promotion,
distribution, marketing, post-approval monitoring and reporting, and import and export of biopharmaceutical products. The
processes for obtaining marketing approvals in the United States and in foreign countries and jurisdictions, along with
compliance with applicable statutes and regulations and other regulatory authorities, require the expenditure of substantial
time and financial resources.
Approval and Regulation of Drugs in the United States
In the United States, drug products are regulated under the Federal Food, Drug and Cosmetic Act, or FDCA, and applicable
implementing regulations and guidance. The failure of an applicant to comply with the applicable regulatory requirements at
any time during the product development process, including non-clinical testing, clinical testing, the approval process or
post-approval process, may result in delays to the conduct of a study, regulatory review and approval and/or administrative or
judicial sanctions. These sanctions may include, but are not limited to, the FDA’s refusal to allow an applicant to proceed
with clinical trials, refusal to approve pending applications, license suspension or revocation, withdrawal of an approval,
imposition of a clinical hold, issuance of warning letters and other types of letters, adverse publicity, product recalls, product
seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts,
restitution, disgorgement of profits or civil or criminal investigations and penalties brought by the FDA or Department of
Justice, or DOJ, or other government entities, including state agencies.
An applicant seeking approval to market and distribute a new drug in the United States generally must satisfactorily complete
each of the following steps before the product candidate will be approved by the FDA:
• preclinical testing including laboratory tests, animal studies and formulation studies, which must be performed in
accordance with the FDA’s good laboratory practice, or GLP, regulations and standards;
•
submission to the FDA of an IND for human clinical testing, which must become effective before human clinical trials
may begin;
• approval by an independent institutional review board, or IRB, representing each clinical site before each clinical trial
may be initiated;
• performance of adequate and well-controlled human clinical trials to establish the safety, potency and purity of the
product candidate for each proposed indication, in accordance with current good clinical practices, or GCP;
• preparation and submission to the FDA of a new drug application, or NDA, for a drug product which includes not only
the results of the clinical trials, but also detailed information on the chemistry, manufacture and quality controls for the
product candidate and proposed labelling for one or more proposed indication(s);
•
•
•
review of the product candidate by an FDA advisory committee, where appropriate or if applicable;
satisfactory completion of an FDA inspection of the manufacturing facility or facilities, including those of third parties,
at which the product candidate or components thereof are manufactured to assess compliance with current good
manufacturing practices, or cGMP, requirements and to assure that the facilities, methods and controls are adequate to
preserve the product’s identity, strength, quality and purity;
satisfactory completion of any FDA audits of the non-clinical and clinical trial sites to assure compliance with GCP and
the integrity of clinical data in support of the NDA;
• payment of user fees and securing FDA approval of the NDA to allow marketing of the new drug product; and
• compliance with any post-approval requirements, including the potential requirement to implement a Risk Evaluation
and Mitigation Strategy, or REMS, and the potential requirement to conduct any post-approval studies required by the
FDA.
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Preclinical Studies
Before an applicant begins testing a product candidate with potential therapeutic value in humans, the product candidate
enters the preclinical testing stage, including in vitro and animal studies to assess the safety and activity of the drug for initial
testing in humans and to establish a rationale for therapeutic use. Preclinical tests include laboratory evaluations of product
chemistry, formulation and stability, as well as other studies to evaluate, among other things, the toxicity of the product
candidate. The conduct of the preclinical tests and formulation of the compounds for testing must comply with federal
regulations and requirements, including GLP regulations and standards. The results of the preclinical tests, together with
manufacturing information, analytical data, any available clinical data or literature and plans for clinical trials, among other
things, are submitted to the FDA as part of an IND. Some long-term preclinical testing, such as animal tests of reproductive
adverse events and carcinogenicity and long-term toxicity studies may continue after the IND is submitted.
The IND and IRB Processes
An IND is an exemption from the FDCA that allows an unapproved product candidate to be shipped in interstate commerce
for use in an investigational clinical trial and a request for FDA authorization to administer such investigational product to
humans. Such authorization must be secured prior to interstate shipment and administration of any product candidate that is
not the subject of an approved NDA. In support of a request for an IND, applicants must submit a protocol for each clinical
trial, and any subsequent protocol amendments must be submitted to the FDA as part of the IND. In addition, the results of
the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and
plans for clinical trials, among other things, must be submitted to the FDA as part of an IND. The FDA requires a 30-day
waiting period after the filing of each IND before clinical trials may begin. This waiting period is designed to allow the FDA
to review the IND to determine whether human research subjects will be exposed to unreasonable health risks. At any time
during this 30-day period or thereafter, the FDA may raise concerns or questions about the conduct of the trials as outlined in
the IND and impose a clinical hold or partial clinical hold. In these cases, the IND sponsor and the FDA must resolve any
outstanding concerns before clinical trials can begin.
Following commencement of a clinical trial under an IND, the FDA may also place a clinical hold or partial clinical hold on
that trial. Clinical holds are imposed by the FDA whenever there is concern for patient safety and may be a result of new
data, findings, or developments in clinical, nonclinical, and/or chemistry, manufacturing, and controls (CMC). A clinical
hold is an order issued by the FDA to the sponsor 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 clinical work requested under the IND. For
example, a specific protocol or part of a protocol may not be allowed to proceed, while other protocols may be allowed. No
more than 30 days 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 issuance of a clinical hold or partial clinical hold, a clinical trial may only
resume after the FDA has so notified the sponsor. The FDA will base that determination on information provided by the
sponsor correcting the deficiencies previously cited or otherwise satisfying the FDA that the clinical trial can proceed.
A sponsor may choose, but is not required, to conduct a foreign clinical study under an IND. When a foreign clinical study is
conducted under an IND, all FDA IND requirements must be met unless waived. When a foreign clinical study is not
conducted under an IND, the sponsor must ensure that the study complies with certain regulatory requirements of the FDA in
order to use the study as support for an IND or application for marketing approval. Specifically, on April 28, 2008, the FDA
amended its regulations governing the acceptance of foreign clinical studies not conducted under an investigational new drug
application as support for an IND or a new drug application. The final rule provides that such studies must be conducted in
accordance with GCP, including review and approval by an independent ethics committee, or IEC, and informed consent
from subjects. The GCP requirements in the final rule encompass both ethical and data integrity standards for clinical studies.
The FDA’s regulations are intended to help ensure the protection of human subjects enrolled in non-IND foreign clinical
studies, as well as the quality and integrity of the resulting data. They further help ensure that non-IND foreign studies are
conducted in a manner comparable to that required for IND studies.
In addition to the foregoing IND requirements, an IRB representing each institution participating in the clinical trial must
review and approve the plan for any clinical trial before it commences at that institution, and the IRB must conduct
continuing review and reapprove the study at least annually. The IRB must review and approve, among other things, the
study protocol and informed consent information to be provided to study subjects. An IRB must operate in compliance with
FDA regulations. An IRB can suspend or terminate approval of a clinical trial at its institution, or an institution it represents,
if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the product candidate has been
associated with unexpected serious harm to patients.
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Additionally, some trials are overseen by an independent group of qualified experts organized by the trial sponsor, known as
a data safety monitoring board or committee, or DSMB. This group provides authorization as to whether or not a trial may
move forward at designated check points based on access that only the group maintains to available data from the study.
Suspension or termination of development during any phase of clinical trials can occur if it is determined that the participants
or patients are being exposed to an unacceptable health risk. Other reasons for suspension or termination may be made by us
based on evolving business objectives and/or the competitive environment.
Information about clinical trials must be submitted within specific timeframes to the National Institutes of Health, or NIH, for
public dissemination on its ClinicalTrials.gov website.
Expanded Access to an Investigational Drug for Treatment Use
Expanded access, sometimes called “compassionate use,” is the use of investigational new drug products outside of clinical
trials to treat patients with serious or immediately life-threatening diseases or conditions when there are no comparable or
satisfactory alternative treatment options. The rules and regulations related to expanded access are intended to improve access
to investigational drugs for patients who may benefit from investigational therapies. FDA regulations allow access to
investigational drugs under an IND by the company or the treating physician for treatment purposes on a case-by-case basis
for: individual patients (single-patient IND applications for treatment in emergency settings and non-emergency settings);
intermediate-size patient populations; and larger populations for use of the drug under a treatment protocol or Treatment IND
Application.
When considering an IND application for expanded access to an investigational product with the purpose of treating a patient
or a group of patients, the sponsor and treating physicians or investigators will determine suitability when all of the following
criteria apply: patient(s) have a serious or immediately life-threatening disease or condition, and there is no comparable or
satisfactory alternative therapy to diagnose, monitor, or treat the disease or condition; the potential patient benefit justifies the
potential risks of the treatment and the potential risks are not unreasonable in the context or condition to be treated; and the
expanded use of the investigational drug for the requested treatment will not interfere initiation, conduct, or completion of
clinical investigations that could support marketing approval of the product or otherwise compromise the potential
development of the product.
On December 13, 2016, the 21st Century Cures Act established (and the 2017 Food and Drug Administration
Reauthorization Act later amended) a requirement that sponsors of one or more investigational drugs for the treatment of a
serious disease(s) or condition(s) make publicly available their policy for evaluating and responding to requests for expanded
access for individual patients. Although these requirements were rolled out over time, they have now come into full effect.
This provision requires drug and biologic companies to make publicly available their policies for expanded access for
individual patient access to products intended for serious diseases. Sponsors are required to make such policies publicly
available upon the earlier of initiation of a Phase 2 or Phase 3 study; or 15 days after the drug or biologic receives designation
as a breakthrough therapy, fast track product, or regenerative medicine advanced therapy.
In addition, on May 30, 2018, the Right to Try Act, was signed into law. The law, among other things, provides a federal
framework for certain patients to access certain investigational new drug products that have completed a Phase I clinical trial
and that are undergoing investigation for FDA approval. Under certain circumstances, eligible patients can seek treatment
without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded access program. There is
no obligation for a drug manufacturer to make its drug products available to eligible patients as a result of the Right to Try
Act, but the manufacturer must develop an internal policy and respond to patient requests according to that policy.
Human Clinical Trials in Support of an NDA
Clinical trials involve the administration of the investigational product candidate to human subjects under the supervision of a
qualified investigator in accordance with GCP requirements, which include, among other things, the requirement that all
research subjects provide their informed consent in writing before their participation in any clinical trial. Clinical trials are
conducted under written clinical trial protocols detailing, among other things, the objectives of the study, inclusion and
exclusion criteria, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated.
Human clinical trials are typically conducted in three sequential phases, but the phases may overlap or be combined.
Additional studies may also be required after approval.
Phase 1 clinical trials are initially conducted in a limited population to test the product candidate for safety, including adverse
effects, dose tolerance, absorption, metabolism, distribution, excretion and pharmacodynamics in healthy humans or in
patients. During Phase 1 clinical trials, information about the investigational drug product’s pharmacokinetics and
pharmacological effects may be obtained to permit the design of well-controlled and scientifically valid Phase 2 clinical
trials.
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Phase 2 clinical trials are generally conducted in a limited patient population to identify possible adverse effects and safety
risks, evaluate the efficacy of the product candidate for specific targeted indications and determine dose tolerance and
optimal dosage. Multiple Phase 2 clinical trials may be conducted by the sponsor to obtain information prior to beginning
larger and more costly Phase 3 clinical trials. Phase 2 clinical trials are well controlled, closely monitored and conducted in a
limited patient population.
Phase 3 clinical trials proceed if the Phase 2 clinical trials demonstrate that a dose range of the product candidate is
potentially effective and has an acceptable safety profile. Phase 3 clinical trials are undertaken within an expanded patient
population to further evaluate dosage, provide substantial evidence of clinical efficacy and further test for safety in an
expanded and diverse patient population at multiple, geographically dispersed clinical trial sites. A well-controlled,
statistically robust Phase 3 clinical trial may be designed to deliver the data that regulatory authorities will use to decide
whether or not to approve, and, if approved, how to appropriately label a drug. Such Phase 3 studies are referred to as
“pivotal.”
In some cases, the FDA may approve an NDA for a product candidate but require the sponsor to conduct additional clinical
trials to further assess the product candidate’s safety and effectiveness after approval. Such post-approval trials are typically
referred to as Phase 4 clinical trials. These studies are used to gain additional experience from the treatment of a larger
number of patients in the intended treatment group and to further document a clinical benefit in the case of drugs approved
under Accelerated Approval regulations. Failure to exhibit due diligence with regard to conducting Phase 4 clinical trials
could result in withdrawal of approval for products.
Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently
if serious adverse events occur. In addition, IND safety reports must be submitted to the FDA for any of the following:
serious and unexpected suspected adverse reactions; findings from other studies or animal or in vitro testing that suggest a
significant risk in humans exposed to the product; and any clinically important increase in the case of a serious suspected
adverse reaction over that listed in the protocol or investigator brochure. Phase 1, Phase 2 and Phase 3 clinical trials may not
be completed successfully within any specified period, or at all. Furthermore, the FDA or the sponsor may suspend or
terminate a clinical trial at any time on various grounds, including a finding that the research subjects are being exposed to an
unacceptable health risk. 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 accordance with the IRB’s requirements or if the product
has been associated with unexpected serious harm to patients. The FDA will typically inspect one or more clinical sites to
assure compliance with GCP and the integrity of the clinical data submitted.
Concurrent with clinical trials, companies often complete additional animal studies. They must also develop additional
information about the chemistry and physical characteristics of the drug as well as finalize a process for manufacturing the
product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of
consistently producing quality batches of the drug candidate and, among other things, must develop methods for testing the
identity, strength, quality, purity and potency of the final drug. Additionally, appropriate packaging must be selected and
tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable
deterioration over its shelf life.
Pediatric Studies
Under the Pediatric Research Equity Act of 2003, an NDA or supplement thereto must contain data that are adequate to
assess the safety and effectiveness of the product for the claimed indications in all relevant pediatric subpopulations and to
support dosing and administration for each pediatric subpopulation for which the product is safe and effective. Sponsors must
also submit pediatric study plans prior to the assessment data. Those plans must contain an outline of the proposed pediatric
study or studies the applicant plans to conduct, including study objectives and design, any deferral or waiver requests and
other information required by regulation. The applicant, the FDA, and the FDA’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 may request an
amendment to the plan at any time.
For drugs intended to treat a serious or life-threatening disease or condition, the FDA must, upon the request of an applicant,
meet to discuss preparation of the initial pediatric study plan or to discuss deferral or waiver of pediatric assessments. In
addition, the FDA will meet early in the development process to discuss pediatric study plans with sponsors, and the FDA
must meet with sponsors by no later than the end-of-phase 1 meeting for serious or life-threatening diseases and by no later
than ninety (90) days after the FDA’s receipt of the study plan.
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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 product for use in adults, or full or partial waivers from the pediatric data requirements.
Additional requirements and procedures relating to deferral requests and requests for extension of deferrals are contained in
the Food and Drug Administration Safety and Innovation Act, or FDASIA, in 2012. Unless otherwise required by regulation,
the pediatric data requirements do not apply to products with orphan designation.
The FDA Reauthorization Act of 2017 established new requirements to govern certain molecularly targeted cancer
indications. Any company that submits an NDA three years after the date of enactment of that statute must submit pediatric
assessments with the NDA if the drug is intended for the treatment of an adult cancer and is directed at a molecular target that
FDA determines to be substantially relevant to the growth or progression of a pediatric cancer. The investigation must be
designed to yield clinically meaningful pediatric study data regarding the dosing, safety and preliminary efficacy to inform
pediatric labeling for the product.
Review and Approval of an NDA
In order to obtain approval to market a drug product in the United States, a marketing application must be submitted to the
FDA that provides sufficient data establishing the safety, purity and potency of the proposed drug product for its intended
indication. The application includes all relevant data available from pertinent preclinical and clinical trials, including negative
or ambiguous results as well as positive findings, together with detailed information relating to the product’s chemistry,
manufacturing, controls and proposed labeling, among other things. Data can come from company-sponsored clinical trials
intended to test the safety and effectiveness of a use of a product, or from a number of alternative sources, including studies
initiated by independent investigators. To support marketing approval, the data submitted must be sufficient in quality and
quantity to establish the safety, purity and potency of the drug product to the satisfaction of the FDA.
The NDA is a vehicle through which applicants formally propose that the FDA approve a new product for marketing and sale
in the United States for one or more indications. Every new non-biologic drug product candidate must be the subject of an
approved NDA before it may be commercialized in the United States. Biologic Licensing Applications, of BLAs, are
submitted for approval of biologic products. Under federal law, the submission of most NDAs is subject to an application
user fee, which for federal fiscal year 2019 is $2,588,478 for an application requiring clinical data. The sponsor of an
approved NDA is also subject to an annual program fee, which for fiscal year 2019 is $309,915. Certain exceptions and
waivers are available for some of these fees, such as an exception from the application fee for products with orphan
designation, an exception from the program fee when the program does not engage in manufacturing the drug during a
particular fiscal year and a waiver for certain small businesses.
The FDA conducts a preliminary review of the application, generally within 60 calendar days of its receipt, and strives to
inform the sponsor within 74 days whether the application is sufficiently complete to permit substantive review. The FDA
may request additional information rather than accept the application for filing. In this event, the application must be
resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it
for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA has agreed to
specified performance goals in the review process of NDAs. Under that agreement, 90% of applications seeking approval of
New Molecular Entities, or NMEs, are meant to be reviewed within ten months from the date on which the FDA accepts the
application for filing, and 90% of applications for NMEs that have been designated for Priority Review are meant to be
reviewed within six months of the filing date. For applications seeking approval of products that are not NMEs, the ten-
month and six-month review periods run from the date that the FDA receives the application. The review process and the
Prescription Drug User Fee Act, or PDUFA, goal date may be extended by the FDA for three additional months to consider
new information or clarification provided by the applicant to address an outstanding deficiency identified by the FDA
following the original submission.
Before approving an application, the FDA typically will inspect the facility or facilities where the product is being or will be
manufactured. These pre-approval inspections may cover all facilities associated with an NDA submission, including
component manufacturing, finished product manufacturing and control testing laboratories. The FDA will not approve an
application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements
and adequate to assure consistent production of the product within required specifications. Additionally, before approving an
NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. Under the FDA
Reauthorization Act of 2017, the FDA must implement a protocol to expedite review of responses to inspection reports
pertaining to certain applications, including applications for products in shortage or those for which approval is dependent on
remediation of conditions identified in the inspection report.
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In addition, as a condition of approval, the FDA may require an applicant to develop a REMS. A REMS uses risk-
minimization strategies beyond the professional labeling to ensure that the benefits of the product outweigh the potential
risks. To determine whether a REMS is needed, the FDA will consider the size of the population likely to use the product, the
seriousness of the disease, the expected benefit of the product, the expected duration of treatment, the seriousness of known
or potential adverse events and whether the product is a new molecular entity.
The FDA may refer an application for a novel product to an advisory committee or explain why such referral was not made.
Typically, an advisory committee is a panel of independent experts, including clinicians and other scientific experts, that
review, evaluate and provide a recommendation as to whether the application should be approved and under what conditions.
The FDA is not bound by the recommendations of an advisory committee, but the FDA considers such recommendations
carefully when making decisions.
Fast Track, Breakthrough Therapy, Priority Review and Regenerative Advanced Therapy Designations
The FDA is authorized to designate certain products for expedited review if they are intended to address an unmet medical
need in the treatment of a serious or life-threatening disease or condition. These programs are referred to as Fast Track
designation, Breakthrough Therapy designation, Priority Review designation and Regenerative Advanced Therapy
designation.
Specifically, the FDA may designate a product for Fast Track review if it is intended, whether alone or in combination with
one or more other products, for the treatment of a serious or life-threatening disease or condition and it demonstrates the
potential to address unmet medical needs for such a disease or condition. For Fast Track products, sponsors may have greater
interaction with the FDA, and the FDA may initiate review of sections of a Fast Track product’s application before the
application is complete. This rolling review may be available if the FDA determines, after preliminary evaluation of clinical
data submitted by the sponsor, that a Fast Track product may be effective. The sponsor must also provide, and the FDA must
approve, a schedule for the submission of the remaining information, and the sponsor must pay applicable user fees.
However, the FDA’s time-period goal for reviewing a Fast Track application does not begin until the last section of the
application is submitted. In addition, the Fast Track designation may be withdrawn by the FDA if the FDA believes that the
designation is no longer supported by data emerging in the clinical trial process.
Second, a product may be designated as a Breakthrough Therapy if it is intended, either alone or in combination with one or
more other products, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that
the product may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints,
such as substantial treatment effects observed early in clinical development. The FDA may take certain actions with respect
to Breakthrough Therapies, including holding meetings with the sponsor throughout the development process; providing
timely advice to the product sponsor regarding development and approval; involving more senior staff in the review process;
assigning a cross-disciplinary project lead for the review team and taking other steps to design the clinical trials in an
efficient manner.
Third, the FDA may designate a product for Priority Review if it treats a serious condition and, if approved, would provide a
significant improvement in safety or effectiveness. The FDA determines, on a case-by-case basis, whether the proposed
product represents a significant improvement when compared with other available therapies. Significant improvement may
be illustrated by evidence of increased effectiveness in the treatment of a condition, elimination or substantial reduction of a
treatment-limiting product reaction, documented enhancement of patient compliance that may lead to improvement in serious
outcomes, and evidence of safety and effectiveness in a new subpopulation. A Priority Review designation is intended to
direct overall attention and resources to the evaluation of such applications and to shorten the FDA’s goal for taking action on
a marketing application from ten months to six months.
With passage of the 21st Century Cures Act, or the Cures Act, in December 2016, Congress authorized the FDA to accelerate
review and approval of products designated as Regenerative Advanced Therapies. A product is eligible for this designation if
it is a regenerative medicine therapy that is intended to treat, modify, reverse or cure a serious or life-threatening disease or
condition and if preliminary clinical evidence indicates that the product has the potential to address unmet medical needs for
such disease or condition. The benefits of a Regenerative Advanced Therapy designation include early interactions with the
FDA to expedite development and review, benefits available to breakthrough therapies, potential eligibility for Priority
Review and Accelerated Approval based on surrogate or intermediate endpoints.
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Accelerated Approval Pathway
The FDA may grant Accelerated Approval to a product for a serious or life-threatening condition that provides meaningful
therapeutic advantage to patients over existing treatments based upon a determination that the product has an effect on a
surrogate endpoint that is reasonably likely to predict clinical benefit. The FDA may also grant Accelerated Approval for
such a condition when the product has an effect on an intermediate clinical endpoint that can be measured earlier than an
effect on irreversible morbidity or mortality, or IMM, and that is reasonably likely to predict an effect on IMM or other
clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative
treatments. Products granted Accelerated Approval must meet the same statutory standards for safety and effectiveness as
those granted traditional approval.
For the purposes of Accelerated Approval, a surrogate endpoint is a marker, such as a laboratory measurement, radiographic
image, physical sign or other measure that is thought to predict clinical benefit but is not itself a measure of clinical benefit.
Surrogate endpoints can often be measured more easily or more rapidly than clinical endpoints. An intermediate clinical
endpoint is a measurement of a therapeutic effect that is considered reasonably likely to predict the clinical benefit of a drug,
such as an effect on IMM. The FDA has limited experience with Accelerated Approvals based on intermediate clinical
endpoints but has indicated that such endpoints generally may support Accelerated Approval where the therapeutic effect
measured by the endpoint is not itself a clinical benefit and basis for traditional approval, if there is a basis for concluding
that the therapeutic effect is reasonably likely to predict the ultimate clinical benefit of a product.
The Accelerated Approval pathway is most often used in settings in which the course of a disease is long and an extended
period of time is required to measure the intended clinical benefit of a product, even if the effect on the surrogate or
intermediate clinical endpoint occurs rapidly. Thus, Accelerated Approval has been used extensively in the development and
approval of products for treatment of a variety of cancers in which the goal of therapy is generally to improve survival or
decrease morbidity and the duration of the typical disease course requires lengthy and sometimes large trials to demonstrate a
clinical or survival benefit. Thus, the benefit of Accelerated Approval derives from the potential to receive approval based on
surrogate endpoints sooner than possible for trials with clinical or survival endpoints, rather than deriving from any explicit
shortening of the FDA approval timeline, as is the case with Priority Review.
The Accelerated Approval pathway is usually contingent on a sponsor’s agreement to conduct, in a diligent manner,
additional post-approval confirmatory studies to verify and describe the product’s clinical benefit. As a result, a product
candidate approved on this basis is subject to rigorous post-marketing compliance requirements, including the completion of
Phase 4 or post-approval clinical trials to confirm the effect on the clinical endpoint. Failure to conduct required post-
approval studies, or to confirm a clinical benefit during post-marketing studies, would allow the FDA to initiate expedited
proceedings to withdraw approval of the product. All promotional materials for product candidates approved under
accelerated regulations are subject to prior review by the FDA.
The FDA’s Decision on an NDA
On the basis of the FDA’s evaluation of the application and accompanying information, including the results of the
inspection of the manufacturing facilities, the FDA may issue an approval letter or a complete response letter. An approval
letter authorizes commercial marketing of the product with specific prescribing information for specific indications. A
complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing or
information in order for the FDA to reconsider the application. If and when those deficiencies have been addressed to the
FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to
reviewing such resubmissions in two or six months depending on the type of information included. Even with submission of
this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for
approval.
If the FDA approves a new product, it may limit the approved indications for use of the product, require that
contraindications, warnings or precautions be included in the product labeling, or require that post-approval studies, including
Phase 4 clinical trials, be conducted to further assess the drug’s safety after approval. The agency may also require testing
and surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution
restrictions or other risk management mechanisms, including a REMS, to help ensure that the benefits of the product
outweigh the potential risks. REMS programs can include medication guides, communication plans for health care
professionals, and elements to assure safe use, or ETASU. ETASU can include, but are not limited to, special training or
certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring and the use of
patent registries. The FDA may prevent or limit further marketing of a product based on the results of post-market studies or
surveillance programs. The FDA may require a REMS before or after approval if it becomes aware of a serious risk
associated with use of the product. The requirement for a REMS can materially affect the potential market and profitability of
a product. After approval, many types of changes to the approved product, such as adding new indications, changing
manufacturing processes and adding labeling claims, are subject to further testing requirements and FDA review and
approval.
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Post-Approval Regulation
If regulatory approval for marketing of a product or new indication for an existing product is obtained, the sponsor will be
required to comply with all regular post-approval regulatory requirements as well as any post-approval requirements that the
FDA may have imposed as part of the approval process. The sponsor will be required to report, among other things, certain
adverse reactions and manufacturing problems to the FDA, provide updated safety and efficacy information and comply with
requirements concerning advertising and promotional labeling requirements. Manufacturers and certain of their
subcontractors are required to register their establishments with the FDA and certain state agencies and are subject to periodic
unannounced inspections by the FDA and certain state agencies for compliance with ongoing regulatory requirements,
including cGMP regulations, which impose certain procedural and documentation requirements upon manufacturers.
Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented.
Accordingly, the sponsor and its third-party manufacturers must continue to expend time, money and effort in the areas of
production and quality control to maintain compliance with cGMP regulations and other regulatory requirements.
A 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 is released for distribution. If the product is subject to official release, the manufacturer must
submit to the FDA samples of each lot, together with a release protocol showing a summary of the history of manufacture of
the lot and the results of all of the manufacturer’s tests performed on the lot. The FDA may also perform certain confirmatory
tests on lots of some products before releasing the lots for distribution. Finally, the FDA will conduct laboratory research
related to the safety, purity, potency and effectiveness of pharmaceutical products.
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements is not
maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a
product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to
comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information;
imposition of post-market studies or clinical trials to assess safety risks; or imposition of distribution or other restrictions
under a REMS program. Other potential consequences include, among other things:
•
•
•
restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or
product recalls;
fines, warning letters or holds on post-approval clinical trials;
refusal of the FDA to approve pending applications or supplements to approved applications, 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 the marketing, labeling, advertising and promotion of prescription drug products placed on the
market. This regulation includes, among other things, standards and regulations for direct-to-consumer advertising,
communications regarding unapproved uses, industry-sponsored scientific and educational activities, and promotional
activities involving the Internet and social media. Promotional claims about a drug’s safety or effectiveness are prohibited
before the drug is approved. After approval, a drug product generally may not be promoted for uses that are not approved by
the FDA, as reflected in the product’s prescribing information. In the United States, health care professionals are generally
permitted to prescribe drugs for such uses not described in the drug’s labeling, known as off-label uses, because the FDA
does not regulate the practice of medicine. However, FDA regulations impose rigorous restrictions on manufacturers’
communications, prohibiting the promotion of off-label uses. It may be permissible, under very specific, narrow conditions,
for a manufacturer to engage in nonpromotional, non-misleading communication regarding off-label information, such as
distributing scientific or medical journal information.
If a company is found to have promoted off-label uses, it may become subject to adverse public relations and administrative
and judicial enforcement by the FDA, the Department of Justice, or the Office of the Inspector General of the Department of
Health and Human Services, as well as state authorities. This could subject a company to a range of penalties that could have
a significant commercial impact, including civil and criminal fines and agreements that materially restrict the manner in
which a company promotes or distributes drug products. The federal government has levied large civil and criminal fines
against companies for alleged improper promotion and has also requested that companies enter into consent decrees or
permanent injunctions under which specified promotional conduct is changed or curtailed.
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In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, or
PDMA, and its implementing regulations, as well as the Drug Supply Chain Security Act, or DSCA, which regulate the
distribution and tracing of prescription drug samples at the federal level and set minimum standards for the regulation of
distributors by the states. The PDMA, its implementing regulations and state laws limit the distribution of prescription
pharmaceutical product samples, and the DSCA imposes requirements to ensure accountability in distribution and to identify
and remove counterfeit and other illegitimate products from the market.
Section 505(b)(2) NDAs
NDAs for most new drug products are based on two full clinical studies, which must contain substantial evidence of the
safety and efficacy of the proposed new product for the proposed use. These applications are submitted under
Section 505(b)(1) of the FDCA. The FDA is, however, authorized to approve an alternative type 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 and efficacy for a similar product or published literature. Specifically, Section 505(b)(2) applies to NDAs for a drug
for which the investigations made to show whether or not the drug is safe for use and effective in use and relied upon by the
applicant for approval of the application “were not conducted by or for the applicant and for which the applicant has not
obtained a right of reference or use from the person by or for whom the investigations were conducted.”
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 under Section 505(b)(2) may provide an alternate and potentially more expeditious
pathway to FDA approval for new or improved formulations or new uses of previously approved products. If the 505(b)(2)
applicant can establish that reliance on the FDA’s previous approval is scientifically appropriate, the applicant may eliminate
the need to conduct certain preclinical or clinical studies of the new product. The FDA may also require companies to
perform additional studies or measurements 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 for which the referenced product has been approved, as well as
for any new indication sought by the Section 505(b)(2) applicant.
Abbreviated New Drug Applications for Generic Drugs
In 1984, with passage of the Hatch-Waxman Amendments to the FDCA, Congress established an abbreviated regulatory
scheme authorizing the FDA to approve generic drugs that are shown to contain the same active ingredients as, and to be
bioequivalent to, drugs previously approved by the FDA pursuant to NDAs. To obtain approval of a generic drug, an
applicant must submit an Abbreviated New Drug Application, or ANDA, to the agency. An ANDA is a comprehensive
submission that contains, among other things, data and information pertaining to the active pharmaceutical ingredient,
bioequivalence, drug product formulation, specifications and stability of the generic drug, as well as analytical methods,
manufacturing process validation data and quality control procedures. ANDAs are abbreviated because they generally do not
include preclinical and clinical data to demonstrate safety and effectiveness. Instead, in support of such applications, a
generic manufacturer may rely on the preclinical and clinical testing previously conducted for a drug product previously
approved under an NDA, known as the reference-listed drug, or RLD.
Specifically, in order for an ANDA to be approved, the FDA must find that the generic version is identical to the RLD with
respect to the active ingredients, route of administration, dosage form, strength and conditions of use of the drug. At the same
time, the FDA must also determine that the generic drug is bioequivalent to the innovator drug. Under the statute, a generic
drug is bioequivalent to a RLD if “the rate and extent of absorption of the drug do not show a significant difference from the
rate and extent of absorption of the listed drug.” Upon approval of an ANDA, the FDA indicates whether the generic product
is “therapeutically equivalent” to the RLD in its publication “Approved Drug Products with Therapeutic Equivalence
Evaluations,” also referred to as the “Orange Book.” Physicians and pharmacists consider a therapeutic equivalent generic
drug to be fully substitutable for the RLD. In addition, by operation of certain state laws and numerous health insurance
programs, the FDA’s designation of therapeutic equivalence often results in substitution of the generic drug without the
knowledge or consent of either the prescribing physician or the 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. The FDCA provides a period of five years of non-patent data exclusivity for a new drug
containing a new chemical entity. For the purposes of this provision, a new chemical entity, or NCE, is a drug that contains
no active moiety that has previously been approved by the FDA in any other NDA. An active moiety is the molecule or ion
responsible for the physiological or pharmacological action of the drug substance. In cases where such NCE exclusivity has
been granted, an ANDA may not be filed with the FDA until the expiration of five years unless the submission is
accompanied by a Paragraph IV certification, in which case the applicant may submit its application four years following the
original product approval.
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The FDCA also provides for a period of three years of exclusivity if the NDA includes reports of one or more new clinical
investigations, other than bioavailability or bioequivalence studies, that were conducted by or for the applicant and are
essential to the approval of the application. This three-year exclusivity period often protects changes to a previously approved
drug product, such as a new dosage form, route of administration, combination or indication. Three-year exclusivity would be
available for a drug product that contains a previously approved active moiety, provided the statutory requirement for a new
clinical investigation is satisfied. Unlike five-year NCE exclusivity, an award of three-year exclusivity does not block the
FDA from accepting ANDAs seeking approval for generic versions of the drug as of the date of approval of the original drug
product. The FDA typically makes decisions about awards of data exclusivity shortly before a product is approved.
The FDA must establish a Priority Review track for certain generic drugs, requiring the FDA to review a drug application
within eight months for a drug that has three or fewer approved drugs listed in the Orange Book and is no longer protected by
any patent or regulatory exclusivities, or is on the FDA’s drug shortage list. The FDA is also authorized to expedite review of
“competitor generic therapies” or drugs with inadequate generic competition, including holding meetings with or providing
advice to the drug sponsor prior to submission of the application.
Hatch-Waxman Patent Certification and the 30-Month Stay
Upon approval of an NDA or a supplement thereto, NDA sponsors are required to list with the FDA each patent with claims
that cover the applicant’s product or an approved method of using the product. Each of the patents listed 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 the FDA 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 not seeking approval. 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 FDA concerning any
patents listed for the approved product in the Orange Book to the same extent that an ANDA applicant would.
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 a Paragraph IV certification. If the applicant does not challenge the listed patents or
indicates that it is not seeking approval of a patented method of use, the application will not be approved until all the listed
patents claiming the referenced product have expired (other than method of use patents involving indications for which the
applicant is not seeking approval).
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 and patent 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 to the notice of the Paragraph IV
certification. The filing of a patent infringement lawsuit within 45 days after the receipt of a Paragraph IV certification
automatically prevents the FDA from approving the ANDA until the earlier of 30 months after the receipt of the Paragraph
IV notice, the expiration of the patent, or a decision in the infringement case that 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 FDA concerning 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 Section 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 obtaining
approval 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 subsequent patent 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.
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Pediatric Exclusivity
Pediatric exclusivity is another type of non-patent marketing exclusivity in the United States and, if granted, provides for the
attachment of an additional six months of marketing protection to the term of any existing regulatory exclusivity, including
the non-patent and orphan exclusivity. This six-month exclusivity may be granted if an NDA sponsor submits pediatric data
that fairly respond to a written request from the FDA for such data. The data do not need to show the product to be effective
in the pediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA’s request, the additional
protection is granted. If reports of requested pediatric studies are submitted to and accepted by the FDA within the statutory
time limits, whatever statutory or regulatory periods of exclusivity or patent protection cover the product are extended by six
months. This is not a patent term extension, but it effectively extends the regulatory period during which the FDA cannot
approve another application.
Orphan Drug Designation and Exclusivity
Under the Orphan Drug Act, the FDA may designate a drug product as an “orphan drug” if it is intended to treat a rare
disease or condition, generally meaning that it affects fewer than 200,000 individuals in the United States, or more in cases in
which there is no reasonable expectation that the cost of developing and making a product available in the United States for
treatment of the disease or condition will be recovered from sales of the product. A company must seek orphan drug
designation before submitting an NDA for the candidate product. If the request is granted, the FDA will disclose the identity
of the therapeutic agent and its potential use. Orphan drug designation does not shorten the PDUFA goal dates for the
regulatory review and approval process, although it does convey certain advantages such as tax benefits and exemption from
the PDUFA application fee.
If a product with orphan designation receives the first FDA approval for the disease or condition for which it has such
designation or for a select indication or use within the rare disease or condition for which it was designated, the product
generally will receive orphan drug exclusivity. Orphan drug exclusivity means that the FDA may not approve another
sponsor’s marketing application for the same drug for the same condition for seven years, except in certain limited
circumstances. Orphan exclusivity does not block the approval of a different product for the same rare disease or condition,
nor does it block the approval of the same product for different conditions. If a drug designated as an orphan drug ultimately
receives marketing approval for an indication broader than what was designated in its orphan drug application, it may not be
entitled to exclusivity.
Orphan drug exclusivity will not bar approval of another product under certain circumstances, including if a subsequent
product with the same drug for the same condition is shown to be clinically superior to the approved product on the basis of
greater efficacy or safety, or providing a major contribution to patient care, or if the company with orphan drug exclusivity is
not able to meet market demand. This is the case despite an earlier court opinion holding that the Orphan Drug Act
unambiguously required the FDA to recognize orphan exclusivity regardless of a showing of clinical superiority.
Patent Term Restoration and Extension
A patent claiming a new drug product may be eligible for a limited patent term extension under the Hatch-Waxman Act,
which permits a patent restoration of up to five years for patent term lost during the FDA regulatory review. The restoration
period granted on a patent covering a product is typically one-half the time between the effective date of a clinical
investigation involving human beings is begun and the submission date of an application, plus the time between the
submission date of an application and the ultimate approval date. Patent term restoration cannot be used to extend the
remaining term of a patent past a total of 14 years from the product’s approval date. Only one patent applicable to an
approved product is eligible for the extension, and only those claims covering the approved product, a method for using it, or
a method for manufacturing it may be extended. Additionally, the application for the extension must be submitted prior to the
expiration of the patent in question. A patent that covers multiple products for which approval is sought can only be extended
in connection with one of the approvals. The United States Patent and Trademark Office reviews and approves the
application for any patent term extension or restoration in consultation with the FDA.
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FDA Approval of Companion Diagnostics
If safe and effective use of a therapeutic depends on an in vitro diagnostic, then the FDA generally will require approval or
clearance of that diagnostic, known as a companion diagnostic, at the same time that the FDA approves the therapeutic
product. In August 2014, the FDA issued final guidance clarifying the requirements that will apply to approval of therapeutic
products and in vitro companion diagnostics. According to the guidance, if FDA determines that a companion diagnostic
device is essential to the safe and effective use of a novel therapeutic product or indication, FDA generally will not approve
the therapeutic product or new therapeutic product indication if the companion diagnostic device is not approved or cleared
for that indication. Approval or clearance of the companion diagnostic device will ensure that the device has been adequately
evaluated and has adequate performance characteristics in the intended population. The review of in vitro companion
diagnostics in conjunction with the review of our therapeutic treatments for cancer will, therefore, likely involve coordination
of review by the FDA’s Center for Drug Evaluation and Research and the FDA’s Center for Devices and Radiological Health
Office of In Vitro Diagnostics Device Evaluation and Safety.
The FDA previously has required in vitro companion diagnostics intended to select the patients who will respond to the
product candidate to obtain pre-market approval, or PMA, simultaneously with approval of the therapeutic product candidate.
The PMA process, including the gathering of clinical and preclinical data and the submission to and review by the FDA, can
take several years or longer. It involves a rigorous premarket review during which the applicant must prepare and provide the
FDA with reasonable assurance of the device’s safety and effectiveness and information about the device and its components
regarding, among other things, device design, manufacturing and labeling. PMA applications are subject to an application
fee, which exceeds $250,000 for most PMAs fees for medical device product review; for federal fiscal year 2019, the
standard fee for review of a PMA is $322,147and the small business fee is $80,537.
A clinical trial is typically required for a PMA application and, in a small percentage of cases, the FDA may require a clinical
study in support of a 510(k) submission. A manufacturer that wishes to conduct a clinical study involving the device is
subject to the FDA’s IDE regulation. The IDE regulation distinguishes between significant and non-significant risk device
studies and the procedures for obtaining approval to begin the study differ accordingly. Also, some types of studies are
exempt from the IDE regulations. A significant risk device presents a potential for serious risk to the health, safety, or
welfare of a subject. Significant risk devices are devices that are substantially important in diagnosing, curing, mitigating, or
treating disease or in preventing impairment to human health. Studies of devices that pose a significant risk require both FDA
and an IRB approval prior to initiation of a clinical study. Non-significant risk devices are devices that do not pose a
significant risk to the human subjects. A non-significant risk device study requires only IRB approval prior to initiation of a
clinical study.
Health Care Law and Regulation
Health care providers and third-party payers play a primary role in the recommendation and prescription of drug products that
are granted marketing approval. Arrangements with providers, consultants, third-party payers and customers are subject to
broadly applicable fraud and abuse, anti-kickback, false claims laws, patient privacy laws and regulations and other health
care laws and regulations that may constrain business and/or financial arrangements. Restrictions under applicable federal
and state health care laws and regulations, include the following:
•
•
•
the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and
willfully soliciting, offering, paying, receiving or providing remuneration, directly or indirectly, in cash or in kind, to
induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or
service, for which payment may be made, in whole or in part, under a federal health care program such as Medicare and
Medicaid;
the federal civil and criminal false claims laws, including the civil False Claims Act, and civil monetary penalties laws,
which prohibit individuals or entities from, among other things, knowingly presenting, or causing to be presented, to
the federal government, claims for payment that are false, fictitious or fraudulent or knowingly making, using or
causing to made or used a false record or statement to avoid, decrease or conceal an obligation to pay money to the
federal government;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created additional federal
criminal laws that prohibit, among other things, knowingly and willfully executing, or attempting to execute, a scheme
to defraud any health care benefit program or making false statements relating to health care matters;
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• HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, and their respective
implementing regulations, including the Final Omnibus Rule published in January 2013, which impose obligations,
including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of
individually identifiable health information;
•
•
•
the federal false statements statute, which prohibits knowingly and willfully falsifying, concealing ·or covering up a
material fact or making any materially false statement in connection with the delivery of or payment for health care
benefits, items or services;
the Foreign Corrupt Practices Act, or FCPA, which prohibits companies and their intermediaries from making, or
offering or promising to make improper payments to non-U.S. officials for the purpose of obtaining or retaining
business or otherwise seeking favorable treatment;
the federal transparency requirements known as the federal Physician Payments Sunshine Act, under the Patient
Protection and Affordable Care Act, as amended by the Health Care Education Reconciliation Act, or the Affordable
Care Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies to report annually to
the Centers for Medicare & Medicaid Services, or CMS, within the United States Department of Health and Human
Services, information related to payments and other transfers of value made by that entity to physicians and teaching
hospitals, as well as ownership and investment interests held by physicians and their immediate family members; and
• analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to
health care items or services that are reimbursed by non-government third-party payers, including private insurers.
Further, some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary
compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring
manufacturers to report information related to payments to physicians and other health care providers or marketing
expenditures. Additionally, some state and local laws require the registration of pharmaceutical sales representatives in the
jurisdiction. State and foreign laws also govern the privacy and security of health information in some circumstances, many
of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance
efforts.
Pharmaceutical Insurance Coverage and Health Care Reform
In the United States and markets in other countries, patients who are prescribed treatments for their conditions and providers
performing the prescribed services generally rely on third-party payers to reimburse all or part of the associated health care
costs. Significant uncertainty exists as to the coverage and reimbursement status of products approved by the FDA and other
government authorities. Thus, even if a product candidate is approved, sales of the product will depend, in part, on the extent
to which third-party payers, including government health programs in the United States such as Medicare and Medicaid,
commercial health insurers and managed care organizations, provide coverage and establish adequate reimbursement levels
for, the product. The process for determining whether a payer will provide coverage for a product may be separate from the
process for setting the price or reimbursement rate that the payer will pay for the product once coverage is approved. Third-
party payers are increasingly challenging the prices charged, examining the medical necessity and reviewing the cost-
effectiveness of medical products and services and imposing controls to manage costs. Third-party payers may limit coverage
to specific products on an approved list, also known as a formulary, which might not include all of the approved products for
a particular indication.
In order to secure coverage and reimbursement for any product that might be approved for sale, a company may need to
conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the
product, in addition to the costs required to obtain FDA or other comparable marketing approvals. Nonetheless, product
candidates may not be considered medically necessary or cost effective. A decision by a third-party payer not to cover a
product could reduce physician utilization once the product is approved and have a material adverse effect on sales, results of
operations and financial condition. Additionally, a payer’s decision to provide coverage for a product does not imply that an
adequate reimbursement rate will be approved. Further, one payer’s determination to provide coverage for a product does not
assure that other payers will also provide coverage and reimbursement for the product, and the level of coverage and
reimbursement can differ significantly from payer to payer.
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The containment of health care costs also has become a priority of federal, state and foreign governments and the prices of
products have been a focus in this effort. Governments have shown significant interest in implementing cost-containment
programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products.
Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with
existing controls and measures, could further limit a company’s revenue generated from the sale of any approved products.
Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and
reimbursement status is attained for one or more products for which a company or its collaborators receive marketing
approval, less favorable coverage policies and reimbursement rates may be implemented in the future.
There have been a number of federal and state proposals during the last few years regarding the pricing of pharmaceutical
and biopharmaceutical products, limiting coverage and reimbursement for drugs and biologics and other medical products,
government control and other changes to the health care system in the United States.
In March 2010, the United States Congress enacted the Patient Protection and Affordable Care Act, or ACA, which, among
other things, includes changes to the coverage and payment for drug products under government health care programs.
Among the provisions of the ACA of importance to our potential product candidates are:
• an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and
biologic agents, apportioned among these entities according to their market share in certain government healthcare
programs;
• expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid
coverage to certain individuals with income at or below 133% of the federal poverty level, thereby potentially
increasing a manufacturer’s Medicaid rebate liability;
• expanded manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate
for both branded and generic drugs and revising the definition of “average manufacturer price,” or AMP, for
calculating and reporting Medicaid drug rebates on outpatient prescription drug prices;
• addressed a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are
calculated for drugs that are inhaled, infused, instilled, implanted or injected;
• expanded the types of entities eligible for the 340B drug discount program;
• established the Medicare Part D coverage gap discount program by requiring manufacturers to provide a 50% (and 70%
starting January 1, 2019) point-of-sale-discount off the negotiated price of applicable brand drugs to eligible
beneficiaries during their coverage gap period as a condition for the manufacturers’ outpatient drugs to be covered
under Medicare Part D; and
• a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical
effectiveness research, along with funding for such research.
Other legislative changes have been proposed and adopted in the United States since the ACA was enacted. In August 2011,
the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select
Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years
2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several
government programs. This includes aggregate reductions of Medicare payments to providers up to 2% per fiscal year, which
went into effect in April 2013 and, due to subsequent legislative amendments, will remain in effect through 2027 unless
additional Congressional action is taken. In January 2013, President Obama signed into law the American Taxpayer Relief
Act of 2012, which, among other things, further reduced Medicare payments to several providers, including hospitals,
imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover
overpayments to providers from three to five years.
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Since enactment of the ACA, there have been numerous legal challenges and Congressional actions to repeal and replace
provisions of the law. For example, with enactment of the Tax Cuts and Jobs Act of 2017, which was signed by President
Trump on December 22, 2017, Congress repealed the “individual mandate.” The repeal of this provision, which requires
most Americans to carry a minimal level of health insurance, will become effective in 2019. According to the Congressional
Budget Office, the repeal of the individual mandate will cause 13 million fewer Americans to be insured in 2027 and
premiums in insurance markets may rise. Additionally, on January 22, 2018, President Trump signed a continuing resolution
on appropriations for fiscal year 2018 that delayed the implementation of certain ACA-mandated fees, including the so-called
“Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance
providers based on market share, and the medical device excise tax on non-exempt medical devices. Further, the Bipartisan
Budget Act of 2018, among other things, amends the ACA, effective January 1, 2019, to increase from 50 percent to
70 percent the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and to
close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole”. The Congress will likely
consider other legislation to replace elements of the ACA during the next Congressional session.
The Trump Administration has also taken executive actions to undermine or delay implementation of the ACA. Since
January 2017, President Trump has signed two Executive Orders designed to delay the implementation of certain provisions
of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. One Executive
Order directs federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or
delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals,
healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. The second Executive Order
terminates the cost-sharing subsidies that reimburse insurers under the ACA. Several state Attorneys General filed suit to stop
the administration from terminating the subsidies, but their request for a restraining order was denied by a federal judge in
California on October 25, 2017. In addition, CMS has recently proposed regulations that would give states greater flexibility
in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the
essential health benefits required under the ACA for plans sold through such marketplaces. Further, on June 14, 2018, U.S.
Court of Appeals for the Federal Circuit ruled that the federal government was not required to pay more than $12 billion in
ACA risk corridor payments to third-party payors who argued were owed to them. The effects of this gap in reimbursement
on third-party payors, the viability of the ACA marketplace, providers, and potentially our business, are not yet known.
Further, there have been several recent U.S. congressional inquiries and proposed federal and proposed and enacted state
legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing
and manufacturer patient programs, reduce the costs of drugs under Medicare and reform government program
reimbursement methodologies for drug products. For example, there have been several recent U.S. congressional inquiries
and proposed federal and proposed and enacted state legislation designed to, among other things, bring more transparency to
drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the costs of drugs under
Medicare and reform government program reimbursement methodologies for drug products. At the federal level, Congress
and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures
to control drug costs.
For example, on May 11, 2018, the Administration issued a plan to lower drug prices. Under this blueprint for action, the
Administration indicated that the Department of Health and Human Services (HHS) will: take steps to end the gaming of
regulatory and patent processes by drug makers to unfairly protect monopolies; advance biosimilars and generics to boost
price competition; evaluate the inclusion of prices in drug makers’ ads to enhance price competition; speed access to and
lower the cost of new drugs by clarifying policies for sharing information between insurers and drug makers; avoid excessive
pricing by relying more on value-based pricing by expanding outcome-based payments in Medicare and Medicaid; work to
give Part D plan sponsors more negotiation power with drug makers; examine which Medicare Part B drugs could be
negotiated for a lower price by Part D plans, and improving the design of the Part B Competitive Acquisition Program;
update Medicare’s drug-pricing dashboard to increase transparency; prohibit Part D contracts that include “gag rules” that
prevent pharmacists from informing patients when they could pay less out-of-pocket by not using insurance; and require that
Part D plan members be provided with an annual statement of plan payments, out-of-pocket spending, and drug price
increases. More recently, on January 31, 2019, the HHS Office of Inspector General proposed modifications to the federal
Anti-Kickback Statute discount safe harbor for the purpose of reducing the cost of drug products to consumers which, among
other things, if finalized, will affect discounts paid by manufacturers to Medicare Part D plans, Medicaid managed care
organizations and pharmacy benefit managers working with these organizations.
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At the state level, individual states are increasingly aggressive in passing legislation and implementing regulations designed
to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts,
restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed
to encourage importation from other countries and bulk purchasing. In addition, regional health care authorities and
individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which
suppliers will be included in their prescription drug and other health care programs. These measures could reduce the ultimate
demand for our products, once approved, or put pressure on our product pricing. We expect that additional state and federal
healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state
governments will pay for healthcare products and services, which could result in reduced demand for our product candidates
or additional pricing pressures.
Review and Approval of Medicinal Products in the European Union
In order to market any product outside of the United States, a company must also comply with numerous and varying
regulatory requirements of other countries and jurisdictions regarding quality, safety and efficacy and governing, among
other things, clinical trials, marketing authorization, commercial sales and distribution of products. Whether or not it obtains
FDA approval for a product, an applicant will need to obtain the necessary approvals by the comparable non-U.S. regulatory
authorities before it can commence clinical trials or marketing of the product in those countries or jurisdictions. The approval
process ultimately varies between countries and jurisdictions and can involve additional product testing and additional
administrative review periods. The time required to obtain approval in other countries and jurisdictions might differ from and
be longer than that required to obtain FDA approval. Regulatory approval in one country or jurisdiction does not ensure
regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country or jurisdiction may
negatively impact the regulatory process in others. Specifically, however, the process governing approval of medicinal
products in the European Union, or EU, generally follows the same lines as in the United States. It entails satisfactory
completion of preclinical studies and adequate and well-controlled clinical trials to establish the safety and efficacy of the
product for each proposed indication. It also requires the submission to the relevant competent authorities of a marketing
authorization application, or MAA, and granting of a marketing authorization by these authorities before the product can be
marketed and sold in the EU.
Clinical Trial Approval
The Clinical Trials Directive 2001/20/EC, the Directive 2005/28/EC on GCP and the related national implementing
provisions of the individual member states of the European Union, or EU Member States, govern the system for the approval
of clinical trials in the EU. Under this system, an applicant must obtain prior approval from the competent national authority
of the EU Member States in which the clinical trial is to be conducted. Furthermore, the applicant may only start a clinical
trial at a specific study site after the competent ethics committee has issued a favorable opinion. The clinical trial application
must be accompanied by, among other documents, an investigational medicinal product dossier (the Common Technical
Document) with supporting information prescribed by Directive 2001/20/EC, Directive 2005/28/EC, where relevant the
implementing national provisions of the individual EU Member States and further detailed in applicable guidance documents.
In April 2014, the new Clinical Trials Regulation, (EU) No 536/2014, was adopted. The Clinical Trials Regulation was
published on June 16, 2014 but is not expected to apply later in 2019. The Clinical Trials Regulation will be directly
applicable in all the EU Member States, repealing the current Clinical Trials Directive 2001/20/EC and replacing any national
legislation that was put in place to implement the Directive. Conduct of all clinical trials performed in the EU will continue to
be bound by currently applicable provisions until the new Clinical Trials Regulation becomes applicable. The extent to which
on-going clinical trials will be governed by the Clinical Trials Regulation will depend on when the Clinical Trials Regulation
becomes applicable and on the duration of the individual clinical trial. If a clinical trial continues for more than three years
from the day on which the Clinical Trials Regulation becomes applicable the Clinical Trials Regulation will at that time
begin to apply to the clinical trial.
The new Clinical Trials Regulation aims to simplify and streamline the approval of clinical trials in the EU. The main
characteristics of the regulation include: a streamlined application procedure via a single entry point, the “EU Portal and
Database”; a single set of documents to be prepared and submitted for the application as well as simplified reporting
procedures for clinical trial sponsors; and a harmonized procedure for the assessment of applications for clinical trials, which
is divided in two parts. Part I is assessed by the appointed reporting Member State, whose assessment report is submitted for
review by the sponsor and all other competent authorities of all EU Member States in which an application for authorization
of a clinical trial has been submitted (Concerned Member States). Part II is assessed separately by each Concerned Member
State. Strict deadlines have been established for the assessment of clinical trial applications. The role of the relevant ethics
committees in the assessment procedure will continue to be governed by the national law of the Concerned Member State.
However, overall related timelines will be defined by the Clinical Trials Regulation.
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PRIME Designation in the EU
In March 2016, the European Medicines Agency, or EMA, launched an initiative to facilitate development of product
candidates in indications, often rare, for which few or no therapies currently exist. The PRIority MEdicines, or PRIME,
scheme is intended to encourage drug development in areas of unmet medical need and provides accelerated assessment of
products representing substantial innovation reviewed under the centralized procedure. Products from small- and medium-
sized enterprises, or SMEs, may qualify for earlier entry into the PRIME scheme than larger companies. Many benefits
accrue to sponsors of product candidates with PRIME designation, including but not limited to, early and proactive
regulatory dialogue with the EMA, frequent discussions on clinical trial designs and other development program elements,
and accelerated marketing authorization application assessment once a dossier has been submitted. Importantly, a dedicated
Agency contact and rapporteur from the Committee for Human Medicinal Products, or CHMP, or Committee for Advanced
Therapies, or CAT, are appointed early in PRIME scheme facilitating increased understanding of the product at EMA’s
Committee level. A kick-off meeting initiates these relationships and includes a team of multidisciplinary experts at the EMA
to provide guidance on the overall development and regulatory strategies.
Marketing Authorization
To obtain a marketing authorization for a product under EU regulatory systems, an applicant must submit an MAA either
under a centralized procedure administered by the EMA, or one of the procedures administered by competent authorities in
the EU Member States (decentralized procedure, national procedure or mutual recognition procedure). A marketing
authorization may be granted only to an applicant established in the EU. Regulation (EC) No 1901/2006 provides that prior to
obtaining a marketing authorization in the EU, applicants have to demonstrate compliance with all measures included in an
EMA-approved Paediatric Investigation Plan, or PIP, covering all subsets of the pediatric population, unless the EMA has
granted (1) a product-specific waiver, (2) a class waiver or (3) a deferral for one or more of the measures included in the PIP.
The centralized procedure provides for the grant of a single marketing authorization by the European Commission that is
valid across the European Economic Area (i.e. the EU as well as Iceland, Liechtenstein and Norway). Pursuant to Regulation
(EC) No 726/2004, the centralized procedure is compulsory for specific products, including for medicines produced by
certain biotechnological processes, products designated as orphan medicinal products, advanced therapy medicinal products
and products with a new active substance indicated for the treatment of certain diseases, including products for the treatment
of cancer. For products with 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 interest of patients, the centralized procedure may be optional. The
centralized procedure may at the request of the applicant also be used in certain other cases. We anticipate that the centralized
procedure will be mandatory for the product candidates we are developing.
Under the centralized procedure, the CHMP is responsible for conducting the initial assessment of a product and for several
post-authorization and maintenance activities, such as the assessment of modifications or extensions to an existing marketing
authorization. Under the centralized procedure in the EU, the maximum timeframe for 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 in
response to questions of the CHMP. Accelerated evaluation might be granted by the CHMP in exceptional cases, when a
medicinal product is of major interest from the point of view of public health and in particular from the viewpoint of
therapeutic innovation. If the CHMP accepts such request, the time limit of 210 days will be reduced to 150 days but it is
possible that the CHMP can revert to the standard time limit for the centralized procedure if it considers that it is no longer
appropriate to conduct an accelerated assessment. At the end of this period, the CHMP provides a scientific opinion on
whether or not a marketing authorization should be granted in relation to a medicinal product. Within 15 calendar days of
receipt of a final opinion from the CHMP, the European Commission must prepare a draft decision concerning an application
for marketing authorization. This draft decision must take the opinion and any relevant provisions of EU law into account.
Before arriving at a final decision on an application for centralized authorization of a medicinal product the European
Commission must consult the Standing Committee on Medicinal Products for Human Use. The Standing Committee is
composed of representatives of the EU Member States and chaired by a non-voting European Commission representative.
The European Parliament also has a related “droit de regard”. The European Parliament’s role is to ensure that the European
Commission has not exceeded its powers in deciding to grant or refuse to grant a marketing authorization.
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The European Commission may grant a so-called “marketing authorization under exceptional circumstances”. Such
authorization is intended for products for which the applicant can demonstrate that it is unable to provide comprehensive data
on the efficacy and safety under normal conditions of use, because the indications for which the product in question is
intended are encountered so rarely that the applicant cannot reasonably be expected to provide comprehensive evidence, or in
the present state of scientific knowledge, comprehensive information cannot be provided, or it would be contrary to generally
accepted principles of medical ethics to collect such information. Consequently, marketing authorization under exceptional
circumstances may be granted subject to certain specific obligations, which may include the following:
•
•
•
the applicant must complete an identified program of studies within a time period specified by the competent authority,
the results of which form the basis of a reassessment of the benefit/risk profile;
the medicinal product in question may be supplied on medical prescription only and may in certain cases be
administered only under strict medical supervision, possibly in a hospital and in the case of a radiopharmaceutical, by
an authorized person; and
the package leaflet and any medical information must draw the attention of the medical practitioner to the fact that the
particulars available concerning the medicinal product in question are as yet inadequate in certain specified respects.
A marketing authorization under exceptional circumstances is subject to annual review to reassess the risk-benefit balance in
an annual reassessment procedure. Continuation of the authorization is linked to the annual reassessment and a negative
assessment could potentially result in the marketing authorization being suspended or revoked. The renewal of a marketing
authorization of a medicinal product under exceptional circumstances, however, follows the same rules as a “normal”
marketing authorization. Thus, a marketing authorization under exceptional circumstances is granted for an initial five years,
after which the authorization will become valid indefinitely, unless the EMA decides that safety grounds merit one additional
five-year renewal.
The European Commission may also grant a so-called “conditional marketing authorization” prior to obtaining the
comprehensive clinical data required for an application for a full marketing authorization. Such conditional marketing
authorizations may be granted for product candidates (including medicines designated as orphan medicinal products), if
(i) the risk-benefit balance of the product candidate is positive, (ii) it is likely that the applicant will be in a position to
provide the required comprehensive clinical trial data, (iii) the product fulfills an unmet medical need and (iv) the benefit to
public health of the immediate availability on the market of the medicinal product concerned outweighs the risk inherent in
the fact that additional data are still required. A conditional marketing authorization may contain specific obligations to be
fulfilled by the marketing authorization holder, including obligations with respect to the completion of ongoing or new
studies, and with respect to the collection of pharmacovigilance data. Conditional marketing authorizations are valid for one
year, and may be renewed annually, if the risk-benefit balance remains positive, and after an assessment of the need for
additional or modified conditions and/or specific obligations. The timelines for the centralized procedure described above
also apply with respect to the review by the CHMP of applications for a conditional marketing authorization.
The EU medicines rules expressly permit the EU Member States to adopt national legislation prohibiting or restricting the
sale, supply or use of any medicinal product containing, consisting of or derived from a specific type of human or animal cell,
such as embryonic stem cells. While the products we have in development do not make use of embryonic stem cells, it is
possible that the national laws in certain EU Member States may prohibit or restrict us from commercializing our products,
even if they have been granted an EU marketing authorization.
Unlike the centralized authorization procedure, the decentralized marketing authorization procedure requires a separate
application to, and leads to separate approval by, the competent authorities of each EU Member State in which the product is
to be marketed. This application is identical to the application that would be submitted to the EMA for authorization through
the centralized procedure. The reference EU Member State prepares a draft assessment and drafts of the related materials
within 120 days after receipt of a valid application. The resulting assessment report is submitted to the concerned EU
Member States who, within 90 days of receipt, must decide whether to approve the assessment report and related materials. If
a concerned EU Member State cannot approve the assessment report and related materials due to concerns relating to a
potential serious risk to public health, disputed elements may be referred to the European Commission, whose decision is
binding on all EU Member States.
The mutual recognition procedure similarly is based on the acceptance by the competent authorities of the EU Member States
of the marketing authorization of a medicinal product by the competent authorities of other EU Member States. The holder of
a national marketing authorization may submit an application to the competent authority of an EU Member State requesting
that this authority recognize the marketing authorization delivered by the competent authority of another EU Member State.
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Regulatory Data Protection in the EU
In the EU, innovative medicinal products approved on the basis of a complete independent data package qualify for eight
years of data exclusivity upon marketing authorization and an additional two years of market exclusivity pursuant to
Directive 2001/83/EC. Regulation (EC) No 726/2004 repeats this entitlement for medicinal products authorized in
accordance the centralized authorization procedure. Data exclusivity prevents applicants for authorization of generics of these
innovative products from referencing the innovator’s data to assess a generic (abridged) application for a period of eight
years. During an additional two-year period of market exclusivity, a generic marketing authorization application can be
submitted and authorized, and the innovator’s data may be referenced, but no generic medicinal product can be placed on the
EU market until the expiration of the market exclusivity. The overall ten-year period will be extended to a maximum of 11
years if, during the first eight years of those ten years, the marketing authorization holder obtains an authorization for one or
more new therapeutic indications which, during the scientific evaluation prior to their authorization, are held to bring a
significant clinical benefit in comparison with existing therapies. Even if a compound is considered to be a new chemical
entity so that the innovator gains the prescribed period of data exclusivity, another company nevertheless could also market
another version of the product if such company obtained marketing authorization based on an MAA with a complete
independent data package of pharmaceutical tests, preclinical tests and clinical trials.
Periods of Authorization and Renewals
A marketing authorization has an initial validity for five years in principle. The marketing authorization may be renewed after
five years on the basis of a re-evaluation of the risk-benefit balance by the EMA or by the competent authority of the EU
Member State. To this end, the marketing authorization holder must provide the EMA or the competent authority with a
consolidated version of the file in respect of quality, safety and efficacy, including all variations introduced since the
marketing authorization was granted, at least six months before the marketing authorization ceases to be valid. The European
Commission or the competent authorities of the EU Member States may decide, on justified grounds relating to
pharmacovigilance, to proceed with one further five-year period of marketing authorization. Once subsequently definitively
renewed, the marketing authorization shall be valid for an unlimited period. Any authorization which is not followed by the
actual placing of the medicinal product on the EU market (in case of centralized procedure) or on the market of the
authorizing EU Member State within three years after authorization ceases to be valid (the so-called sunset clause).
Paediatric Studies and Exclusivity
Prior to obtaining a marketing authorization in the European Union, applicants must demonstrate compliance with all
measures included in an EMA-approved PIP covering all subsets of the pediatric population, unless the EMA has granted a
product-specific waiver, a class waiver, or a deferral for one or more of the measures included in the PIP. The respective
requirements for all marketing authorization procedures are laid down in Regulation (EC) No 1901/2006, the so-called
Paediatric Regulation. This requirement also applies when a company wants to add a new indication, pharmaceutical form or
route of administration for a medicine that is already authorized. The Paediatric Committee of the EMA, or PDCO, may grant
deferrals for some medicines, allowing a company to delay development of the medicine for children until there is enough
information to demonstrate its effectiveness and safety in adults. The PDCO may also grant waivers when development of a
medicine for children is not needed or is not appropriate, such as for diseases that only affect the elderly population. Before
an MAA can be filed, or an existing marketing authorization can be amended, the EMA determines that companies actually
comply with the agreed studies and measures listed in each relevant PIP. If an applicant obtains a marketing authorization in
all EU Member States, or a marketing authorization granted in the centralized procedure by the European Commission, and
the study results for the pediatric population are included in the product information, even when negative, the medicine is
then eligible for an additional six-month period of qualifying patent protection through extension of the term of the
Supplementary Protection Certificate, or SPC.
Orphan Drug Designation and Exclusivity
Regulation (EC) No. 141/2000, as implemented by Regulation (EC) No. 847/2000 provides that a drug can be designated as
an orphan drug by the European Commission if its sponsor can establish: that the product is intended for the diagnosis,
prevention or treatment of (1) a life-threatening or chronically debilitating condition affecting not more than five in ten
thousand persons in the EU when the application is made, or (2) a life-threatening, seriously debilitating or serious and
chronic condition in the EU and that without incentives it is unlikely that the marketing of the drug in the EU would generate
sufficient return to justify the necessary investment. For either of these conditions, the applicant must demonstrate that there
exists no satisfactory method of diagnosis, prevention or treatment of the condition in question that has been authorized in the
EU or, if such method exists, the drug will be of significant benefit to those affected by that condition.
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Once authorized, orphan medicinal products are entitled to 10 years of market exclusivity in all EU Member States and in
addition a range of other benefits during the development and regulatory review process including scientific assistance for
study protocols, authorization through the centralized marketing authorization procedure covering all member countries and a
reduction or elimination of registration and marketing authorization fees. However, marketing authorization may be granted
to a similar medicinal product with the same orphan indication during the 10-year period with the consent of the marketing
authorization holder for the original orphan medicinal product or if the manufacturer of the original orphan medicinal product
is unable to supply sufficient quantities. Marketing authorization may also be granted to a similar medicinal product with the
same orphan indication if this product is safer, more effective or otherwise clinically superior to the original orphan
medicinal product. The period of market exclusivity may, in addition, be reduced to six years if it can be demonstrated on the
basis of available evidence that the original orphan medicinal product is sufficiently profitable not to justify maintenance of
market exclusivity.
Regulatory Requirements After a Marketing Authorization has been Obtained
In case an authorization for a medicinal product in the EU is obtained, the holder of the marketing authorization is required to
comply with a range of requirements applicable to the manufacturing, marketing, promotion and sale of medicinal products.
These include:
• Compliance with the EU’s stringent pharmacovigilance or safety reporting rules must be ensured. These rules can
impose post-authorization studies and additional monitoring obligations.
• The manufacturing of authorized medicinal products, for which a separate manufacturer’s license is mandatory, must
also be conducted in strict compliance with the applicable EU laws, regulations and guidance, including Directive
2001/83/EC, Directive 2003/94/EC, Regulation (EC) No 726/2004 and the European Commission Guidelines for Good
Manufacturing Practice. These requirements include compliance with EU cGMP standards when manufacturing
medicinal products and active pharmaceutical ingredients, including the manufacture of active pharmaceutical
ingredients outside of the EU with the intention to import the active pharmaceutical ingredients into the EU.
• The marketing and promotion of authorized drugs, including industry-sponsored continuing medical education and
advertising directed toward the prescribers of drugs and/or the general public, are strictly regulated in the EU notably
under Directive 2001/83EC, as amended, and are also subject to EU Member State laws. Direct-to-consumer
advertising of prescription medicines is prohibited across the EU.
Brexit and the Regulatory Framework in the United Kingdom
On June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the EU, commonly referred to as Brexit.
Thereafter, on March 29, 2017, the country formally notified the EU of its intention to withdraw pursuant to Article 50 of the
Lisbon Treaty. The withdrawal of the United Kingdom from the EU will take effect either on the effective date of the
withdrawal agreement or, in the absence of agreement, two years after the United Kingdom provides a notice of withdrawal
pursuant to the EU Treaty, which would be March 29, 2019. Since the regulatory framework for pharmaceutical products in
the United Kingdom covering quality, safety and efficacy of pharmaceutical products, clinical trials, marketing authorization,
commercial sales and distribution of pharmaceutical products is derived from EU directives and regulations, Brexit could
materially impact the future regulatory regime that applies to products and the approval of product candidates in the United
Kingdom. It remains to be seen how, if at all, Brexit will impact regulatory requirements for product candidates and products
in the United Kingdom. See “Risk factors—Failure to obtain marketing approval in foreign jurisdictions would prevent our
product candidates from being marketed abroad.”
The United Kingdom has a period of a maximum of two years from the date of its formal notification to negotiate the terms
of its withdrawal from, and future relationship with, the European Union. If no formal withdrawal agreement is reached
between the United Kingdom and the European Union, then it is expected the United Kingdom's membership of the
European Union will automatically terminate two years after the submission of the notification of the United Kingdom's
intention to withdraw from the European Union. Discussions between the United Kingdom and the European Union focused
on finalizing withdrawal issues and transition agreements are ongoing. However, limited progress to date in these
negotiations and ongoing uncertainty within the UK Government and Parliament sustains the possibility of the United
Kingdom leaving the European Union on March 29, 2019 without a withdrawal agreement and associated transition period in
place, which is likely to cause significant market and economic disruption.
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General Data Protection Regulation
The collection, use, disclosure, transfer, or other processing of personal data regarding individuals in the EU, including
personal health data, is subject to the EU General Data Protection Regulation (GDPR), which became effective on May 25,
2018. The GDPR is wide-ranging in scope and imposes numerous requirements on companies that process personal data,
including requirements relating to processing health and other sensitive data, obtaining consent of the individuals to whom
the personal data relates, providing information to individuals regarding data processing activities, implementing safeguards
to protect the security and confidentiality of personal data, providing notification of data breaches, and taking certain
measures when engaging third-party processors. The GDPR also imposes strict rules on the transfer of personal data to
countries outside the EU, including the U.S., and permits data protection authorities to impose large penalties for violations
of the GDPR, including potential fines of up to €20 million or 4% of annual global revenues, whichever is greater. The
GDPR also confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory
authorities, seek judicial remedies, and obtain compensation for damages resulting from violations of the GDPR.
Compliance with the GDPR will be a rigorous and time-intensive process that may increase the cost of doing business or
require companies to change their business practices to ensure full compliance.
Pricing Decisions for Approved Products
In the EU, pricing and reimbursement schemes vary widely from country to country. Some countries provide that products
may be marketed only after a reimbursement price has been agreed. Some countries may require the completion of additional
studies that compare the cost-effectiveness of a particular product candidate to currently available therapies or so-called
health technology assessments, in order to obtain reimbursement or pricing approval. For example, EU Member States have
the option to restrict the range of products for which their national health insurance systems provide reimbursement and to
control the prices of medicinal products for human use. EU Member States may approve a specific price for a product or it
may instead adopt a system of direct or indirect controls on the profitability of the company placing the product on the
market. Other EU Member States allow companies to fix their own prices for products, but monitor and control prescription
volumes and issue guidance to physicians to limit prescriptions. Recently, many countries in the EU have increased the
amount of discounts required on pharmaceuticals and these efforts could continue as countries attempt to manage health care
expenditures, especially in light of the severe fiscal and debt crises experienced by many countries in the EU. The downward
pressure on health care costs in general, particularly prescription products, has become intense. As a result, increasingly high
barriers are being erected to the entry of new products. Political, economic and regulatory developments may further
complicate pricing negotiations, and pricing negotiations may continue after reimbursement has been obtained. Reference
pricing used by various EU Member States, and parallel trade, i.e., arbitrage between low-priced and high-priced EU Member
States, can further reduce prices. There can be no assurance that any country that has price controls or reimbursement
limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any products, if
approved in those countries.
Employees
As of February 28, 2019, we had 82 full-time employees, including a total of 38 employees with M.D. or Ph.D. degrees. Of
these full-time employees, 58 employees were engaged in research and development. None of our employees are represented
by labor unions or covered by collective bargaining agreements. We consider our relationship with our employees to be good.
Facilities
Our principal facilities consist of office and laboratory space. We currently occupy approximately 36,309 square feet of
office space in Cambridge, Massachusetts under a lease that currently expires in June 2020. In September 2018, we executed
the Fourth Amendment to our non-cancellable operating lease. The terms of the amendment, which covers additional space
and expires in February 2022, expanded the size of the leased premises to include additional 11,237 square feet in the leased
facility as of February 2019.
45
Scientific Advisory Board
We have established a scientific advisory board and we regularly seek advice and input from these leading scientists and
physicians on matters related to our research and development programs. The members of our advisory board consist of
experts across a range of key disciplines relevant to our programs. Our advisors are not our employees and may have
commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. In addition, our
advisors may have arrangements with other companies to assist those companies in developing products or technologies that
may compete with ours. All of our advisors are affiliated with other entities and devote only a small portion of their time to
us. The current members of our scientific advisory board are:
Name
David Livingston, M.D.
Scott Lowe, Ph.D.
Robert Schreiber, Ph.D.
Padmanee Sharma, M.D., Ph.D.
ADDITIONAL INFORMATION
Positions
Deputy Director, Dana Farber Harvard Cancer Center and
Professor of Medicine and Genetics, Harvard Medical School
Chair of the Geoffrey Beene Cancer Research Center, Cancer
Biology and Genetics Program, Sloan-Kettering Institute and
Howard Hughes Medical Institute
Professor of Pathology and Immunology, Professor
Molecular Microbiology and Director of the Center of
Human Immunology and Immunotherapy programs,
Washington University School of Medicine
Professor, Department of Genitourinary Medical Oncology,
Department of Immunology, Division of Cancer Medicine,
The University of Texas MD Anderson Cancer Center
We were incorporated as a Delaware corporation in 2008. Our principal executive offices are located at 215 First Street, Suite
200, Cambridge, Massachusetts 02142, and our telephone number is (617) 714-0555. Our wholly-owned subsidiary is
Constellation Securities Corporation.
Our Internet address is www.constellationpharma.com. Through a link on the “Investor Relations” section of this
website, ir.constellationpharma.com, we make available, free of charge, our annual report on Form 10-K, quarterly reports
on Form 10-Q, proxy statement on Form DEF 14A, current reports on Form 8-K, and any amendments to those reports, as
soon as reasonably practicable after we electronically file such material or furnish them to the Securities and Exchange
Commission, or the SEC. In addition, we will provide electronic or paper copies of our filings free of charge upon request.
Information contained on our corporate website or any other website is not incorporated into this Annual Report and does not
constitute a part of this Annual Report.
The SEC also maintains a website containing reports, proxy materials and information statements, among other information,
at http://www.sec.gov.
46
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 expressed in forward-looking statements made by us or on our behalf in this Annual Report on
Form 10-K and other filings with the Securities and Exchange Commission, or the 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 capital
We have incurred significant losses since our inception. We expect to incur losses over the next several years and may
never achieve or maintain profitability.
Since inception, we have incurred significant operating losses. Our net loss was $59.9 million for the year ended
December 31, 2018, $35.4 million for the year ended December 31, 2017 and $34.5 million for the year ended December 31,
2016. As of December 31, 2018, we had an accumulated deficit of $233.8 million. To date, we have financed our operations
primarily through our initial public offering, which closed on July 23, 2018, sales of our preferred stock, payments received
in connection with collaboration and research agreements and borrowings under loan agreements. All of our revenue to date
has been collaboration revenue. We have devoted substantially all of our financial resources and efforts to research and
development, including clinical trials and preclinical studies. We are still in the early stages of development of our product
candidates, and we have not completed development of any product candidates. We expect to continue to incur significant
expenses and operating losses over the next several years. Our net losses may fluctuate significantly from quarter to quarter
and year to year. We anticipate that our expenses will increase substantially as we:
• continue our Phase 1b/2 clinical trial of CPI-1205, which we refer to as the ProSTAR trial, and our Phase 2 clinical trial
of CPI-0610, which we refer to as the MANIFEST trial;
• complete IND-enabling studies and prepare for a planned Phase 1 clinical trial of CPI-0209, our second-generation
EZH2 inhibitor;
• advance our clinical-stage product candidates into later stage trials;
• continue the research and development of our other product candidates;
• seek to discover and develop additional product candidates;
• seek regulatory approvals for any product candidates that successfully complete clinical trials;
• ultimately establish a sales, marketing and distribution infrastructure to commercialize any products for which we may
obtain regulatory approval;
• scale up our manufacturing processes and capabilities, or arrange for a third party to do so on our behalf, to support our
clinical trials of our product candidates and commercialization of any of our product candidates for which we obtain
marketing approval;
• acquire or in-license products, product candidates or technologies;
• maintain, expand, enforce, defend and protect our intellectual property portfolio;
• hire additional clinical, quality control and scientific personnel; and
• add operational, financial and administrative personnel, including personnel to support our product development and
planned future commercialization efforts and our operations as a public company.
47
To become and remain profitable, we must succeed in developing, and eventually commercializing, a product or products
that generate significant revenue. The ability to achieve this success will require us to be effective in a range of challenging
activities, including completing preclinical testing and clinical trials of our product candidates, discovering additional product
candidates, obtaining regulatory approval for these product candidates and manufacturing, marketing and selling any
products for which we may obtain regulatory approval. We are only in the preliminary stages of most of these activities. We
may never succeed in these activities and, even if we do, may never generate revenues that are significant enough to achieve
profitability. Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are
unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve
profitability. Our expenses will increase if, among other things:
• we are required by the U.S. Food and Drug Administration, or the FDA, the European Medicines Agency, or the EMA,
or other regulatory authorities to perform trials or studies in addition to those currently expected;
• there are any delays in completing our clinical trials or the development of any of our product candidates; or
• there are any third-party challenges to our intellectual property or we need to defend against any intellectual property-
related claim.
Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our
failure to become and remain profitable would depress the value of our company and could impair our ability to raise capital,
expand our business, maintain our research and development efforts, diversify our product offerings or even continue our
operations. A decline in the value of our company could also cause our stockholders to lose all or part of their investment.
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 product development programs or commercialization efforts.
We expect to devote substantial financial resources to our ongoing and planned activities, particularly as we continue our
Phase 1b/2 clinical trial of CPI-1205 and our Phase 2 clinical trial of CPI-0610 and prepare for a planned Phase 1 clinical trial
of CPI-0209; and continue research and development and initiate additional clinical trials of, and seek regulatory approval
for, these and other product candidates. We expect our expenses to increase substantially in connection with our ongoing
activities, particularly as we advance our preclinical activities and clinical trials. In addition, if we obtain regulatory approval
for any of our product candidates, we expect to incur significant commercialization expenses related to product
manufacturing, marketing, sales and distribution. Furthermore, we will incur additional costs associated with operating as a
public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing
operations. If we are unable to raise capital when needed or on acceptable terms, we could be forced to delay, reduce or
eliminate our research and development programs or any future commercialization efforts.
Our future capital requirements will depend on many factors, including:
• the progress, costs and results of our ongoing Phase 1b/2 clinical trial of CPI-1205 and Phase 2 clinical trial of CPI-
0610;
• the scope, progress, results and costs of discovery research, preclinical development, laboratory testing and clinical
trials for our other product candidates, including our planned Phase 1 clinical trial of CPI-0209;
• the number and development requirements of other product candidates that we pursue;
• the costs, timing and outcome of regulatory review of our product candidates;
• our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of
such arrangements;
• milestones and other collaboration-based revenues, if any;
• the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and
distribution, for any of our product candidates for which we receive marketing approval;
• the amount and timing of revenue, if any, received from commercial sales of our product candidates for which we
receive marketing approval;
• the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual
property and proprietary rights and defending any intellectual property-related claims; and
• the extent to which we acquire or in-license other products, product candidates or technologies.
48
As of December 31, 2018, we had cash and cash equivalents of approximately $114.6 million. We believe that our existing
cash and cash equivalents as of December 31, 2018, will enable us to fund our operating expenses and capital expenditure
requirements into the second quarter of 2020. However, we have based this estimate on assumptions that may prove to be
wrong, and our operating plan may change as a result of many factors currently unknown to us. As a result, we could deplete
our capital resources sooner than we currently expect.
Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive
and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain
regulatory approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial
success. Commercial revenues, if any, will not be derived unless and until we can achieve sales of commercially available
products, which we do not anticipate for many years, if at all. Accordingly, we will need to continue to rely on additional
financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms,
or at all. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we
believe we have sufficient funds for our current or future operating plans. If adequate funds are not available to us on a timely
basis, we may be required to delay, limit, reduce or terminate preclinical studies, clinical trials or other development activities
for one or more of our product candidates or delay, limit, reduce or terminate our establishment of sales and marketing
capabilities or other activities that may be necessary to commercialize our product candidates.
Raising additional capital may cause dilution to our stockholders, restrict our operations 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 equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing
arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through
the sale of equity or convertible debt securities, our stockholders’ ownership interests will be diluted, and the terms of these
securities may include liquidation or other preferences that adversely affect our stockholders’ rights as a common
stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants
limiting or restricting our ability to take specific actions, such as incurring additional debt, selling or licensing our assets,
making capital expenditures or declaring dividends.
If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements
with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs
or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds
through equity or debt financings 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
otherwise prefer to develop and market ourselves.
Our limited operating history may make it difficult for stockholders to evaluate the success of our business to date and to
assess our future viability.
We commenced active operations in early 2008, and our operations to date have been limited to organizing and staffing our
company, business planning, raising capital, developing our technology, identifying potential product candidates, undertaking
preclinical studies and conducting clinical trials. All but two of our product candidates are still in preclinical development.
We have not yet demonstrated our ability to successfully develop any product candidate, obtain regulatory approvals,
manufacture a commercial scale product or arrange for a third party to do so on our behalf, or conduct sales and marketing
activities necessary for successful product commercialization. Consequently, any predictions stockholders make about our
future success or viability may not be as accurate as they could be if we had a longer operating history.
In addition, as our business grows, we may encounter unforeseen expenses, difficulties, complications, delays and other
known and unknown factors. We will need to transition at some point from a company with a research and development
focus to a company capable of supporting commercial activities. We may not be successful in such a transition.
We expect our financial condition and operating results to fluctuate significantly from quarter-to-quarter and year-to-year due
to a variety of factors, many of which are beyond our control. Accordingly, stockholders should not rely upon the results of
any quarterly or annual periods as indications of future operating performance.
49
Any future indebtedness may limit cash flow available to invest in the ongoing needs of our business.
Any future indebtedness that we may incur combined with our other financial obligations and contractual commitments could
have significant adverse consequences, including:
• requiring us to dedicate a substantial portion of cash flow from operations or cash on hand to the payment of interest
on, and principal of, our debt, which will reduce the amounts available to fund working capital, capital expenditures,
product development efforts 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 our industry; and
• placing us at a competitive disadvantage compared to our competitors that have less debt or better debt servicing
options.
We intend to satisfy any future debt service obligations with our existing cash and funds from external sources. Nonetheless,
we may not have sufficient funds or may be unable to arrange for additional financing to pay the amounts due under any
future debt. Funds from external sources may not be available on acceptable terms, if at all. In addition, a failure to comply
with the covenants under any future loan agreements we may enter into could result in an event of default and acceleration of
amounts due. If an event of default occurs and the lenders accelerate the amounts due under such loan agreements, we may
not be able to make accelerated payments, and such lenders could seek to enforce security interests in the collateral securing
such indebtedness.
Comprehensive tax reform legislation could adversely affect our business and financial condition.
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act, or TCJA, which significantly reforms the
Internal Revenue Code of 1986, as amended. The TCJA, among other things, contains significant changes to corporate
taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the
tax deduction for net interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the
deduction for net operating losses to 80% of annual taxable income and elimination of net operating loss carrybacks, in each
case, for losses arising in taxable years beginning after December 31, 2017 (though any such net operating losses may be
carried forward indefinitely), one-time taxation of offshore earnings at reduced rates regardless of whether they are
repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for
certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business
deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the TCJA is
uncertain and our business and financial condition could be adversely affected. In addition, it is uncertain how various states
will respond to the TCJA. The impact of this reform on holders of our common stock is also uncertain and could be adverse.
We urge investors in our common stock to consult with their legal and tax advisors with respect to TCJA and the potential tax
consequences of investing in or holding our common stock.
Risks Related to the Discovery and Development of our Product Candidates
Our approach to the discovery and development of product candidates based on the inhibition of epigenetic regulators by
small molecules is an emerging field, and we do not know whether we will be able to successfully develop any products.
The discovery and development of small molecules that inhibit epigenetic regulators to restore normal gene expression is an
emerging field, and the scientific discoveries that form the basis for our efforts to discover and develop product candidates
are relatively new. Although epigenetic regulation of gene expression plays an essential role in biological function, few drugs
premised on the inhibition of epigenetic regulators have been developed.
50
Before obtaining marketing approval from regulatory authorities for the sale of any product candidate, we must conduct
extensive clinical trials to demonstrate the safety and efficacy of such product candidate in humans. We have not yet begun or
completed a pivotal clinical trial of any product candidate. Clinical trials may fail to demonstrate that our product candidates
are safe for humans and effective for indicated uses. Even if the clinical trials are successful, changes in marketing approval
policies during the development period, changes in or the enactment or promulgation of additional statutes, regulations or
guidance or changes in regulatory review for each submitted product application may cause delays in the approval or
rejection of an application. Regulatory authorities have substantial discretion in the approval process and may cause delays in
the approval or rejection of an application. As a result of these factors, it is more difficult for us to predict the time and cost
of product candidate development, and we cannot predict whether the application of our epigenetic platform, or any similar
or competitive epigenetic platforms, will result in the development and regulatory approval of any products. There can be no
assurance that any development problems we experience in the future related to our epigenetics platform or any of our
research programs will not cause significant delays or unanticipated costs, or that such development problems can be solved.
In addition, adverse developments in preclinical studies or clinical trials conducted by others of epigenetic product candidates
or adverse events in patients treated with epigenetic products may cause the FDA or other regulatory agencies to require
modifications to clinical trials of epigenetic product candidates, revise the requirements for approval of epigenetic product
candidates or limit the use of epigenetic products, any of which could materially harm our business. Moreover, there have
been significant adverse side effects in clinical trials of epigenetic product candidates of our competitors. For example, one
such competitor recently reported that a pediatric patient in its Phase 1 clinical trial of an EZH2 inhibitor had developed a
secondary lymphoma following treatment. This same company previously reported that in the course of the preclinical safety
studies of its EZH2 inhibitor it had observed the development of lymphoma in rats. We have no preclinical or clinical data
from our studies to date to suggest that patients are likely to experience similar side effects with our product candidates that
inhibit EZH2. However, due to concerns regarding hematological malignancies, the FDA previously inquired about our plans
for typical long-term toxicology studies of CPI-1205, which studies we plan to conduct, and required that we include the
development of a rare leukemia as a potential risk in the informed consent for our CPI-1205 trials. The FDA required us to
update the investigator’s brochure and informed consent for our trials of CPI-1205 to include the risk of the development of
T-cell lymphoma. The FDA provided guidance regarding our planned long-term toxicology study in rats, including that it
should be designed to enhance the probability of detecting whether the development of lymphoma is associated with
exposure to CPI-1205. Further, adverse events in our or our competitors’ preclinical studies and/or clinical trials of epigenetic
product candidates, even if not ultimately attributable to the product candidate under exploration, and the resulting negative
publicity, could result in increased governmental regulation, unfavorable public perception, inadequate acceptance in the
medical community, potential regulatory delays in the testing or approval of our product candidates and any additional
product candidates that we may identify and develop, stricter labeling requirements for those product candidates that are
approved, and a decrease in demand for any such product candidates.
Any of these factors may prevent us from completing our preclinical studies, completing any clinical trials that we may
initiate or commercializing any product candidates we may develop, on a timely or profitable basis, if at all.
We are early in our development efforts, and we only have two product candidates in clinical trials that we are developing.
All of our other product candidates are still in preclinical development. If we are unable to commercialize our product
candidates or experience significant delays in doing so, our business will be materially harmed.
We are early in our development efforts, and we only have two product candidates in clinical trials that we are developing,
CPI-1205 for the treatment of metastatic castration-resistant prostate cancer, or mCRPC, and CPI-0610 for the treatment of
myelofibrosis, or MF. All of our other product candidates are still in preclinical development. We have invested substantially
all of our efforts and financial resources in our integrated epigenetics platform to discover and develop new drugs that
selectively modulate gene expression that may lead to the killing or reprogramming of cancer cells or result in anti-tumor
immune activity. Our ability to generate product revenues, which we do not expect will occur for many years, if ever, will
depend heavily on the successful development and eventual commercialization of our product candidates. The success of our
product candidates will depend on several factors, including the following:
•
successfully completing preclinical studies and clinical trials;
• expanding and maintaining a workforce of experienced scientists and others with experience in epigenetics to continue
to develop our product candidates;
•
successfully applying for and receiving marketing approvals from applicable regulatory authorities;
• obtaining and maintaining intellectual property protection and regulatory exclusivity for our product candidates;
51
• making arrangements with third-party manufacturers for, or establishing, commercial manufacturing capabilities;
• establishing sales, marketing and distribution capabilities and successfully launching commercial sales of the products,
if and when approved, whether alone or in collaboration with others;
• acceptance of the products, if and when approved, by patients, the medical community and third-party payors;
• effectively competing with other therapies;
• obtaining and maintaining coverage, adequate pricing and adequate reimbursement from third-party payors, including
government payors;
• maintaining, enforcing, defending and protecting our rights in our intellectual property portfolio;
• not infringing, misappropriating or otherwise violating others’ intellectual property or proprietary rights; and
• maintaining a continued acceptable safety profile of the products following approval.
If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an
inability to successfully develop and commercialize our product candidates, which would materially harm our business.
We may not be successful in our efforts to use our product platform to build a pipeline of product candidates.
A key element of our strategy is to use our integrated epigenetics product platform to build a pipeline of small molecule
product candidates that selectively modulate gene expression in tumor and immune cells to drive anti-tumor activity and
progress these product candidates through clinical development for the treatment of a variety of different types of cancer.
Even if we are successful in continuing to build our pipeline, the potential product candidates that we identify may not be
suitable for clinical development, including as a result of being shown to have harmful side effects or other characteristics
that indicate that they are unlikely to receive marketing approval and achieve market acceptance. If we do not successfully
develop and commercialize product candidates based upon our technological approach, we will not be able to obtain product
revenues in future periods, which likely would result in significant harm to our financial position and adversely affect our
stock price.
Clinical drug development involves a lengthy and expensive process, with an uncertain outcome. We may incur additional
costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of
our product candidates.
We have product candidates in clinical development, and our remaining product candidates are in preclinical development.
The risk of failure for each of our product candidates is high. It is impossible to predict when or if any of our product
candidates will prove effective or safe in humans or will receive regulatory approval. Before obtaining marketing approval
from regulatory authorities for the sale of any product candidate, we must complete preclinical development and then conduct
extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans.
Product candidates are subject to continued preclinical safety studies, which may be conducted concurrent with our clinical
testing. The outcomes of these safety studies may delay the launch of or enrollment in future clinical trials.
Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to
outcome. A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinical testing and early
clinical trials 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, preclinical and clinical data are often susceptible to varying interpretations and
analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and
clinical trials have nonetheless failed to obtain marketing approval of their products. Furthermore, the failure of any of our
product candidates to demonstrate safety and efficacy in any clinical trial could negatively impact the perception of our other
product candidates and/or cause the FDA or other regulatory authorities to require additional testing before approving any of
our product candidates. In addition, results from compassionate use protocols or investigator-sponsored trials may not be
confirmed in company-sponsored trials and/or may negatively impact the prospects for our programs.
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We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability
to receive marketing approval or commercialize our product candidates, including:
•
regulators or institutional review boards, or IRBs, may not authorize us or our investigators to commence a clinical trial
or conduct a clinical trial at a prospective trial site;
• we may experience delays in reaching, or fail to reach, agreement on acceptable clinical trial contracts or clinical trial
protocols with prospective trial sites;
• clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators
may require us, to conduct additional clinical trials or abandon product development programs;
• preclinical testing may produce results based on which we may decide, or regulators may require us, to conduct
additional preclinical studies before we proceed with certain clinical trials, limit the scope of our clinical trials, halt
ongoing clinical trials or abandon product development programs;
•
the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment
in these clinical trials may be slower than we anticipate or participants may drop out of these clinical trials at a higher
rate than we anticipate;
• our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us
in a timely manner, or at all;
• we may have to suspend or terminate clinical trials of our product candidates for various reasons, including
noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health
risks;
•
•
•
•
•
regulators or IRBs may require that we or our investigators suspend or terminate clinical research for various reasons,
including noncompliance with regulatory requirements or a finding that the participants are being exposed to
unacceptable health risks;
regulators or IRBs may require us to perform additional or unanticipated clinical trials to obtain approval or we may be
subject to additional post-marketing testing requirements to maintain regulatory approval;
regulators may revise the requirements for approving our product candidates, or such requirements may not be as we
anticipate;
the cost of clinical trials of our product candidates may be greater than we anticipate;
the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product
candidates may be insufficient or inadequate;
• our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our
investigators, regulators or IRBs to suspend or terminate the trials; and
•
regulators may withdraw their approval of a product or impose restrictions on its distribution, such as in the form of a
risk evaluation and mitigation strategy, or REMS.
If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we
currently contemplate, if we are unable to successfully complete clinical trials of our product candidates or other testing, if
the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we 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 or a REMS that includes significant use or distribution restrictions or safety warnings;
• be subject to additional post-marketing testing requirements; or
• have the product removed from the market after obtaining marketing approval.
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Our product development costs will also increase if we experience delays in testing or in obtaining marketing approvals. We
do not know whether any of our preclinical studies or clinical trials will begin as planned, will need to be restructured or will
be completed on schedule, or at all. We may also determine to change the design or protocol of one or more of our clinical
trials, including to add additional arms or patient populations, which could result in increased costs and expenses and/or
delays. Significant preclinical study or clinical trial delays also could shorten any periods during which we may have the
exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do
and impair our ability to successfully commercialize our product candidates and may harm our business and results of
operations.
If we experience delays or difficulties in the enrollment of patients in clinical trials, our receipt of necessary regulatory
approvals could be delayed or prevented.
We may not be able to initiate or continue clinical trials for our product candidates if we are unable to locate and enroll a
sufficient number of eligible patients to participate in these trials as required by the FDA or similar regulatory authorities
outside of the United States. In particular, because certain of our products may be focused on specific patient populations, our
ability to enroll eligible patients may be limited or may result in slower enrollment than we anticipate. In addition, some of
our competitors have ongoing clinical trials for product candidates that may treat the broader patient populations within
which our product candidates are being developed for the treatment of a subset of identifiable patients with cancer and other
diseases, and patients who would otherwise be eligible for our clinical trials may instead enroll in clinical trials of our
competitors’ product candidates.
Patient enrollment is affected by a variety of other factors, including:
•
•
•
•
•
•
•
•
•
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the prevalence and severity of the disease under investigation;
the eligibility criteria for the trial in question;
the perceived risks and benefits of the product candidate under trial;
the existence of existing treatments for the indications for which we are conducting clinical trials;
the efforts to facilitate timely enrollment in clinical trials;
the patient referral practices of physicians;
the ability to monitor patients adequately during and after treatment;
the proximity and availability of clinical trial sites for prospective patients;
the conducting of clinical trials by competitors for product candidates that treat the same indications as our product
candidates;
the ability to identify specific patient population for biomarker-defined trial cohort(s); and
the cost to, or lack of adequate compensation for, prospective patients.
Our inability to locate and enroll a sufficient number of patients for our clinical trials would result in significant delays, could
require us to abandon one or more clinical trials altogether and could delay or prevent our receipt of necessary regulatory
approvals. Enrollment delays in our clinical trials may result in increased development costs for our product candidates,
which would cause the value of our company to decline and limit our ability to obtain additional financing.
If serious adverse events or unacceptable side effects are identified during the development of our product candidates, we
may need to abandon or limit our development of some of our product candidates.
If our product candidates, either alone or in combination with other therapeutics, are associated with serious adverse events or
undesirable side effects in clinical trials or have characteristics that are unexpected in clinical trials or preclinical testing, we
may need to abandon their development or limit development to more narrow uses or subpopulations in which the serious
adverse events, undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-
benefit perspective. In pharmaceutical development, many compounds that initially show promise in early-stage or clinical
testing for treating cancer are later found to cause side effects that prevent further development of the compound. In addition,
if third parties manufacture or use our product candidates without our permission, and generate adverse events or
unacceptable side effects, this could also have an adverse impact on our development efforts.
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We are currently pursuing the development of our product candidates in combination with other approved therapeutics. If
the FDA revokes approval of any such therapeutic, or if safety, efficacy, manufacturing or supply issues arise with any
therapeutic that we use in combination with one of our product candidates in the future, we may be unable to further
develop and/or market our product candidate or we may experience significant regulatory delays or supply shortages, and
our business could be materially harmed.
We are pursuing the development of our product candidates in combination with other approved therapeutics. We are
currently conducting (i) a Phase 1b/2 clinical trial of CPI-1205 for the treatment of mCRPC in combination with
enzalutamide, which is marketed by Pfizer Inc. and Astellas Pharma Inc. and is currently approved to treat mCRPC, or
abiraterone acetate, which is marketed by Janssen and is currently approved for use in combination with prednisone for the
treatment of patients with mCRPC, and (ii) a Phase 2 clinical trial of CPI-0610 as a monotherapy or in combination with
ruxolitinib, which is marketed by Incyte, Inc. and is currently approved to treat intermediate or high-risk MF, in patients with
MF. We expect to commence additional clinical trials of our product candidates in combination with other approved
therapeutics, including, if our Phase 1b/2 trial is successful, a pivotal Phase 3 clinical trial of CPI-1205 in combination with
either enzalutamide or abiraterone acetate for the treatment of mCRPC. We may also seek to develop our product candidates
in combination with other therapeutics in the future.
We did not develop or obtain regulatory approval for, and we do not manufacture or sell, any of these approved therapeutics.
In addition, these combinations have not been tested before and may, among other things, fail to demonstrate synergistic
activity, may fail to achieve superior outcomes relative to the use of single agents or other combination therapies, may
exacerbate adverse events associated with one of our product candidates when used as monotherapy or may fail to
demonstrate sufficient safety or efficacy traits in clinical trials to enable us to complete those clinical trials or obtain
marketing approval for the combination therapy.
If the FDA revokes its approval of any of these therapeutics, we will not be able to continue clinical development of or
market CPI-1205, CPI-0610 or any other product candidate in combination with such revoked therapeutic. If safety or
efficacy issues arise with these or any other therapeutics that we seek to combine with our product candidates in the future,
we may experience significant regulatory delays, and the FDA may require us to redesign or terminate the applicable clinical
trials. Moreover, if these therapeutics were to receive regulatory approval in combination with a different therapeutic in any
indication for which we are pursuing approval, such approval could impact the feasibility and design of any subsequent
clinical trials that we may seek to conduct evaluating CPI-1205, CPI-0610 or any other product candidate in combination
with such therapeutic. If manufacturing, cost or other issues result in a supply shortage of these therapeutics or any other
combination therapeutics, we may not be able to complete clinical development of CPI-1205 or CPI-0610 on our current
timeline or at all, or any other product candidate we may develop in the future.
In addition, we may need, for supply, data referencing or other purposes, to collaborate or otherwise engage with the
companies who market these approved therapeutics. If we are unable to do so on a timely basis, on acceptable terms or at all,
we may have to curtail the development of a product candidate or indication, reduce or delay its development program, delay
its potential commercialization or reduce the scope of any sales or marketing activities.
Even if CPI-1205, CPI-0610 or any other product candidate were to receive regulatory approval and be commercialized for
use in combination with enzalutamide, abiraterone acetate, ipilimumab, pembrolizumab or ruxolitinib, as applicable, or
another therapeutic, we would continue to be subject to the risk that the FDA could revoke its approval of such therapeutic,
that safety, efficacy, manufacturing, cost or supply issues could arise with one of these therapeutic agents, or that the current
standard of care may be replaced. This could result in CPI-1205, CPI-0610 or any such other product candidate, if approved,
being removed from the market or being less successful commercially.
In addition to therapeutic combinations, we are exploring the use of a co-medication to enhance the exposure of CPI-1205
and may also seek to similarly develop our other product candidates using a co-medication. Similar risks relating to the
development of our product candidates in combination with other approved therapeutics described herein also apply to the
development of our product candidates using a co-medication.
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We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on
product candidates or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we focus on research programs and product candidates that we
identify for specific indications. As a result, we may forego or delay pursuit of opportunities with other product candidates or
for other indications that later prove to have greater commercial potential. For example, we made a strategic decision to
advance development of CPI-1205 in solid tumors, despite encouraging clinical data in our Phase 1 trial of CPI-1205 in
patients with progressive/relapsed lymphoma, primarily due to strategic considerations with respect to a pathway to
regulatory approval and potential commercial opportunities. Our resource allocation decisions may cause us to fail to
capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and
development programs and product candidates for specific indications may not yield any commercially viable products. If we
do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish
valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it
would have been more advantageous for us to retain sole development and commercialization rights to such product
candidate.
We currently plan to conduct clinical trials for product candidates at sites outside the United States, and the FDA may not
accept data from trials conducted in such locations.
We currently plan to conduct clinical trials outside the United States. Although the FDA may accept data from clinical trials
conducted outside the United States, acceptance of these data is subject to conditions imposed by the FDA. For example, the
clinical trial must be well designed and conducted and be performed by qualified investigators in accordance with ethical
principles. The trial population must also adequately represent the U.S. population, and the data must be applicable to the
U.S. population and U.S. medical practice in ways that the FDA deems clinically meaningful. In addition, while these clinical
trials are subject to the applicable local laws, FDA acceptance of the data will depend on its determination that the trials also
complied with all applicable U.S. laws and regulations. If the FDA does not accept the data from any trial that we conduct
outside the United States, it would likely result in the need for additional trials, which would be costly and time-consuming
and could delay or permanently halt our development of the applicable product candidates.
Risks Related to the Commercialization of Our Product Candidates
Even if any of our product candidates receives marketing approval, it may fail to achieve the degree of market acceptance
by physicians, patients, third-party payors and others in the medical community necessary for commercial success, and
the market opportunity for any of our product candidates, if approved, may be smaller than we estimate.
If any of our product candidates receives marketing approval, it may nonetheless fail to gain sufficient market acceptance by
physicians, patients, third-party payors and others in the medical community. For example, current cancer treatments like
chemotherapy and radiation therapy are well established in the medical community, and doctors may continue to rely on
these treatments. If our product candidates do not achieve an adequate level of acceptance, we may not generate significant
product revenues and we may not become profitable. The degree of market acceptance of our product candidates, if approved
for commercial sale, will depend on a number of factors, including:
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the efficacy and potential advantages of our product candidates compared to alternative treatments;
• our ability to offer our products for sale at competitive prices;
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the clinical indications for which the product is approved;
the convenience and ease of administration compared to alternative treatments;
the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
the strength of marketing and distribution support;
the timing of market introduction of competitive products;
the availability of third-party coverage and adequate reimbursement;
the prevalence and severity of any side effects; and
• any restrictions on the use of our products together with other medications.
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Our assessment of the potential market opportunity for our product candidates is based on industry and market data that we
obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and
third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to
be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe these
industry publications and third-party research, surveys and studies are reliable, we have not independently verified such data.
Our estimates of the potential market opportunities for our product candidates include several key assumptions based on our
industry knowledge, industry publications, third-party research and other surveys, which may fail to accurately reflect market
opportunities. While we believe that our internal assumptions are reasonable, no independent source has verified such
assumptions. If any of our assumptions or estimates, or these publications, research, surveys or studies prove to be inaccurate,
then the actual market for any of our product candidates may be smaller than we expect, and as a result our product revenue
may be limited and it may be more difficult for us to achieve or maintain profitability.
If we are unable to establish sales, marketing and distribution capabilities or enter into sales, marketing and distribution
agreements with third parties, we may not be successful in commercializing our product candidates if and when they are
approved.
We do not have a sales or marketing infrastructure and have no experience in the sale, marketing or distribution of
pharmaceutical products. To achieve commercial success for any product for which we have obtained marketing approval,
we will need to establish a sales, marketing and distribution organization, either ourselves or through collaborations or other
arrangements with third parties.
In the future, we expect to build a focused, specialty sales and marketing infrastructure to market some of our product
candidates in the United States, if and when they are approved. There are risks involved with establishing our own sales,
marketing and distribution capabilities. For example, recruiting and training a sales force is expensive and time-consuming
and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and
establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily
incurred these commercialization expenses. These efforts may be costly, and our investment would be lost if we cannot retain
or reposition our sales and marketing personnel.
Factors that may inhibit our efforts to commercialize our products on our own include:
• our inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;
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the inability of sales personnel to obtain access to physicians or persuade adequate numbers of physicians to prescribe
any future products;
the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage
relative to companies with more extensive product lines; and
• unforeseen costs and expenses associated with creating an independent sales and marketing organization.
If we are unable to establish our own sales, marketing and distribution capabilities and enter into arrangements with third
parties to perform these services, our product revenues and our profitability, if any, are likely to be lower than if we were to
market, sell and distribute any products that we develop ourselves. In addition, we may not be successful in entering into
arrangements with third parties to sell, market and distribute our product candidates or may be unable to do so on terms that
are acceptable to us. We likely will have little control over such third parties, and any of them may fail to devote the
necessary resources and attention to sell and market our products effectively. If we do not establish sales, marketing and
distribution capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in
commercializing our product candidates.
We face substantial competition, which may result in others discovering, developing or commercializing products before
or more successfully than we do.
The development and commercialization of new drug products is highly competitive. We face competition with respect to our
current product candidates, and will face competition with respect to any product candidates that we may seek to develop or
commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology
companies worldwide. There are a number of large pharmaceutical and biotechnology companies that currently market and
sell products or are pursuing the development of products for the treatment of many of the disease indications for which we
are developing our product candidates. Some of these competitive products and therapies are based on scientific approaches
that are the same as or similar to our approach, and others are based on entirely different approaches. Potential competitors
also include academic institutions, government agencies and other public and private research organizations that conduct
research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and
commercialization.
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Specifically, there are a large number of companies developing or marketing treatments for cancer, including many large
pharmaceutical and biotechnology companies. In addition, many companies are developing cancer therapies that work by
targeting epigenetic mechanisms, including through EZH2 and BET inhibition, such as AbbVie Inc., CellCentric Ltd.,
Celgene Corporation, Daiichi Sankyo Company, Eli Lilly & Company, Epizyme, Inc., GlaxoSmithKline plc, Incyte, Inc.,
Novartis AG, Pfizer Inc. and Zenith Epigenetics Ltd.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are
safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that
we may develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we
may obtain approval for ours, which could result in additional challenges to our regulatory approval strategy and/or our
competitors establishing a stronger market position before we are able to enter the market. In addition, our ability to compete
may be affected in many cases by insurers or other third-party payors seeking to encourage the use of generic products.
Generic products are currently on the market for many of the indications that we are pursuing, and additional products are
expected to become available on a generic basis over the coming years. If our product candidates achieve marketing
approval, we expect that they will be priced at a significant premium over competitive generic products.
Many of the companies against which we are competing or against which we may compete in the future have significantly
greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical
trials, obtaining regulatory approvals and marketing approved products than we do.
Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being
concentrated among a smaller number of our competitors. Smaller and other early-stage companies may also prove to be
significant competitors, particularly through collaborative arrangements with large and established companies. These third
parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial
sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our
programs.
If our contracted manufacturing facilities experience production issues for any reason, we may be unable to manufacture
clinical supplies or commercial quantities of our product candidates for a substantial amount of time, which could have a
material adverse effect on our business.
We rely, and expect to continue to rely, on third parties to manufacture clinical supplies of our product candidates and
commercial supplies of our products, if and when approved for marketing by applicable regulatory authorities, as well as for
packaging, sterilization, storage, distribution and other production logistics. If these third parties do not successfully carry out
their contractual duties, meet expected deadlines or manufacture our product candidates in accordance with regulatory
requirements, if there are disagreements between us and such parties, or if such parties are unable to expand capacities to
support commercialization of any of our product candidates for which we obtain marketing approval, we may not be able to
fulfill, or may be delayed in producing sufficient product candidates to meet, our supply requirements. These facilities may
also be affected by natural disasters, such as floods or fire, or such facilities could face manufacturing issues, such as
contamination or regulatory concerns following a regulatory inspection of such facility. In such instances, we may need to
locate an appropriate replacement third-party facility and establish a contractual relationship, which may not be readily
available or on acceptable terms, which would cause additional delay and increased expense, including as a result of
additional required FDA approvals, and may have a material adverse effect on our business.
Our third-party manufacturers are subject to inspection and approval by the FDA before we can commence the manufacture
and sale of any of our product candidates, and thereafter subject to FDA inspection from time to time. Failure by our third-
party manufacturers to pass such inspections and otherwise satisfactorily complete the FDA approval regimen with respect to
our product candidates may result in regulatory actions such as the issuance of FDA Form 483 notices of observations,
warning letters or injunctions or the loss of operating licenses.
We or our third-party manufacturers may also encounter shortages in the raw materials or active pharmaceutical ingredient
necessary to produce our product candidates in the quantities needed for our clinical trials or, if our product candidates are
approved, in sufficient quantities for commercialization or to meet an increase in demand, as a result of capacity constraints
or delays or disruptions in the market for the raw materials or active pharmaceutical ingredient, including shortages caused by
the purchase of such raw materials or active pharmaceutical ingredient by our competitors or others. The failure of us or our
third-party manufacturers to obtain the raw materials or active pharmaceutical ingredient necessary to manufacture sufficient
quantities of our product candidates, may have a material adverse effect on our business.
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Even if we are able to commercialize any product candidates, the products may become subject to unfavorable pricing
regulations, third-party coverage or reimbursement practices or healthcare reform initiatives, which could harm our
business.
The regulations that govern marketing approvals, pricing, coverage and reimbursement for new drug products vary widely
from country to country. Current and future legislation may significantly change the approval requirements in ways that
could involve additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a
drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing
approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing
governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a product in a
particular country, but then be subject to price regulations that delay our commercial launch of the product, possibly for
lengthy time periods, and negatively impact the revenues we are able to generate from the sale of the product in that country.
Adverse pricing limitations may hinder our ability to recoup our investment in one or more product candidates, even if our
product candidates obtain marketing approval.
Our ability to commercialize any product candidates successfully also will depend in part on the extent to which coverage
and adequate reimbursement for these products and related treatments will be available from government health
administration authorities, private health insurers and other organizations. Government authorities and third-party payors,
such as private health insurers and health maintenance organizations, decide which medications they will pay for and
establish reimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment.
Government authorities and third-party payors have attempted to control costs by limiting coverage and the amount of
reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companies provide them
with predetermined discounts from list prices and are challenging the prices charged for medical products. Coverage and
reimbursement may not be available for any product that we commercialize and, even if these are available, the level of
reimbursement may not be satisfactory. Reimbursement may affect the demand for, or the price of, any product candidate for
which we obtain marketing approval. Obtaining and maintaining adequate reimbursement for our products may be difficult.
We may be required to conduct expensive pharmacoeconomic studies to justify coverage and reimbursement or the level of
reimbursement relative to other therapies. If coverage and adequate reimbursement are not available or reimbursement is
available only to limited levels, we may not be able to successfully commercialize any product candidate for which we obtain
marketing approval.
There may be significant delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be
more limited than the purposes for which the drug is approved by the FDA or similar regulatory authorities outside of the
United States. Moreover, eligibility for coverage and reimbursement does not imply that a drug will be paid for in all cases or
at a rate that covers our costs, including research, development, manufacture, sale and distribution expenses. Interim
reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made
permanent. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be
based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other
services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare
programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where
they may be sold at lower prices than in the United States. Third-party payors often rely upon Medicare coverage policy and
payment limitations in setting their own reimbursement policies. Our inability to promptly obtain coverage and adequate
reimbursement rates from both government-funded and private payors for any approved products that we develop could have
a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our
overall financial condition.
There can be no assurance that our product candidates, even if they are approved for sale in the United States or in other
countries, will be considered medically reasonable and necessary for a specific indication or cost-effective by third-party
payors, or that coverage and an adequate level of reimbursement will be available or that third-party payors’ reimbursement
policies will not adversely affect our ability to sell our product candidates profitably.
Product liability lawsuits against us could divert our resources and could cause us to incur substantial liabilities and to
limit commercialization of any products that we may develop.
We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials
and use of our product candidates through compassionate use, and we will face an even greater risk if we commercially sell
any products that we may develop. For example, in January 2017, a participant dosed in our Phase 1 clinical trial of CPI-0610
filed a complaint against us in the United States District Court for the District of Arizona, alleging negligence, lack of
informed consent, strict products liability and loss of consortium, related to alleged psychological injuries resulting from the
use of CPI-0610. The plaintiff is seeking damages and alleges that the trial protocols did not adequately inform the plaintiff
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of the risks of psychosis and that the plaintiff was misled into believing that the Phase 1 clinical trial participation was with a
product that had already proven efficacious. We filed an answer in March 2017. While we believe we have meritorious
defenses, expect insurance to cover any damages as a result of this claim and do not deem this litigation to be material, it
could divert management’s attention and resources, and result in harm to our reputation or any of the other results described
below.
If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will
incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
• decreased demand for any product candidates or products that we may develop;
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injury to our reputation and significant negative media attention;
• withdrawal of clinical trial participants;
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significant costs to defend any related litigation;
substantial monetary awards to trial participants or patients;
loss of revenue;
reduced resources of our management to pursue our business strategy; and
the inability to commercialize any products that we may develop.
We currently hold $10 million in product liability insurance coverage in the aggregate, with a per incident limit of
$10 million, which may not be adequate to cover all liabilities that we may incur. We may need to increase our insurance
coverage as we expand our clinical trials or if we commence commercialization of our product candidates. Insurance
coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount
adequate to satisfy any liability that may arise.
Risks Related to Our Dependence on Third Parties
We rely, and expect to continue to rely, on third parties to conduct our clinical trials, and those third parties may not
perform satisfactorily, including failing to meet deadlines for the completion of such trials.
We currently rely on third-party clinical research organizations to conduct our ongoing Phase 1b/2 clinical trial of CPI-1205
and Phase 2 clinical trial of CPI-0610 and plan to rely on third-party clinical research organizations or third-party research
collaboratives to conduct our planned clinical trials. We do not plan to independently conduct clinical trials of our other
product candidates. We expect to continue to rely on third parties, such as clinical research organizations, clinical data
management organizations, medical institutions and clinical investigators, to conduct our clinical trials. These agreements
might terminate for a variety of reasons, including a failure to perform by the third parties. If we need to enter into alternative
arrangements, our product development activities might be delayed.
Our reliance on these third parties for research and development activities will reduce our control over these activities but
will not relieve us of our responsibilities. For example, we will remain responsible for ensuring that each of our clinical trials
is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to
comply with standards, commonly referred to as good clinical practices, or GCPs, for conducting, recording and reporting the
results of 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. We also are required to register ongoing clinical trials and post the results of
completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within specified timeframes. Failure to do
so can result in fines, adverse publicity and civil and criminal sanctions.
If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical
trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in
obtaining, marketing approvals for our product candidates and will not be able to, or may be delayed in our efforts to,
successfully develop and commercialize our product candidates. Furthermore, these third parties may also have relationships
with other entities, some of which may be our competitors.
We also expect to rely on other third parties to store and distribute drug supplies for our clinical trials. Any performance
failure on the part of our distributors could delay clinical development or marketing approval of our product candidates or
commercialization of our products, producing additional losses and depriving us of potential product revenue.
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We contract with third parties for the manufacture of our product candidates for preclinical and clinical testing and
expect to continue to do so for commercialization. This reliance on third parties increases the risk that we will not have
sufficient quantities of our product candidates or products or such quantities at an acceptable cost or quality, which could
delay, prevent or impair our development or commercialization efforts.
We do not have any manufacturing facilities or personnel, and we rely, and expect to continue to rely, on third parties for the
manufacture of our product candidates for preclinical and clinical testing, as well as for commercial manufacture if any of our
product candidates receive marketing approval. This reliance on third parties increases the risk that we will not have
sufficient quantities of our product candidates or products or such quantities at an acceptable cost or quality, which could
delay, prevent or impair our development or commercialization efforts.
We also expect to rely on third-party manufacturers or third-party collaborators for the manufacture of commercial supply of
any other product candidates for which we or our collaborators obtain marketing approval. We may be unable to establish
any agreements with third-party manufacturers or to do so on acceptable terms. Even if we are able to establish agreements
with third-party manufacturers, reliance on third-party manufacturers entails additional risks, including:
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reliance on the third party for regulatory compliance and quality assurance;
the possible breach of the manufacturing agreement by the third party;
the possible misappropriation of our proprietary information, including our trade secrets and know-how; and
the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for
us.
Third-party manufacturers may not be able to comply with current good manufacturing practices, or cGMP, regulations or
similar regulatory requirements outside of the United States. Our failure, or the failure of our third-party manufacturers, to
comply with applicable regulations could result in sanctions being imposed on us, including clinical holds, fines, injunctions,
civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or
products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of
our products.
Our product candidates and any products that we may develop may compete with other product candidates and products for
access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that
might be capable of manufacturing for us.
Any performance failure on the part of our existing or future manufacturers could delay clinical development or marketing
approval. We do not currently have arrangements in place for redundant supply or a second source for bulk drug substance. If
our current contract manufacturers cannot perform as agreed, we may be required to replace such manufacturers. Although
we believe that there are several potential alternative manufacturers who could manufacture our product candidates, we may
incur added costs and delays in identifying and qualifying any such replacement.
Our current and anticipated future dependence upon others for the manufacture of our product candidates or products may
adversely affect our future profit margins and our ability to commercialize any products that receive marketing approval on a
timely and competitive basis.
We may enter into collaborations with third parties for the development or commercialization of our product candidates.
If our collaborations are not successful, we may not be able to capitalize on the market potential of these product
candidates and our business could be adversely affected.
We may utilize collaboration, distribution and other marketing arrangements with third parties to develop and commercialize
CPI-1205, CPI-0610 and CPI-0209 or any other product candidates for which we obtain marketing approval in markets
outside the United States. We also may enter into arrangements with third parties to perform these services in the United
States if we do not establish our own sales, marketing and distribution capabilities in the United States for our product
candidates or if we determine that such third-party arrangements are otherwise beneficial. We also may seek third-party
collaborators for development and commercialization of other product candidates. Our likely collaborators for any sales,
marketing, distribution, development, licensing or broader collaboration arrangements include large and mid-size
pharmaceutical companies, regional and national pharmaceutical companies and biotechnology companies. We are currently
party to a license and collaboration agreement with Genentech, Inc., or Genentech, and F. Hoffmann-La Roche Ltd, or
Roche, pursuant to which we have granted Genentech and Roche exclusive licenses to develop and commercialize products
directed to a certain target in return for potential milestone and/or royalty payments. Pursuant to this license and collaboration
agreement, we have, and in connection with any other such arrangements we enter into with any third parties in the future, we
will likely have, limited control over the amount and timing of resources that our collaborators dedicate to the development
or commercialization of our product candidates. Our ability to generate revenues from these arrangements will depend on our
collaborators’ abilities and efforts to successfully perform the functions assigned to them in these arrangements.
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Collaborations that we enter into may pose a number of risks, including the following:
• collaborators have significant discretion in determining the amount and timing of efforts and resources that they will
apply to these collaborations;
• collaborators may not perform their obligations as expected;
• collaborators may not pursue development of our product candidates or may elect not to continue or renew
development programs based on results of clinical trials or other studies, changes in the collaborators’ strategic focus or
available funding, or external factors, such as an acquisition, that divert resources or create competing priorities;
• collaborators may not pursue commercialization of any product candidates that achieve regulatory approval or may
elect not to continue or renew commercialization programs based on results of clinical trials or other studies, changes in
the collaborators’ strategic focus or available funding, or external factors, such as an acquisition, that may 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 or conduct new clinical trials or require a new formulation of a product candidate
for clinical testing;
• collaborators could independently develop, or develop with third parties, products that compete directly or indirectly
with our product candidates and products if the collaborators believe that the competitive products are more likely to be
successfully developed or can be commercialized under terms that are more economically attractive than ours;
• product candidates discovered in collaboration with us may be viewed by our collaborators as competitive with their
own product candidates or products, which may cause collaborators to cease to devote resources to the
commercialization of our product candidates;
• a collaborator may fail to comply with applicable regulatory requirements regarding the development, manufacture,
distribution or marketing of a product candidate or product;
• a collaborator with marketing and distribution rights to one or more of our product candidates that achieve regulatory
approval may not commit sufficient resources to the marketing and distribution of such product or products;
• disagreements with collaborators, including disagreements over intellectual property or proprietary rights, contract
interpretation or the preferred course of development, might cause delays or terminations of the research, development
or commercialization of product candidates, might lead to additional responsibilities for us with respect to product
candidates, or might result in litigation or arbitration, any of which would be time-consuming and expensive;
• collaborators may not properly obtain, maintain, enforce, defend or protect our intellectual property or proprietary
rights or may use our proprietary information in such a way as to potentially lead to disputes or legal proceedings that
could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation;
• collaborators may infringe, misappropriate or otherwise violate the intellectual property or proprietary rights of third
parties, which may expose us to litigation and potential liability; and
• collaborations may be terminated for the convenience of the collaborator, and, if terminated, we could be required to
raise additional capital to pursue further development or commercialization of the applicable product candidates.
Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient
manner, or at all. If any collaborations that we enter into do not result in the successful development and commercialization
of products or if one of our collaborators terminates its agreement with us, we may not receive any future research funding or
milestone or royalty payments under the collaboration. If we do not receive the funding we expect under these agreements,
our development of our product candidates could be delayed and we may need additional resources to develop our product
candidates. All of the risks relating to product development, regulatory approval and commercialization described herein also
apply to the activities of our collaborators.
Additionally, subject to its contractual obligations to us, if a collaborator of ours is involved in a business combination, the
collaborator might deemphasize or terminate the development or commercialization of any product candidate licensed to it by
us. If one of our collaborators terminates its agreement with us, we may find it more difficult to attract new collaborators and
our perception in the business and financial communities could be adversely affected.
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If we are not able to establish collaborations, we may have to alter our development and commercialization plans and our
business could be adversely affected.
For some of our product candidates, we may decide to collaborate with pharmaceutical or biotechnology companies for the
development and potential commercialization of those product candidates. We face significant competition in seeking
appropriate collaborators. Whether we reach a definitive agreement for a 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’s evaluation of a number of factors. Those factors may include the design or results of clinical trials,
the likelihood of approval by the FDA or similar regulatory authorities outside the United States, the potential market for the
subject product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the
potential of competing products, the existence of uncertainty with respect to our ownership of technology, which can exist if
there is a challenge to such ownership without regard to the merits of the challenge, and industry and market conditions
generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may
be available to collaborate on and whether such a collaboration could be more attractive than the one with us for our product
candidate. We may also be restricted under future license agreements from entering into agreements on certain terms with
potential collaborators. Collaborations are complex and time-consuming to negotiate and document. In addition, there have
been a significant number of recent business combinations among large pharmaceutical and biotechnology companies that
have resulted in a reduced number of potential future collaborators.
If we are unable to reach agreements with suitable collaborators on a timely basis, on acceptable terms or at all, we may have
to curtail the development of a product candidate, reduce or delay its development program or one or more of our other
development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or
increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to fund
and undertake development or commercialization activities on our own, we may need to obtain additional expertise and
additional capital, which may not be available to us on acceptable terms or at all. If we fail to enter into collaborations and do
not have sufficient funds or expertise to undertake the necessary development and commercialization activities, we may not
be able to further develop our product candidates or bring them to market or continue to develop our product platform.
If we are required by FDA to develop a companion diagnostic to identify patients who are likely to benefit from a
therapeutic product, we will by reliant on third parties to develop a diagnostic and their failure to do so may delay or
prevent approval of the therapeutic product.
In July 2014, the FDA issued final guidance that stated that if safe and effective use of a therapeutic depends on an in vitro
diagnostic, then the FDA generally will not approve the therapeutic unless the FDA approves or clears this “in vitro
companion diagnostic device” at the same time that the FDA approves the therapeutic. We may be required by FDA to
develop companion diagnostics to identify patients who are likely to benefit from our therapeutic product candidates. We
expect to rely on third parties for much of the development, testing and manufacturing of such diagnostics. We will likely
rely on such third parties to also obtain any required regulatory approval for and then commercially supply such diagnostics.
We have very limited experience in the development of diagnostics and, even with the help of third parties with greater
experience, may fail to obtain the required diagnostic product marketing approval, which could prevent or delay approval of
the therapeutic product. Because we expect to rely on third parties for various aspects of the development, testing and
manufacture, as well as for regulatory approval for and commercial supply, of our diagnostics, the commercial success of any
of our product candidates that require a diagnostic will be tied to and dependent on the continued ability of such third parties
to make the diagnostic commercially available on reasonable terms in the relevant geographies.
Risks Related to Our Intellectual Property
If we are unable to obtain, maintain, enforce and protect patent protection for our technology and product candidates or if
the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize
technology and products similar or identical to ours, and our ability to successfully develop and commercialize our
technology and product candidates may 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 any proprietary technology and product candidates we develop, including CPI-1205, CPI-0610 and
CPI-0209. We seek to protect our proprietary position by filing patent applications in the United States and abroad related to
our technologies and product candidates that are important to our business and by in-licensing intellectual property related to
such technologies and product candidates. If we are unable to obtain or maintain patent protection with respect to any
proprietary technology or product candidate, our business, financial condition, results of operations and prospects could be
materially harmed. In particular, we do not own or in-license any patented intellectual property related to our epigenetics
platform. Accordingly, we may not be able to prevent third parties from developing and commercializing a similar platform
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or technology to compete with us. Additionally, we do not currently own or in-license any intellectual property related to our
CPI-0209 product candidate other than one provisional patent application that we own covering the composition of matter
and methods of use of CPI-0209. Our provisional patent application is not eligible to become an issued patent until, among
other things, we file a non-provisional patent application within 12 months of filing thereof. If we do not timely file any non-
provisional patent applications, we may lose our priority date with respect to our provisional patent application and any
patent protection on the inventions disclosed in our provisional patent application. While we intend to timely file non-
provisional patent applications relating to our provisional patent application, we cannot predict whether any of our future
patent applications for CPI-0209 or any other future product candidates will result in the issuance of patents that effectively
protect CPI-0209 and any other future product candidates, or if any of our issued patents or if any of our licensor’s issued
patents will effectively prevent others from commercializing competitive products.
The patent prosecution process is expensive, time-consuming and complex, and we may not be able to file, prosecute,
maintain, defend or license all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also
possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain
patent protection. Moreover, in some circumstances, we do not have the right to control the preparation, filing and
prosecution of patent applications, or to maintain, enforce and defend the patents, covering technology that we license from
third parties. Therefore, these in-licensed patents and applications may not be prepared, filed, prosecuted, maintained,
defended and enforced in a manner consistent with the best interests of our business.
Although we enter into non-disclosure and confidentiality agreements with parties who have access to confidential or
patentable aspects of our research and development output, such as our employees, collaborators, contract research
organizations, contract manufacturers, consultants, advisors and other third parties, any of these parties may breach the
agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent
protection.
The patent position of pharmaceutical and biotechnology companies generally is highly uncertain, involves complex legal
and factual questions and has in recent years been the subject of much litigation. In addition, the scope of patent protection
outside of the United States is uncertain and laws of foreign countries may not protect our rights to the same extent as the
laws of the United States. For example, European patent law restricts the patentability of methods of treatment of the human
body more than United States law does. With respect to both owned and in-licensed patent rights, we cannot predict whether
the patent applications we and our licensors are currently pursuing will issue as patents in any particular jurisdiction or
whether the claims of any issued patents will provide sufficient protection from competitors. In addition, publications of
discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and
other jurisdictions are typically not published until 18 months after filing, or in some cases not published at all. Therefore,
neither we nor our licensors can know with certainty whether either we or our licensors were the first to make the inventions
claimed in the patents and patent applications we own or in-license now or in the future, or that either we or our licensors
were the first to file for patent protection of such inventions. As a result, the issuance, scope, validity, enforceability and
commercial value of our owned and in-licensed patent rights are highly uncertain. For example, with respect to CPI-1205, we
own three issued U.S. composition of matter patents that contain claims covering CPI-1205 specifically and generically. We
are aware of prior art that may invalidate some but not all of the generic claims included in one of the composition of matter
patents. While we believe that the specific claims, and the other generic claims, contained in our issued U.S. composition of
matter patents provide protection for the composition of matter of CPI-1205 and are not implicated by such prior art, third
parties may nevertheless challenge such claims and if such specific claims, or any such other generic claims on which we
may rely, are invalidated or rendered unenforceable for any reason, we will lose valuable intellectual property rights and our
ability to prevent others from competing with us would be impaired.
Moreover, our owned and in-licensed pending and future patent applications may not result in patents being issued which
protect our technology and product candidates, in whole or in part, or which effectively prevent others from commercializing
competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United
States and other countries may diminish the value of our patents and our ability to obtain, protect, maintain, defend and
enforce our patent rights, narrow the scope of our patent protection and, more generally, could affect the value or narrow the
scope of our patent rights.
Moreover, we or our licensors may be subject to a third-party preissuance submission of prior art to the United States Patent
and Trademark Office, or USPTO, or become involved in opposition, derivation, revocation, reexamination, inter partes
review, post-grant review or interference proceedings challenging our patent rights. An adverse determination in any such
submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to
commercialize our technology or product candidates and compete directly with us, without payment to us. If the breadth or
strength of protection provided by our patents and patent applications is threatened, it could dissuade companies from
collaborating with us to license, develop or commercialize current or future product candidates. Furthermore, such
proceedings also may result in substantial cost and require significant time from our management and employees, even if the
eventual outcome is favorable to us.
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In January 2018, after completing an internal review of our patent portfolio, we submitted a request to the USPTO to reissue
one of our U.S. patents covering CPI-1205 in order to correct one structure in the claims. Corresponding requests have been
filed for the corresponding Chinese, Eurasian and Colombian patents, all of which have been reissued with the corrected
structure. The United States reissue application is currently allowed and we anticipate an updated patent to issue within the
next few months.
Additionally, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and its
scope can be reinterpreted after issuance. Even if our owned and in-licensed patent applications issue as patents, they may not
issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise
provide us with any competitive advantage. The issuance of a patent is not conclusive as to its inventorship, scope, validity or
enforceability, and our owned and in-licensed patents may be challenged in the courts or patent offices in the United States
and abroad. Such challenges may result in loss of exclusivity or in patent claims being narrowed, invalidated or held
unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or
identical technology and products, or limit the duration of the patent protection of our technology and product candidates.
Such proceedings also may result in substantial cost and require significant time from our management and employees, even
if the eventual outcome is favorable to us. Given the amount of time required for the development, testing and regulatory
review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are
commercialized. Furthermore, our competitors may be able to circumvent our owned or in-licensed patents by developing
similar or alternative technologies or products in a non-infringing manner. As a result, our owned and in-licensed patent
portfolio may not provide us with sufficient rights to exclude others from commercializing technology and products similar
or identical to any of our technology and product candidates.
Moreover, some of our owned and in-licensed patents and patent applications are, and may in the future be, co-owned with
third parties. If we are unable to obtain an exclusive license to any such third-party co-owners’ interest in such patents or
patent applications, such co-owners may be able to license their rights to other third parties, including our competitors, and
our competitors could market competing products and technology. In addition, we may need the cooperation of any such co-
owner of our patents in order to enforce such patents against third parties, and such cooperation may not be provided to us.
Any of the foregoing could have a material adverse effect on our competitive position, business, financial conditions, results
of operations, and prospects.
Furthermore, our owned and in-licensed patents may be subject to a reservation of rights by one or more third parties. For
example, the research resulting in certain of our in-licensed patent rights and technology was funded in part by the U.S.
government. As a result, the government may have certain rights, such as march-in rights, to such patent rights and
technology. When new technologies are developed with government funding, the government generally obtains certain rights
in any resulting patents, including a non-exclusive license authorizing the government to use the invention for non-
commercial purposes. These rights may permit the government to disclose our confidential information to third parties and to
exercise march-in rights to use or allow third parties to use our licensed technology. The government can exercise its march-
in rights if it determines that action is necessary because we fail to achieve practical application of the government-funded
technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to
give preference to U.S. industry. In addition, our rights in such inventions may be subject to certain requirements to
manufacture products embodying such inventions substantially in the United States. Any exercise by the government of such
rights could harm our competitive position, business, financial condition, results of operations, and prospects. In addition,
under the Research, Development and Commercialization Agreement, or the LLS Agreement, with The Leukemia &
Lymphoma Society, or LLS, we are required to use commercially reasonable efforts to research, develop and commercialize
CPI-0610. If we fail to meet the foregoing obligation, then, under certain circumstances, LLS may terminate the LLS
Agreement and may exercise the exclusive, sublicensable and worldwide license we granted LLS in and to certain of our
intellectual property to develop and commercialize CPI-0610.
If we do not obtain patent term extension for any product candidates we may develop, our business may be materially
harmed.
In the United States, depending upon the timing, duration, and specifics of any FDA marketing approval of a product
candidate, the patent term of a patent that covers an FDA-approved drug may be eligible for limited patent term extension,
which permits patent term restoration as compensation for the patent term lost during the FDA regulatory review process.
The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act, permits a
patent term extension of up to five years beyond the expiration of the patent. The length of the patent term extension is
related to the length of time the drug is under regulatory review. Patent extension cannot extend the remaining term of a
patent beyond a total of 14 years from the date of product approval, and only one patent applicable to an approved drug may
be extended and only those claims covering the approved drug, a method for using it, or a method for manufacturing it may
be extended. Similar provisions are available in Europe and other non-United States jurisdictions to extend the term of a
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patent that covers an approved drug. While, in the future, if and when our product candidates receive FDA approval, we
expect to apply for patent term extensions on patents covering those product candidates, there is no guarantee that the
applicable authorities will agree with our assessment of whether such extensions should be granted, and even if granted, the
length of such extensions. We may not be granted an extension because of, for example, failing to exercise due diligence
during the testing phase or regulatory review process, failing to apply within applicable deadlines, failing to apply prior to
expiration of the relevant patents, or otherwise failing to satisfy applicable requirements. If we are unable to obtain any patent
term extension or the term of any such extension is less than we request, our competitors may obtain approval of competing
products following the expiration of our patent rights, and our business, financial condition, results of operations, and
prospects could be materially harmed.
Changes to patent laws in the United States and other jurisdictions could diminish the value of patents in general, thereby
impairing our ability to protect our products.
Changes in either the patent laws or interpretation of patent laws in the United States, including patent reform legislation such
as the Leahy-Smith America Invents Act, or the Leahy-Smith Act, could increase the uncertainties and costs surrounding the
prosecution of our owned and in-licensed patent applications and the maintenance, enforcement or defense of our owned and
in-licensed issued patents. The Leahy-Smith Act includes a number of significant changes to United States patent law. These
changes include provisions that affect the way patent applications are prosecuted, redefine prior art, provide more efficient
and cost-effective avenues for competitors to challenge the validity of patents, and enable third-party submission of prior art
to the USPTO during patent prosecution and additional procedures to attack the validity of a patent at USPTO-administered
post-grant proceedings, including post-grant review, inter partes review, and derivation proceedings. Assuming that other
requirements for patentability are met, prior to March 2013, in the United States, the first to invent the claimed invention was
entitled to the patent, while outside the United States, the first to file a patent application was entitled to the patent. After
March 2013, under the Leahy-Smith Act, the United States transitioned to a first-to-file system in which, assuming that the
other statutory requirements for patentability are met, the first inventor to file a patent application will be entitled to the
patent on an invention regardless of whether a third party was the first to invent the claimed invention. As such, the Leahy-
Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent
applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our
business, financial condition, results of operations, and prospects.
In addition, the patent positions of companies in the development and commercialization of biologics and pharmaceuticals
are particularly uncertain. Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in
certain circumstances and weakened the rights of patent owners in certain situations. This combination of events has created
uncertainty with respect to the validity and enforceability of patents once obtained. Depending on future actions by the U.S.
Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways
that could have a material adverse effect on our patent rights and our ability to protect, defend and enforce our patent rights in
the future.
We or our licensors may become involved in lawsuits to protect or enforce our patent or other intellectual property rights,
which could be expensive, time-consuming and unsuccessful.
Competitors and other third parties may infringe, misappropriate or otherwise violate our or our licensor’s issued patents or
other intellectual property. As a result, we or our licensors may need to file infringement, misappropriation or other
intellectual property related claims, which can be expensive and time-consuming. Any claims we assert against perceived
infringers could provoke such parties to assert counterclaims against us alleging that we infringe, misappropriate or otherwise
violate their intellectual property. In addition, in a patent infringement proceeding, such parties could counterclaim that the
patents we or our licensors have asserted are invalid or unenforceable. In patent litigation in the United States, defendant
counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged
failure to meet any of several statutory requirements, including lack of novelty, obviousness, or non-enablement. Grounds for
an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant
information from the USPTO, or made a misleading statement, during prosecution. Third parties may institute such claims
before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include
re-examination, post-grant review, inter partes review, interference proceedings, derivation proceedings, and equivalent
proceedings in foreign jurisdictions (e.g., opposition proceedings).
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An adverse result in any such proceeding could put one or more of our owned or in-licensed patents at risk of being
invalidated or interpreted narrowly, and could put any of our owned or in-licensed patent applications at risk of not yielding
an issued patent. A court may also refuse to stop the third party from using the technology at issue in a proceeding on the
grounds that our owned or in-licensed patents do not cover such technology. Furthermore, because of the substantial amount
of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential
information or trade secrets could be compromised by disclosure during this type of litigation. Any of the foregoing could
allow such third parties to develop and commercialize competing technologies and products and have a material adverse
impact on our business, financial condition, results of operations, and prospects.
Third parties may initiate legal proceedings alleging that we are infringing, misappropriating or otherwise violating their
intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the
success of our business.
Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and
sell our product candidates and use our proprietary technologies without infringing, misappropriating or otherwise violating
the intellectual property and proprietary rights of third parties. There is considerable patent and other intellectual property
litigation in the pharmaceutical and biotechnology industries. We may become party to, or threatened with, adversarial
proceedings or litigation regarding intellectual property rights with respect to our technology and product candidates,
including interference proceedings, post grant review, inter partes review, and derivation proceedings before the USPTO and
similar proceedings in foreign jurisdictions such as oppositions before the European Patent Office.
The legal threshold for initiating litigation or contested proceedings is low, so that even lawsuits or proceedings with a low
probability of success might be initiated and require significant resources to defend. Litigation and contested proceedings can
also be expensive and time-consuming, and our adversaries in these proceedings may have the ability to dedicate
substantially greater resources to prosecuting these legal actions than we can. The risks of being involved in such litigation
and proceedings may increase if and as our product candidates near commercialization and as we gain the greater visibility
associated with being a public company. Third parties may assert infringement claims against us based on existing patents or
patents that may be granted in the future, regardless of merit. We may not be aware of all such intellectual property rights
potentially relating to our technology and product candidates and their uses. Thus, we do not know with certainty that our
technology and product candidates, or our development and commercialization thereof, do not and will not infringe,
misappropriate or otherwise violate any third party’s intellectual property.
Even if we believe that third party intellectual property claims are without merit, there is no assurance that a court would find
in our favor on questions of misappropriation, infringement, validity, enforceability, or priority. A court of competent
jurisdiction could hold these third-party patents are valid, enforceable, and infringed, which could materially and adversely
affect our ability to commercialize any technology or product candidate covered by the asserted third-party patents. In order
to successfully challenge the validity of any such U.S. patent in federal court, we would need to overcome a presumption of
validity. As this burden is a high one requiring us to present clear and convincing evidence as to the invalidity of any such
U.S. patent claim, there is no assurance that a court of competent jurisdiction would invalidate the claims of any such U.S.
patent. If we are found to infringe, misappropriate or otherwise violate a third party’s intellectual property rights, we could be
required to obtain a license from such third party to continue developing, manufacturing and marketing our technology and
product candidates. 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, it could be non-exclusive, thereby giving our competitors and other third parties
access to the same technologies licensed to us and could require us to make substantial licensing and royalty payments. We
could be forced, including by court order, to cease developing, manufacturing and commercializing the infringing technology
or product. In addition, we could be found liable for significant monetary damages, including treble damages and attorneys’
fees, if we are found to have willfully infringed a patent or other intellectual property right and could be forced to indemnify
our customers or collaborators. A finding of infringement could prevent us from commercializing our product candidates or
force us to cease some of our business operations, which could materially harm our business. In addition, we may be forced
to redesign our product candidates, seek new regulatory approvals and indemnify third parties pursuant to contractual
agreements. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a
similar material adverse effect on our business, financial condition, results of operations, and prospects.
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Intellectual property litigation or other legal proceedings relating to intellectual property could cause us to spend
substantial resources and distract our personnel from their normal responsibilities.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to
incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In
addition, there could be public announcements of the results of hearings, motions or other interim proceedings or
developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse
effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and
reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not
have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors
may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater
financial resources and may also have an advantage in such proceedings due to their more mature and developed intellectual
property portfolios. Uncertainties resulting from the initiation and continuation of intellectual property litigation or other
proceedings could compromise our ability to compete in the marketplace.
Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee
payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or
eliminated for non-compliance with these requirements.
Periodic maintenance, renewal and annuity fees and various other government fees on any issued patent and pending patent
application must be paid to the USPTO and foreign patent agencies in several stages or annually over the lifetime of our
owned and in-licensed patents and patent applications. The USPTO and various foreign governmental patent agencies require
compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent
application process. In certain circumstances, we rely on our licensing partners to pay these fees to, or comply with the
procedural and documentary rules of, the relevant patent agency. With respect to our patents, we rely on an annuity service to
remind us of the due dates and to make payment after we instruct them to do so. While an inadvertent lapse can in many
cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in
which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete
loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent
or patent application include failure to respond to official actions within prescribed time limits, non-payment of fees and
failure to properly legalize and submit formal documents. In such an event, potential competitors might be able to enter the
market with similar or identical products or technology. If we or our licensors fail to maintain the patents and patent
applications covering our product candidates, it would have a material adverse effect on our business, financial condition,
results of operations, and prospects.
If we fail to comply with our obligations in our intellectual property licenses and funding arrangements with third parties,
we could lose rights that are important to our business.
We are party to license and funding agreements that impose, and we may enter into additional licensing and funding
arrangements with third parties that may impose, diligence, development and commercialization timelines, milestone
payment, royalty, insurance and other obligations on us. Under our existing licensing and funding agreements, we are
obligated to pay royalties on net product sales of product candidates or related technologies to the extent they are covered by
the agreements. If we fail to comply with such obligations under current or future license and funding agreements, our
counterparties may have the right to terminate these agreements or require us to grant them certain rights. Such an occurrence
could materially adversely affect the value of any product candidate being developed under any such agreement. For
example, under the LLS Agreement, we are required to use commercially reasonable efforts to research, develop and
commercialize CPI-0610. If we fail to meet the foregoing obligation, then, under certain circumstances, LLS may terminate
the LLS Agreement and may exercise the exclusive, sublicensable and worldwide license we granted LLS in and to certain of
our intellectual property to develop and commercialize CPI-0610. Termination of these agreements or reduction or
elimination of our rights under these agreements may result in our having to negotiate new or reinstated agreements with less
favorable terms, or cause us to lose our rights under these agreements, including our rights to important intellectual property
or technology, which would have a material adverse effect on our business, financial condition, results of operations, and
prospects.
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Additionally, these and other license agreements may not provide exclusive rights to use the licensed intellectual property
and technology in all relevant fields of use and in all territories in which we may wish to develop or commercialize our
technology and products in the future. As a result, we may not be able to prevent competitors from developing and
commercializing competitive products and technology in fields of use and territories not included in such agreements. In
addition, we may not have the right to control the preparation, filing, prosecution, maintenance, enforcement, and defense of
patents and patent applications covering the technology that we license from third parties. Therefore, we cannot be certain
that these patents and patent applications will be prepared, filed, prosecuted, maintained, and defended in a manner consistent
with the best interests of our business. If our licensors fail to prosecute, maintain, enforce, and defend such patents, or lose
rights to those patents or patent applications, the rights we have licensed may be reduced or eliminated, and our right to
develop and commercialize any of our products that are the subject of such licensed rights could be adversely affected.
We may need to obtain additional licenses from others to advance our research or allow commercialization of our product
candidates. It is possible that we may be unable to obtain additional licenses at a reasonable cost or on reasonable terms, if at
all, or such licenses may be non-exclusive. The licensing or acquisition of third-party intellectual property rights is a
competitive area, and several more established companies may pursue strategies to license or acquire third-party intellectual
property rights that we may consider attractive or necessary. These established companies may have a competitive advantage
over us due to their size, capital resources and greater clinical development and commercialization capabilities. In addition,
companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may be unable to
license or acquire third-party intellectual property rights on terms that would allow us to make an appropriate return on our
investment or at all.
If we are unable to obtain rights to required third-party intellectual property rights or maintain the existing intellectual
property rights we have, we may be required to expend significant time and resources to redesign our technology, product
candidates, or the methods for manufacturing them or to develop or license replacement technology, all of which may not be
feasible on a technical or commercial basis. If we are unable to do so, we may be unable to develop or commercialize the
affected technology and product candidates, which could harm our business, financial condition, results of operations, and
prospects significantly.
Disputes may arise regarding intellectual property subject to a licensing agreement, including:
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•
•
the scope of rights granted under the license agreement and other interpretation related issues;
the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to
the licensing agreement;
the sublicensing of patent and other rights under our collaborative development relationships;
• our diligence obligations under the license agreement and what activities satisfy those diligence obligations;
•
•
the inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual
property by our licensors and us and our partners; and
the priority of invention of patented technology.
In addition, the agreements under which we currently license intellectual property or technology from third parties are
complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any
contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant
intellectual property or technology, or increase what we believe to be our financial or other obligations under the relevant
agreement, either of which could have a material adverse effect on our business, financial condition, results of operations,
and prospects. Moreover, if disputes over intellectual property that we have licensed prevent or impair our ability to maintain
our current licensing arrangements on commercially acceptable terms, we may be unable to successfully develop and
commercialize the affected technology and product candidates, which could have a material adverse effect on our business,
financial conditions, results of operations, and prospects.
Our licensors may have relied on third-party consultants or collaborators or on funds from third parties such that our licensors
are not the sole and exclusive owners of the patents and patent applications we in-licensed. If other third parties have
ownership rights to our in-licensed patents, they may be able to license such patents to our competitors, and our competitors
could market competing products and technology. This could have a material adverse effect on our competitive position,
business, financial conditions, results of operations, and prospects.
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In spite of our best efforts, our licensors might conclude that we have materially breached our license agreements and might
therefore terminate the license agreements, thereby removing our ability to develop and commercialize product candidates
and technology covered by these license agreements. If these in-licenses are terminated, or if the underlying intellectual
property fails to provide the intended exclusivity, competitors would have the freedom to seek regulatory approval of, and to
market, products and technologies identical to ours. This could have a material adverse effect on our competitive position,
business, financial conditions, results of operations, and prospects.
We may not be able to protect our intellectual property and proprietary rights throughout the world.
Filing, prosecuting, and defending patents on product candidates in all countries throughout the world would be prohibitively
expensive, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States.
Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United
States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions.
Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own
products and, further, may export otherwise infringing products to territories where we have patent protection or licenses but
enforcement is not as strong as that in the United States. These products may compete with our products, and our patents or
other intellectual property rights may not be effective or sufficient to prevent them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign
jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement
of patents, trade secrets, and other intellectual property protection, particularly those relating to biotechnology products,
which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of
our intellectual property and proprietary rights generally. Proceedings to enforce our intellectual property and proprietary
rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our
business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of
not issuing, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate,
and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce
our intellectual property and proprietary rights around the world may be inadequate to obtain a significant commercial
advantage from the intellectual property that we develop or license.
Many countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third
parties. In addition, many countries limit the enforceability of patents against government agencies or government
contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of
such patent. If we or any of our licensors is forced to grant a license to third parties with respect to any patents relevant to our
business, our competitive position may be impaired, and our business, financial condition, results of operations, and
prospects may be adversely affected.
We may be subject to claims by third parties asserting that our employees, consultants, contractors or we have wrongfully
used or disclosed alleged trade secrets of their current or former employers or claims asserting we have misappropriated
their intellectual property, or claiming ownership of what we regard as our own intellectual property.
Many of our employees, consultants and contractors were previously employed at universities or other pharmaceutical or
biotechnology companies, including our competitors or potential competitors. Although we try to ensure that our employees
and contractors do not use the proprietary information or know-how of others in their work for us, we may be subject to
claims that these individuals or we have used or disclosed intellectual property, including trade secrets or other proprietary
information, of any such individual’s current or former employer. Litigation may be necessary to defend against these claims.
In addition, while it is our policy to require our employees, consultants and contractors who may be involved in the
development of intellectual property to execute agreements assigning such intellectual property to us, we may be
unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our
own. Our intellectual property assignment agreements with them may not be self-executing or may be breached, and we may
be forced to bring claims against third parties, or defend claims they may bring against us, to determine the ownership of
what we regard as our intellectual property. Such claims could have a material adverse effect on our business, financial
conditions, results of operations, and prospects.
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If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable
intellectual property rights or personnel, which could have a material adverse effect on our competitive business position and
prospects. Such intellectual property rights could be awarded to a third party, and we could be required to obtain a license
from such third party to commercialize our technology or products, which license may not be available on commercially
reasonable terms, or at all, or such license may be non-exclusive. Even if we are successful in prosecuting or defending
against such claims, litigation could result in substantial costs and be a distraction to our management and employees.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
In addition to seeking patents for some of our technology and product candidates, we also rely on trade secrets and
confidentiality agreements to protect our unpatented know-how, technology and other proprietary information, to maintain
our competitive position. We seek to protect our trade secrets and other proprietary technology, in part, by entering into non-
disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate
collaborators, outside scientific collaborators, contract research organizations, contract manufacturers, consultants, advisors
and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees
and consultants. We cannot guarantee that we have entered into such agreements with each party that may have or has had
access to our trade secrets or proprietary technology. Despite these efforts, any of these parties may breach the agreements
and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for
such breaches. Detecting the disclosure or misappropriation of a trade secret and enforcing a claim that a party illegally
disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In
addition, some courts inside and outside of the United States are less willing or unwilling to protect trade secrets. If any of
our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would
have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete
with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor or other third party,
our competitive position would be materially and adversely harmed.
Intellectual property rights do not necessarily address all potential threats.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights
have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For
example:
• our epigenetics platform is not protected by any patented intellectual property, and we may not be able to develop,
acquire or in-license any patentable technologies or other intellectual property related to such platform;
• we, or our license partners or current or future collaborators, might not have been the first to make the inventions
covered by the issued patent or pending patent applications that we license or may own in the future;
• we, or our license partners or current or future collaborators, might not have been the first to file patent applications
covering certain of our or their inventions;
• others may independently develop similar or alternative technologies or duplicate any of our technologies without
infringing our owned or in-licensed intellectual property rights;
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it is possible that our owned and in-licensed pending patent applications or those we may own or in-license in the future
will not lead to issued patents;
issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challenges by
our competitors;
• our competitors might conduct research and development activities in countries where we do not have patent rights and
then use the information learned from such activities to develop competitive products for sale in our major commercial
markets;
• we may not develop additional proprietary technologies that are patentable;
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the patents of others may harm our business; and
• we may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third party may
subsequently file a patent covering such intellectual property.
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Should any of these events occur, they could have a material adverse effect on our business, financial condition, results of
operations, and prospects.
Risks Related to Regulatory Approval of Our Product Candidates and Other Legal Compliance Matters
Even if we complete the necessary preclinical studies and clinical trials, the marketing approval process is expensive,
time-consuming and uncertain and may prevent us from obtaining approvals for the commercialization of some or all of
our product candidates. If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we
will not be able to commercialize our product candidates, and our ability to generate revenue will be materially impaired.
Our product candidates and the activities associated with their development and commercialization, including their design,
testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and
distribution, export and import are subject to comprehensive regulation by the FDA and other regulatory agencies in the
United States and by the EMA and similar regulatory authorities outside of the United States. Failure to obtain marketing
approval for a product candidate will prevent us from commercializing the product candidate. We have not submitted an
application for or received marketing approval for any of our product candidates in the United States or in any other
jurisdiction.
We have only limited experience in filing and supporting the applications necessary to gain marketing approvals and expect
to rely on third-party clinical research organizations or other third-party consultants or vendors to assist us in this process.
Securing marketing approval requires the submission of extensive preclinical and clinical data and supporting information to
regulatory authorities for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing
marketing approval also requires the submission of information about the product manufacturing process to, and inspection
of manufacturing facilities by, the regulatory authorities. Our product candidates may not be effective, may be only
moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may
preclude our obtaining marketing approval or prevent or limit commercial use. New cancer drugs frequently are indicated
only for patient populations that have not responded to an existing therapy or have relapsed. If any of our product candidates
receives marketing approval, the accompanying label may limit the approved use of our drug in this way, which could limit
sales of the product.
The process of obtaining marketing approvals, both in the United States and abroad, is expensive, may take many years, if
approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and
novelty of the product candidates involved. Changes in marketing approval policies during the development period, changes
in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product
application, may cause delays in the approval or rejection of an application. Regulatory authorities have substantial discretion
in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and
require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from
preclinical and clinical testing could delay, limit or prevent marketing approval of a product candidate. Any marketing
approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the
approved product not commercially viable.
If we experience delays in obtaining approval or if we fail to obtain approval of our product candidates, the commercial
prospects for our product candidates may be harmed and our ability to generate revenues will be materially impaired.
We may not be able to obtain orphan drug exclusivity for our product candidates and, even if we do, that exclusivity may
not prevent the FDA or the EMA from approving other competing products.
Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs for relatively small
patient populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is
a drug intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than
200,000 individuals in the United States.
Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the indication
for which it has such designation, the product is entitled to a period of marketing exclusivity, which precludes the FDA or the
EMA from approving another marketing application for the same drug for that time period. The applicable period is seven
years in the United States and ten years in Europe. The exclusivity period in Europe can be reduced to six years if a drug no
longer meets the criteria for orphan drug designation or if the drug is sufficiently profitable so that market exclusivity is no
longer justified. Orphan drug exclusivity may be lost if the FDA or EMA determines that the request for designation was
materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients
with the rare disease or condition.
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Even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from
competition because different drugs can be approved for the same condition. In addition, even after an orphan drug is
approved, the FDA can subsequently approve the same drug for the same condition if the FDA concludes that the later drug
is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care.
On August 3, 2017, the U.S. Congress passed the FDA Reauthorization Act of 2017, or FDARA. FDARA, among other
things, codified the FDA’s pre-existing regulatory interpretation, to require that a drug sponsor demonstrate the clinical
superiority of an orphan drug that is otherwise the same as a previously approved drug for the same rare disease in order to
receive orphan drug exclusivity. The new legislation reverses prior precedent holding that the Orphan Drug Act
unambiguously requires that the FDA recognize the orphan exclusivity period regardless of a showing of clinical superiority.
The FDA may further reevaluate the Orphan Drug Act and its regulations and policies. We do not know if, when or how the
FDA may change the orphan drug regulations and policies in the future, and it is uncertain how any changes might affect our
business. Depending on what changes the FDA may make to its orphan drug regulations and policies, our business could be
adversely impacted.
A Fast Track designation by the FDA may not lead to a faster development or regulatory review or approval process.
We received Fast Track designation for CPI-0610 for the treatment of myelofibrosis in November 2018 and we may seek
Fast Track designation for some of our additional product candidates. If a drug is intended for the treatment of a serious or
life-threatening condition and the drug demonstrates the potential to address unmet medical needs for this condition, the drug
sponsor may apply for FDA Fast Track designation. The FDA has broad discretion whether or not to grant this designation,
so even if we believe a particular product candidate is eligible for this designation, we cannot assure stockholders that the
FDA would decide to grant it. Even if we do receive Fast Track designation, we may not experience a faster development
process, review or approval compared to conventional FDA procedures. The FDA may withdraw Fast Track designation if it
believes that the designation is no longer supported by data from our clinical development program.
A Breakthrough Therapy designation by the FDA for our product candidates may not lead to a faster development or
regulatory review or approval process, and it does not increase the likelihood that our product candidates will receive
marketing approval.
We may seek a Breakthrough Therapy designation for some of our product candidates. A Breakthrough Therapy is defined as
a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or
condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing
therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical
development. For drugs and biologics that have been designated as breakthrough therapies, interaction and communication
between the FDA and the sponsor of the trial can help to identify the most efficient path for clinical development while
minimizing the number of patients placed in ineffective control regimens. Drugs designated as breakthrough therapies by the
FDA are also eligible for accelerated approval.
Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe one of our
product candidates meets the criteria for designation as a breakthrough therapy, the FDA may disagree and instead determine
not to make such designation. Even if we receive Breakthrough Therapy designation, the receipt of such designation for a
product candidate may not result in a faster development process, review or approval compared to drugs considered for
approval under conventional FDA procedures and does not assure ultimate approval by the FDA. In addition, even if one or
more of our product candidates qualify as breakthrough therapies, the FDA may later decide that the products no longer meet
the conditions for qualification or decide that the time period for FDA review or approval will not be shortened.
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Failure to obtain marketing approval in foreign 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 foreign jurisdictions, we or our potential
third-party collaborators must obtain separate marketing approvals and comply with numerous and varying regulatory
requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain
approval may differ substantially from that required to obtain FDA approval. The regulatory approval process outside of the
United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries
outside of the United States, it is required that the product be approved for reimbursement before the product can be approved
for sale in that country. We or our potential third-party collaborators may not obtain approvals from regulatory authorities
outside of the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory
authorities in other countries or jurisdictions, and approval by one regulatory authority outside of the United States does not
ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. However, a failure or delay in
obtaining regulatory approval in one country may have a negative effect on the regulatory process in other countries. We may
not be able to file for marketing approvals and may not receive necessary approvals to commercialize our products in any
market.
Additionally, on June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the European Union,
commonly referred to as Brexit. On March 29, 2017, the United Kingdom formally notified the European Union of its
intention to withdraw pursuant to Article 50 of the Lisbon Treaty. Since a significant proportion of the regulatory framework
in the United Kingdom is derived from European Union directives and regulations, the withdrawal could materially impact
the regulatory regime with respect to the approval of our product candidates in the United Kingdom or the European Union.
Any delay in obtaining, or an inability to obtain, any marketing approvals, as a result of Brexit or otherwise, would prevent
us from commercializing our product candidates in the United Kingdom and/or the European Union and restrict our ability to
generate revenue and achieve and sustain profitability. If any of these outcomes occur, we may be forced to restrict or delay
efforts to seek regulatory approval in the United Kingdom and/or European Union for our product candidates, which could
significantly and materially harm our business.
The United Kingdom has a period of a maximum of two years from the date of its formal notification to negotiate the terms
of its withdrawal from, and future relationship with, the European Union. If no formal withdrawal agreement is reached
between the United Kingdom and the European Union, then it is expected the United Kingdom's membership of the
European Union will automatically terminate two years after the submission of the notification of the United Kingdom's
intention to withdraw from the European Union. Discussions between the United Kingdom and the European Union focused
on finalizing withdrawal issues and transition agreements are ongoing. However, limited progress to date in these
negotiations and ongoing uncertainty within the UK Government and Parliament sustains the possibility of the United
Kingdom leaving the European Union on March 29, 2019 without a withdrawal agreement and associated transition period in
place, which is likely to cause significant market and economic disruption.
If we are required by the FDA to obtain approval of a companion diagnostic in connection with approval of a therapeutic
product candidate, and we do not obtain or face delays in obtaining FDA approval of a diagnostic device, we will not be
able to commercialize the product candidate and our ability to generate revenue will be materially impaired.
According to FDA guidance, if the FDA determines that a companion diagnostic device is essential to the safe and effective
use of a novel therapeutic product or indication, the FDA generally will not approve the therapeutic product or new
therapeutic product indication if the companion diagnostic is not also approved or cleared for that indication. Under the
Federal Food, Drug, and Cosmetic Act, or FDCA, companion diagnostics are regulated as medical devices, and the FDA has
generally required companion diagnostics intended to select the patients who will respond to cancer treatment to obtain
Premarket Approval, or a PMA, for the diagnostic. The PMA process, including the gathering of clinical and preclinical data
and the submission to and review by the FDA, involves a rigorous premarket review during which the applicant must prepare
and provide the FDA with reasonable assurance of the device’s safety and effectiveness and information about the device and
its components regarding, among other things, device design, manufacturing and labeling.
For example, a clinical trial is typically required for a PMA application and, in a small percentage of cases, the FDA may
require a clinical study in support of a 510(k) submission. A manufacturer that wishes to conduct a clinical study involving
the device is subject to the FDA’s IDE regulation. The IDE regulation distinguishes between significant and non-significant
risk device studies and the procedures for obtaining approval to begin the study differ accordingly. Also, some types of
studies are exempt from the IDE regulations. A significant risk device presents a potential for serious risk to the health,
safety, or welfare of a subject. Significant risk devices are devices that are substantially important in diagnosing, curing,
mitigating, or treating disease or in preventing impairment to human health. Studies of devices that pose a significant risk
require both FDA and an IRB approval prior to initiation of a clinical study. Non-significant risk devices are devices that do
not pose a significant risk to the human subjects. A non-significant risk device study requires only IRB approval prior to
initiation of a clinical study.
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Thus, a PMA is not guaranteed and may take considerable time, and the FDA may ultimately respond to a PMA submission
with a “not approvable” determination based on deficiencies in the application and require additional clinical trial or other
data that may be expensive and time-consuming to generate and that can substantially delay approval. As a result, if we are
required by the FDA to obtain approval of a companion diagnostic for a therapeutic product candidate, and we do not obtain
or there are delays in obtaining FDA approval of a diagnostic device, we may not be able to commercialize the product
candidate on a timely basis or at all and our ability to generate revenue will be materially impaired.
Any product candidate for which we obtain marketing approval could be subject to post-marketing restrictions or
withdrawal from the market and we may be subject to substantial penalties if we fail to comply with regulatory
requirements or if we experience unanticipated problems with our products, when and if any of them are approved.
Any product candidate for which we obtain marketing approval, along with the manufacturing processes, post-approval
clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of
and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-
marketing information and reports, registration and listing requirements, cGMP requirements relating to 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
approval may 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 implement a REMS. New cancer drugs frequently are indicated only for patient
populations that have not responded to an existing therapy or have relapsed. If any of our product candidates receives
marketing approval, the accompanying label may limit the approved use of our drug in this way, which could limit sales of
the product.
The FDA may also impose requirements for costly post-marketing studies or clinical trials and surveillance to monitor the
safety or efficacy of the product, including the adoption and implementation of REMS. The FDA and other agencies,
including the Department of Justice, or the DOJ, closely regulate and monitor the post-approval marketing and promotion of
drugs to ensure they are marketed and distributed only for the approved indications and in accordance with the provisions of
the approved labeling. The FDA and DOJ impose stringent restrictions on manufacturers’ communications regarding off-
label use, and if we do not market our products for their approved indications, we may be subject to enforcement action for
off-label marketing. Violations of the FDCA and other statutes, including the False Claims Act, relating to the promotion and
advertising of prescription drugs may lead to investigations and enforcement actions alleging violations of federal and state
healthcare fraud and abuse laws, as well as state consumer protection laws.
In addition, later discovery of previously unknown adverse events or other problems with our products, manufacturers or
manufacturing processes, or failure to comply with regulatory requirements, may have various consequences, including:
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restrictions on such products, manufacturers or manufacturing processes;
restrictions and warnings 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;
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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;
• damage to relationships with any potential collaborators;
• unfavorable press coverage and damage to our reputation;
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•
refusal to permit the import or export of our products;
• product seizure;
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injunctions or the imposition of civil or criminal penalties; or
litigation involving patients using our products. Non-compliance with European Union requirements regarding safety
monitoring or pharmacovigilance, and with requirements related to the development of products for the pediatric
population, can also result in significant financial penalties. Similarly, failure to comply with the European Union’s
requirements regarding the protection of personal information can also lead to significant penalties and sanctions.
In addition, manufacturers of approved products and those manufacturers’ facilities are required to comply with extensive
FDA requirements, including ensuring that quality control and manufacturing procedures conform to cGMPs applicable to
drug manufacturers or quality assurance standards applicable to medical device manufacturers, which include requirements
relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation and
reporting requirements. We, any contract manufacturers we may engage in the future, our future collaborators and their
contract manufacturers will also be subject to other regulatory requirements, including submissions of safety and other post-
marketing information and reports, registration and listing requirements, requirements regarding the distribution of samples
to clinicians, recordkeeping, and costly post-marketing studies or clinical trials and surveillance to monitor the safety or
efficacy of the product such as the requirement to implement a REMS.
The efforts of the Trump administration to pursue regulatory reform may limit the FDA’s ability to engage in oversight
and implementation activities in the normal course, and that could negatively impact our business.
The Trump administration has taken several executive actions, including the issuance of a number of executive orders, that
could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and
oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of
marketing applications. On January 30, 2017, President Trump issued an executive order, applicable to all executive
agencies, including the FDA, requiring that for each notice of proposed rulemaking or final regulation to be issued in fiscal
year 2017, the agency shall identify at least two existing regulations to be repealed, unless prohibited by law. These
requirements are referred to as the “two-for-one” provisions. This executive order includes a budget neutrality provision that
requires the total incremental cost of all new regulations in the 2017 fiscal year, including repealed regulations, to be no
greater than zero, except in limited circumstances. For fiscal years 2018 and beyond, the executive order requires agencies to
identify regulations to offset any incremental cost of a new regulation. In interim guidance issued by the Office of
Information and Regulatory Affairs within the Office of Management and on February 2, 2017, the Trump administration
indicates that the “two-for-one” provisions may apply not only to agency regulations, but also to significant agency guidance
documents. It is difficult to predict how these requirements will be implemented, and the extent to which they will impact the
FDA’s ability to exercise its regulatory authority. If these executive actions impose constraints on FDA’s ability to engage in
oversight and implementation activities in the normal course, our business may be negatively impacted.
Our relationships with healthcare providers, physicians and third-party payors will be subject to applicable anti-kickback,
fraud and abuse, false claims, transparency, health information privacy and security, and other healthcare laws and
regulations, which, in the event of a violation, could expose us to criminal sanctions, civil penalties, contractual damages,
reputational harm, administrative burdens and diminished profits and future earnings.
Healthcare providers, physicians and third-party payors will play a primary role in the recommendation and prescription of
any product candidates for which we obtain marketing approval. Our future arrangements with healthcare providers,
physicians and third-party payors may expose us to broadly applicable fraud and abuse and other healthcare laws and
regulations that may constrain the business or financial arrangements and relationships through which we market, sell and
distribute any products for which we obtain marketing approval. In addition, we may be subject to transparency laws and
patient privacy regulation by U.S. federal and state governments and by governments in foreign jurisdictions in which we
conduct our business. Restrictions under applicable federal and state healthcare laws and regulations include the following:
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the federal Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return
for, either the referral of an individual for, or the purchase, order or recommendation or arranging of, any good or
service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid;
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•
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the federal False Claims Act imposes criminal and civil penalties, including through civil whistleblower or qui tam
actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, false
or fraudulent claims for payment by a federal healthcare program or making a false statement or record material to
payment of a false claim or avoiding, decreasing or concealing an obligation to pay money to the federal government,
with potential liability including mandatory treble damages and significant per-claim penalties, currently set at $5,500
to $11,000 per false claim;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability
for executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare
matters;
• HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, and their
respective implementing regulations, also imposes obligations, including mandatory contractual terms, with respect to
safeguarding the privacy, security and transmission of individually identifiable health information;
•
the federal Physician Payments Sunshine Act requires applicable manufacturers of covered drugs to report payments
and other transfers of value to physicians and teaching hospitals; and
• analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws and transparency
statutes, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by
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 compliance guidance promulgated by the federal government and may require drug manufacturers
to report information related to payments and other transfers of value to physicians and other healthcare providers or
marketing expenditures. Additionally, some state and local laws require the registration of pharmaceutical sales
representatives in the jurisdiction. State and foreign laws also govern the privacy and security of health information in some
circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus
complicating compliance efforts.
Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and
regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices
may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other
healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental
regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines,
imprisonment, exclusion of products from government funded healthcare programs, such as Medicare and Medicaid, and the
curtailment or restructuring of our operations. If any of the physicians or other healthcare providers or entities with whom we
expect to do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or
administrative sanctions, including exclusions from participation in
government funded healthcare programs.
Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and
commercialize our product candidates and affect the prices we may obtain for any products that are approved in the
United States or foreign jurisdictions.
In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and
proposed changes regarding the healthcare system that could prevent or delay marketing approval of our product candidates,
restrict or regulate post-approval activities and affect our ability to profitably sell any product candidates for which we obtain
marketing approval. The pharmaceutical industry has been a particular focus of these efforts and have been significantly
affected by legislative initiatives. Current laws, as well as other healthcare reform measures that may be adopted in the future,
may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any FDA
approved product.
In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, changed
the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug
purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for physician-
administered drugs. In addition, this legislation provided authority for limiting the number of drugs that will be covered in
any therapeutic class. Cost reduction initiatives and other provisions of this legislation could decrease the coverage and price
that we receive for any approved products. While the MMA applies only to drug benefits for Medicare beneficiaries, private
payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore,
any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private
payors.
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In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health
Care and Education Reconciliation Act of 2010, or collectively the ACA. Among the provisions of the ACA of potential
importance to our business, including, without limitation, our ability to commercialize and the prices we may obtain for any
of our product candidates that are approved for sale, 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 civil False Claims Act and the federal Anti-Kickback
Statute, new government investigative powers and enhanced penalties for noncompliance;
• a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% (and 70%
starting January 1, 2019) 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 certain financial arrangements 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 with funding for such research.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. These changes include the
Budget Control Act of 2011, which, among other things, led to aggregate reductions to Medicare payments to providers of up
to 2% per fiscal year that started in 2013 and, due to subsequent legislative amendments to the statute, will stay in effect
through 2027 unless additional congressional action is taken, and the American Taxpayer Relief Act of 2012, which, among
other things, reduced Medicare payments to several types of providers and increased the statute of limitations period for the
government to recover overpayments to providers from three to five years. These new laws may result in additional
reductions in Medicare and other healthcare funding and otherwise affect the prices we may obtain for any of our product
candidates for which we may obtain regulatory approval or the frequency with which any such product candidate is
prescribed or used. Further, there have been several recent U.S. congressional inquiries and proposed state and federal
legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing
and manufacturer patient programs, reduce the costs of drugs under Medicare and reform government program
reimbursement methodologies for drug products.
We expect that these healthcare reforms, as well as other healthcare reform measures that may be adopted in the future, may
result in additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, new payment
methodologies and additional downward pressure on the price that we receive for any approved product and/or the level of
reimbursement physicians receive for administering any approved product we might bring to market. Reductions in
reimbursement levels may negatively impact the prices we receive or the frequency with which our products are prescribed or
administered. Any reduction in reimbursement from Medicare or other government programs may result in a similar
reduction in payments from private payors.
With enactment of the TCJA, which was signed by the President on December 22, 2017, Congress repealed the “individual
mandate.” The repeal of this provision, which requires most Americans to carry a minimal level of health insurance, will
become effective in 2019. According to the Congressional Budget Office, the repeal of the individual mandate will cause an
estimated 13 million fewer Americans to be insured in 2027 and premiums in insurance markets may rise. Additionally, on
January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the
implementation of certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-
sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the
medical device excise tax on non-exempt medical devices. Further, the Bipartisan Budget Act of 2018, among other things,
amends the ACA, effective January 1, 2019, to increase from 50% to 70% the point-of-sale discount that is owed by
pharmaceutical manufacturers who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans,
commonly referred to as the “donut hole”. Further, each chamber of the U.S. Congress has put forth multiple bills designed to
repeal or repeal and replace portions of the ACA. Although none of these measures has been enacted by Congress to date,
Congress may consider other legislation to repeal and replace elements of the ACA.
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The Trump Administration has also taken executive actions to undermine or delay implementation of the ACA. Since
January 2017, President Trump has signed two Executive Orders designed to delay the implementation of certain provisions
of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. One Executive
Order directs federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or
delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals,
healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. The second Executive Order
terminates the cost-sharing subsidies that reimburse insurers under the ACA. Several state Attorneys General filed suit to stop
the administration from terminating the subsidies, but their request for a restraining order was denied by a federal judge in
California on October 25, 2017. In addition, CMS has recently proposed regulations that would give states greater flexibility
in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the
essential health benefits required under the ACA for plans sold through such marketplaces. Further, on June 14, 2018, U.S.
Court of Appeals for the Federal Circuit ruled that the federal government was not required to pay more than $12 billion in
ACA risk corridor payments to third-party payors who argued were owed to them. The effects of this gap in reimbursement
on third-party payors, the viability of the ACA marketplace, providers, and potentially our business, are not yet known.
The costs of prescription pharmaceuticals have also been the subject of considerable discussion in the United States, and
members of Congress and the Trump administration have stated that they will address such costs through new legislative and
administrative measures. To date, there have been several recent U.S. congressional inquiries and proposed and enacted state
and federal legislation designed to, among other things, bring more transparency to drug pricing, review the relationship
between pricing and manufacturer patient programs, reduce the costs of drugs under Medicare and reform government
program reimbursement methodologies for drug products. At the federal level, the Trump administration’s budget proposal
for fiscal year 2019 contains further drug price control measures that could be enacted during the 2019 budget process or in
other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain
drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for
generic drugs for low-income patients. While any proposed measures will require authorization through additional legislation
to become effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative
and/or administrative measures to control drug costs. At the state level, legislatures are increasingly passing legislation and
implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient
reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency
measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.
Specifically, there have been several recent U.S. congressional inquiries and proposed federal and proposed and enacted state
legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing
and manufacturer patient programs, reduce the costs of drugs under Medicare and reform government program
reimbursement methodologies for drug products. At the federal level, Congress and the Trump administration have each
indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. For example, on
May 11, 2018, the Administration issued a plan to lower drug prices. Under this blueprint for action, the Administration
indicated that the Department of Health and Human Services (HHS) will: take steps to end the gaming of regulatory and
patent processes by drug makers to unfairly protect monopolies; advance biosimilars and generics to boost price competition;
evaluate the inclusion of prices in drug makers’ ads to enhance price competition; speed access to and lower the cost of new
drugs by clarifying policies for sharing information between insurers and drug makers; avoid excessive pricing by relying
more on value-based pricing by expanding outcome-based payments in Medicare and Medicaid; work to give Part D plan
sponsors more negotiation power with drug makers; examine which Medicare Part B drugs could be negotiated for a lower
price by Part D plans, and improving the design of the Part B Competitive Acquisition Program; update Medicare’s drug-
pricing dashboard to increase transparency; prohibit Part D contracts that include “gag rules” that prevent pharmacists from
informing patients when they could pay less out-of-pocket by not using insurance; and require that Part D plan members be
provided with an annual statement of plan payments, out-of-pocket spending, and drug price increases. More recently, on
January 31, 2019, the HHS Office of Inspector General proposed modifications to the federal Anti-Kickback Statute discount
safe harbor for the purpose of reducing the cost of drug products to consumers which, among other things, if finalized, will
affect discounts paid by manufacturers to Medicare Part D plans, Medicaid managed care organizations and pharmacy benefit
managers working with these organizations.
At the state level, individual states are increasingly aggressive in passing legislation and implementing regulations designed
to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts,
restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed
to encourage importation from other countries and bulk purchasing. In addition, regional health care authorities and
individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which
suppliers will be included in their prescription drug and other health care programs. These measures could reduce the ultimate
demand for our products, once approved, or put pressure on our product pricing. We expect that additional state and federal
healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state
governments will pay for healthcare products and services, which could result in reduced demand for our product candidates
or additional pricing pressures.
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Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional
activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether
the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing
approvals of our product candidates, if any, may be. Increased scrutiny by the U.S. Congress of the FDA’s approval process
may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-
marketing testing and other requirements.
Governments outside of the United States tend to impose strict price controls, which may adversely affect our revenues, if
any.
In some countries, particularly 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 or pricing approval in some countries, we may be
required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies.
If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our
business could be harmed, possibly materially.
If we or any third-party manufacturers we engage now or in the future fail to comply with environmental, health and
safety laws and regulations, we could become subject to fines or penalties or incur costs or liabilities that could harm our
business.
We and third-party manufacturers we engage now are, and any third-party manufacturers we may engage in the future will
be, subject to numerous environmental, health and safety laws and regulations, including those governing laboratory
procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve
the use of hazardous and flammable materials, including chemicals and biological materials. Our operations also produce
hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannot
eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our
use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources.
Liability under certain environmental laws governing the release and cleanup of hazardous materials is joint and several and
could be imposed without regard to fault. We also could incur significant costs associated with civil or criminal fines and
penalties or become subject to injunctions limiting or prohibiting our activities for failure to comply with such laws and
regulations.
Although we maintain general liability insurance as well as workers’ compensation insurance to cover us for costs and
expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, this insurance may not
provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort
claims that may be asserted against us in connection with our storage or disposal of biological, hazardous or radioactive
materials.
In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws
and regulations. These current or future laws and regulations may impair our research, development or production efforts.
Our failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.
Further, with respect to the operations of our current and any future third-party contract manufacturers, it is possible that if
they fail to operate in compliance with applicable environmental, health and safety laws and regulations or properly dispose
of wastes associated with our products, we could be held liable for any resulting damages, suffer reputational harm or
experience a disruption in the manufacture and supply of our product candidates or products. In addition, our supply chain
may be adversely impacted if any of our third party contract manufacturers become subject to injunctions or other sanctions
as a result of their non-compliance with environmental, health and safety laws and regulations.
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We are subject to anti-corruption laws, as well as export control laws, customs laws, sanctions laws and other laws
governing our operations. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other
remedial measures and legal expenses, be precluded from developing manufacturing and selling certain products outside
the United States or be required to develop and implement costly compliance programs, which could adversely affect our
business, results of operations and financial condition.
Our operations are subject to anti-corruption laws, including the U.K. Bribery Act 2010, or Bribery Act, the U.S. Foreign
Corrupt Practices Act, or FCPA, and other anti-corruption laws that apply in countries where we do business and may do
business in the future. The Bribery Act, FCPA and these other laws generally prohibit us, our officers, and our employees and
intermediaries from bribing, being bribed or making other prohibited payments to government officials or other persons to
obtain or retain business or gain some other business advantage. Compliance with the FCPA, in particular, is expensive and
difficult, particularly in countries in which corruption is a recognized problem. In addition, the FCPA presents particular
challenges in the pharmaceutical industry, because, in many countries, hospitals are operated by the government, and doctors
and other hospital employees are considered foreign officials. Certain payments to hospitals in connection with clinical trials
and other work have been deemed to be improper payments to government officials and have led to FCPA enforcement
actions.
We may in the future operate in jurisdictions that pose a high risk of potential Bribery Act or FCPA violations, and we may
participate in collaborations and relationships with third parties whose actions could potentially subject us to liability under
the Bribery Act, FCPA or local anti-corruption laws. In addition, we cannot predict the nature, scope or effect of future
regulatory requirements to which our international operations might be subject or the manner in which existing laws might be
administered or interpreted. If we expand our operations outside of the United States, we will need to dedicate additional
resources to comply with numerous laws and regulations in each jurisdiction in which we plan to operate.
We are also subject to other laws and regulations governing our international operations, including regulations administered
by the governments of the United Kingdom and the United States, and authorities in the European Union, including
applicable export control regulations, economic sanctions on countries and persons, customs requirements and currency
exchange regulations, collectively referred to as the Trade Control laws. In addition, various laws, regulations and executive
orders also restrict the use and dissemination outside of the United States, or the sharing with certain non-U.S. nationals, of
information classified for national security purposes, as well as certain products and technical data relating to those products.
If we expand our presence outside of the United States, it will require us to dedicate additional resources to comply with
these laws, and these laws may preclude us from developing, manufacturing, or selling certain products and product
candidates outside of the United States, which could limit our growth potential and increase our development costs.
There is no assurance that we will be completely effective in ensuring our compliance with all applicable anti-corruption
laws, including the Bribery Act, the FCPA or other legal requirements, including Trade Control laws. If we are not in
compliance with the Bribery Act, the FCPA and other anti-corruption laws or Trade Control laws, we may be subject to
criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have
an adverse impact on our business, financial condition, results of operations and liquidity. The Securities and Exchange
Commission also may suspend or bar issuers from trading securities on U.S. exchanges for violations of the FCPA’s
accounting provisions. Any investigation of any potential violations of the Bribery Act, the FCPA, other anti-corruption laws
or Trade Control laws by United Kingdom, U.S. or other authorities could also have an adverse impact on our reputation, our
business, results of operations and financial condition.
Our employees may engage in misconduct or other improper activities, including non-compliance with regulatory
standards and requirements, which could cause significant liability for us and harm our reputation.
We are exposed to the risk of employee fraud or other misconduct, including intentional failures to comply with FDA
regulations or similar regulations of comparable foreign regulatory authorities, provide accurate information to the FDA or
comparable foreign regulatory authorities, comply with manufacturing standards, comply with federal and state healthcare
fraud and abuse laws and regulations and similar laws and regulations established and enforced by comparable foreign
regulatory authorities, report financial information or data accurately or disclose unauthorized activities to us. Employee
misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in
regulatory sanctions and serious harm to our reputation. This could include violations of HIPAA, other U.S. federal and state
law, and requirements of non-U.S. jurisdictions, including the European Union Data Protection Directive. It is not always
possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not
be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or
other actions or lawsuits stemming from a failure to be in compliance with such laws, standards, regulations, guidance or
codes of conduct. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting
our rights, those actions could have a significant impact on our business and results of operations, including the imposition of
significant fines or other sanctions.
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Our internal computer systems, or those of our collaborators or other contractors or consultants, may fail or suffer
security breaches, which could result in a material disruption of our product development programs.
Our internal computer systems and those of any collaborators, contractors or consultants are vulnerable to damage from
computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Such
systems are also vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by our
employees, third-party vendors and/or business partners, or from cyber-attacks by malicious third parties. Cyber-attacks are
increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. Cyber-attacks
could include the deployment of harmful malware, ransomware, denial-of-service attacks, social engineering and other means
to affect service reliability and threaten the confidentiality, integrity and availability of information. Cyber-attacks also could
include phishing attempts or e-mail fraud to cause payments or information to be transmitted to an unintended recipient.
While we have not experienced any such material system failure, accident, cyber-attack or security breach to date, if such an
event were to occur and cause interruptions in our operations, it could result in a material disruption of our development
programs and our business operations, whether due to a loss of our trade secrets or other proprietary information or other
similar disruptions. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in
our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any
disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of
confidential or proprietary information, we could incur liability, our competitive position could be harmed and the further
development and commercialization of our product candidates could be delayed.
Risks Related to Employee Matters and Managing Growth
Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel.
We are highly dependent on the research and development, clinical and business expertise of our executive officers, as well
as the other principal members of our management, scientific and clinical teams. Although we have entered into employment
letter agreements with our executive officers, each of them may terminate their employment with us at any time. We do not
maintain “key person” insurance for any of our executives or other employees.
Recruiting and retaining qualified scientific, clinical, manufacturing, legal and sales and marketing personnel will also be
critical to our success. Although we have a robust process for interviewing and hiring personnel, there is no guarantee that
individuals will fulfill the obligations we employ them for, or that they will fit within our organizational culture. The loss of
the services of our executive officers or other key employees could impede the achievement of our research, development and
commercialization objectives and seriously harm our ability to successfully implement our business strategy. Furthermore,
replacing executive officers and key employees may be difficult and may take an extended period of time because of the
limited number of individuals in our industry with the breadth of skills and experience required to successfully develop, gain
regulatory approval of and commercialize products. Competition to hire from this limited pool is intense, and we may be
unable to hire, train, retain or motivate these key personnel on acceptable terms given the competition among numerous
pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of
scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors,
including scientific and clinical advisors, to assist us in formulating our research and development and commercialization
strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under
consulting or advisory contracts with other entities that may limit their availability to us. If we are unable to continue to
attract and retain high quality personnel, our ability to pursue our growth strategy will be limited.
We expect to expand our development and regulatory capabilities and potentially implement sales, marketing and
distribution capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our
operations.
We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in
the areas of drug development, clinical, regulatory affairs and, if any of our product candidates receives marketing approval,
sales, marketing and distribution. To manage our anticipated future growth, we must continue to implement 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 be able to effectively manage the expansion of our operations or recruit and train
additional qualified personnel. The expansion of our operations may lead to significant costs and may divert our management
and business development resources. Any inability to manage growth could delay the execution of our business plans or
disrupt our operations.
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Risks Related to Our Common Stock
Our executive officers, directors and principal stockholders, if they choose to act together, have the ability to control all
matters submitted to stockholders for approval.
As of February 28, 2019, our executive officers, directors and affiliated stockholders, in the aggregate, owned shares
representing approximately 43.3% of our capital stock. As a result, if these stockholders were to choose to act together, they
would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For
example, these persons, if they choose to act together, would control the election of directors and approval of any merger,
consolidation or sale of all or substantially all of our assets.
This concentration of ownership control may:
• delay, defer or prevent a change in control;
• entrench our management and board of directors; or
• delay or prevent 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 our company,
which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or
remove our current management.
Provisions in our certificate of incorporation and our bylaws may discourage, delay or prevent a merger, acquisition or other
change in control of our company that stockholders may consider favorable, including transactions in which stockholders
might otherwise receive a premium for their shares. These provisions could also limit the price that 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,
because our board of directors is responsible for appointing the members of our management team, these provisions may
frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more
difficult for stockholders to replace members of our board of directors. Among other things, these provisions:
• establish a classified board of directors such that only one of three classes of directors is elected each year;
• 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 our board of directors;
• establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and
nominations to our board of directors;
•
•
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 stockholder meetings;
• authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute
a “poison pill” that would work to dilute 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 specified provisions of our certificate of incorporation 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 prohibits a 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 transaction in which the person acquired in
excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.
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An active trading market for our common stock may not be sustained.
Our shares of common stock began trading on the Nasdaq Global Select Market on July 19, 2018. Given the limited trading
history of our common stock, there is a risk that an active trading market for our shares may not continue to develop or be
sustained. If an active market for our common stock does not continue to develop or is not sustained, it may be difficult for
our stockholders to sell shares without depressing the market price for the shares, or at all.
If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our
stock, the price of our stock could decline.
The trading market for our common stock relies, in part, on the research and reports that industry or financial analysts publish
about us or our business Although we have obtained analyst coverage, if one or more of the analysts covering our business
downgrade their evaluations of our stock or publish inaccurate or unfavorable research about our business, the price of our
stock could decline. If one or more of these analysts cease to cover our stock, we could lose visibility in the market for our
stock, which in turn could cause our stock price and trading volume to decline.
The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for our
stockholders.
Our stock price is likely to be volatile. During the period from July 18, 2018 to March 7, 2019, the closing price of our
common stock ranged from a high of $11.93 per share to a low of $4.01 per share. The stock market in general and the
market for smaller biopharmaceutical companies in particular have experienced extreme volatility that has often been
unrelated to the operating performance of particular companies. The market price for our common stock may be influenced
by many factors, including:
•
results of or developments in clinical trials of our product candidates or those of our competitors;
• our success in commercializing our product candidates, if and when approved;
•
•
the success of competitive products or technologies;
regulatory or legal developments in the United States and other countries;
• developments or disputes concerning patent applications, issued patents or other intellectual property or proprietary
•
•
•
rights;
the recruitment or departure of key personnel;
the level of expenses related to any of our product candidates or clinical development programs;
the results of our efforts to discover, develop, acquire or in-license products, product candidates or technologies, the
costs of commercializing any such products and the costs of development of any such product candidates or
technologies;
• actual or anticipated changes in estimates as to financial results, development timelines or recommendations by
securities analysts;
• variations in our financial results or the financial results of companies that are perceived to be similar to us;
• 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.
In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has
often been instituted against that company. Such litigation, if instituted against us, could cause us to incur substantial costs to
defend such claims and divert management’s attention and resources.
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A significant portion of our total outstanding shares are eligible to be sold into the market in the near future, which could
cause the market price of our common stock to drop significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market, or the perception in the market that the
holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. Persons who
were our stockholders prior to our initial public offering continue to hold a substantial number of shares of our common
stock. If such persons sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the
trading price of our common stock could decline.
Moreover, holders of a substantial number of shares of our common stock, including shares of our common stock issuable
upon exercise of outstanding warrants, have rights, subject to specified conditions, to require us to file registration statements
covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders.
In July 2018, we filed a registration statement registering all shares of common stock that we may issue under our equity
compensation plans. These shares can be freely sold in the public market upon issuance, subject to volume limitations
applicable to affiliates and the lock-up agreements entered into in connection with our initial public offering.
We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth
companies may make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We
may remain an emerging growth company until December 31, 2023, although if the market value of our common stock that is
held by non-affiliates exceeds $700 million as of any June 30 before that time or if we have annual gross revenues of
$1.07 billion or more in any fiscal year, we would cease to be an emerging growth company as of December 31 of the
applicable year. We also would cease to be an emerging growth company if we issue more than $1 billion of non-convertible
debt over a three-year period. For so long as we remain an emerging growth company, we are permitted and intend to rely on
exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth
companies. These exemptions include:
• not being required to comply with the auditor attestation requirements in the assessment of our internal control over
financial reporting;
• not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight
Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information
about the audit and the financial statements;
•
reduced disclosure obligations regarding executive compensation; and
• exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder
approval of any golden parachute payments not previously approved.
We may choose to take advantage of some or all of the available exemptions. We cannot predict whether investors will find
our common 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 trading market for our common stock and our stock price may be more volatile. In addition,
the JOBS Act permits an emerging growth company to take advantage of an extended transition period to comply with new
or revised accounting standards applicable to public companies until those standards would otherwise apply to private
companies. We have elected not to “opt out” of such extended transition period, which means that when a standard is issued
or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at
the time private companies adopt the new or revised standard and will do so until such time that we either (i) irrevocably
elect to “opt out” of such extended transition period or (ii) no longer qualify as an emerging growth company.
We have incurred and 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 new compliance initiatives and corporate governance practices.
As a public company, and particularly after we are no longer an emerging growth company, we will incur significant legal,
accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, or the Sarbanes-
Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq Global
Select Market and other applicable securities rules and regulations impose various requirements on public companies,
including establishment and maintenance of effective disclosure and financial controls and corporate governance practices.
Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives.
Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities
more time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and
more expensive for us to obtain director and officer liability insurance, which in turn could make it more difficult for us to
attract and retain qualified members of our board of directors.
85
We are evaluating these rules and regulations, 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 to varying interpretations, in many cases due to their
lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by
regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs
necessitated by ongoing revisions to disclosure and governance practices.
Pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, we will be required to furnish a report by our
management on our internal control over financial reporting. However, while we remain an emerging growth company, we
will not be required to include an attestation report on internal control over financial reporting issued by our independent
registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged
in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In
this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a
detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to
improve control processes as appropriate, validate through testing that controls are functioning as documented and implement
a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a
risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial
reporting is effective as required by Section 404. If we identify one or more material weaknesses in our internal control over
financial reporting, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability
of our financial statements.
We previously identified a material weakness in our disclosure controls and procedures and our internal controls, which
we believe has been fully remediated. If we have inadequately remediated this material weakness or if we otherwise fail to
develop, implement and maintain appropriate internal controls in future periods, our ability to report our financial
condition and results of operations accurately and on a timely basis could be adversely affected.
We previously identified a material weakness in our internal control over financial reporting. The specific material weakness
and our remediation efforts are described in Item 9A, “Controls and Procedures” of this Annual Report on Form 10-K in
“Disclosure Controls and Procedures.” A “material weakness” is a deficiency, or a combination of deficiencies, in internal
controls, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated
financial statements would not be prevented or detected. We cannot assure you that additional material weaknesses in our
internal controls will not be identified in the future. Any failure to maintain or implement required new or improved controls,
or any difficulties we encounter in their implementation, could result in additional material weaknesses, or could result in
material misstatements in our financial statements. These misstatements could result in restatements of our financial
statements, cause us to fail to meet our reporting obligations or cause investors to lose confidence in our reported financial
information.
We have developed certain remediation steps to address the material weakness discussed above and to improve our internal
controls. We believe the material weakness discussed above has been fully remediated. If we have inadequately remediated
this material weakness, there will continue to be an increased risk that our future financial statements could contain errors
that will be undetected. Further and continued determinations that there are material weaknesses in the effectiveness of our
internal controls could reduce our ability to obtain financing or could increase the cost of any financing we obtain and require
additional expenditures of resources to comply with applicable requirements. For more information relating to our internal
controls and disclosure controls and procedures, and the remediation plan undertaken by us, see Item 9A, “Controls and
Procedures” of this Annual Report on Form 10-K.
Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital
appreciation, if any, will be our stockholders’ sole source of gain.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if
any, to finance the growth and development of our business. In addition, the terms of any future debt agreements may
preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be our stockholders’
sole source of gain for the foreseeable future.
86
Our certificate of incorporation designates the state courts in the State of Delaware as the sole and exclusive forum for
certain types of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits
against the company and our directors, officers and employees.
Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court
of Chancery of the State of Delaware (or, if the Court of Chancery of the State of Delaware does not have jurisdiction, the
federal district court for the District of Delaware) will be the sole and exclusive forum for (1) any derivative action or
proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors,
officers, employees or stockholders to our company or our stockholders, (3) any action asserting a claim arising pursuant to
any provision of the Delaware General Corporation Law, or the DGCL, or as to which the DGCL confers jurisdiction on the
Court of Chancery of the State of Delaware, or (4) any action asserting a claim arising pursuant to any provision of our
certificate of incorporation or bylaws (in each case, as they may be amended from time to time) or governed by the internal
affairs doctrine. This exclusive forum provision may limit the ability of our stockholders to bring a claim in a judicial forum
that such stockholders find favorable for disputes with us or our directors, officers or employees, which may discourage such
lawsuits against us and our directors, officers and employees.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
We currently lease 36,309 square feet of office and laboratory space in Cambridge, Massachusetts under a lease that expires
in June 2020. In September 2018, we executed the Fourth Amendment to our non-cancellable operating lease. The terms of
the amendment, which covers additional space, expanded the size of the leased premises to include additional 11,237 square
feet in the leased facility as of February 2019, which expires in February 2022. We believe that our facilities are sufficient to
meet our current needs and that suitable additional space will be available as and when needed.
Item 3. Legal Proceedings.
At each reporting date, we evaluate whether or not a potential loss amount or a potential range of losses is probable and
reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. We
expense as incurred the costs related to such legal proceedings. On January 17, 2017, a participant dosed in one of our
clinical trials filed a complaint against us in the United States District Court for the District of Arizona, alleging negligence,
lack of informed consent, strict products liability and loss of consortium. We filed an answer in March 2017. A dispositive
motion is currently pending with the District Court and has yet to be decided. The plaintiff claims damages of $1.5
million. We are working with counsel and our insurer to vigorously defend our position. We believe that we have
meritorious defenses however unfavorable outcome of some amount is reasonably possible.
Item 4. Mine Safety Disclosures.
Not applicable.
87
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Market Information
Our common stock trades under the symbol “CNST” on the Nasdaq Global Select Market and has been publicly traded since
July 19, 2018. Prior to this time, there was no public market for our common stock.
Holders of Our Common Stock
As of March 7, 2019, there were approximately 147 holders of record of shares of our common stock. This number does not
include stockholders for whom shares are held in “nominee” or “street” name.
Dividends
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and
any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock
in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of
directors and will depend on our financial condition, operating results, capital requirements, general business conditions and
other factors that our board of directors may deem relevant.
Unregistered Sales of Equity Securities and Use of Proceeds
Set forth below is information regarding shares of equity securities sold or issued, and options granted, by us during year
ended December 31, 2018 that were not registered under the Securities Act.
In March 2018, the Company issued and sold an aggregate of 68,500,000 shares of Series F convertible preferred stock (the
“Series F Preferred Stock”), at a price of $1.00 per share, for proceeds of $68.4 million, net of issuance costs of $0.1 million.
In April 2018, the Company issued and sold an aggregate of 31,250,000 shares of Series F Preferred Stock in two additional
closings, at a price of $1.00 per share for proceeds of $31.2 million, net of issuance costs of less than $0.1 million. In
connection with the issuance of the Series F Preferred Stock, the holders of the previously outstanding Preferred Stock agreed
to remove their cumulative dividend rights and waive certain anti-dilution rights. The Company assessed whether this change
to the previously outstanding shares of Series A, B, D, E and E-1 Preferred Stock was an extinguishment or modification.
Based on qualitative analysis, there were no substantive changes in cash flows to the previously issued securities as a result
of the additional issuance and therefore the change was accounted for as a modification. This modification did not have any
impact on the Company’s financial statements.
On April 5, 2018, we issued and sold 30,500,000 shares of our Series F preferred stock to 12 investors at a price per share of
$1.00 in cash, for an aggregate purchase price of $30.5 million. On April 27, 2018, we issued and sold 750,000 shares of our
Series F preferred stock to one investor at a price per share of $1.00 in cash, for an aggregate purchase price of $0.8 million.
The Series F preferred stock was convertible into shares of common stock on the terms described in Note 8 to our financial
statements appearing elsewhere in this Annual Report on Form 10-K. No underwriters were involved in the foregoing
issuances of securities. The securities described in this section (a) of were issued to investors in reliance upon the exemption
from the registration requirements of the Securities Act, as set forth in Section 4(a)(2) under the Securities Act and, in certain
cases, Regulation D thereunder, relative to transactions by an issuer not involving any public offering, to the extent an
exemption from such registration was required. All purchasers received written disclosures that the securities had not been
registered under the Securities Act and that any resale must be made pursuant to a registration statement or an available
exemption from such registration.
In July 2018, in connection with the closing of our initial public offering, all of our outstanding shares of preferred stock
were converted into an aggregate of 20,501,927 shares of common stock. The conversion of preferred stock into common
stock occurred in accordance with the terms of our certificate of incorporation and did not constitute a sale for purposes of the
Securities Act.
88
On August 22, 2018, we issued 51,032 shares of common stock to Third Rock Ventures LP (“Third Rock”) upon the exercise
of a common stock purchase warrant, for aggregate proceeds of $79,099. We issued the warrant and the shares of common
stock in reliance on the exemption from the registration provisions of the Securities Act set forth in Section 4(a)(2) of the
Securities Act relating to sales by an issuer not involving any public offering. According to the terms of the common stock
purchase warrant, Third Rock represented to us that it was acquiring the warrant for its own account for investment purposes,
that it had made such inquiry of us as it deemed appropriate in accepting the warrant, that it was capable of evaluating the
risks of the investment, and that it was an accredited investor as such term is defined in Rule 501 of Regulation D
promulgated under the Securities Act.
Purchase of Equity Securities
We did not purchase any of our registered equity securities during the period covered by this Annual Report on Form 10K.
Use of Proceeds from Registered Securities
On July 23, 2018 we closed our initial public offering of common stock under a registration statement on Form S-1 (333-
225822) that was declared effective by the Securities and Exchange Commission (the “SEC”) on July 18, 2018.
We received aggregate net proceeds from the offering of $52.2 million, after deducting underwriting discounts and
commissions and other offering expenses payable by us. None of the underwriting discounts and commissions or other
offering expenses were incurred or paid to directors or officers of ours or their associates or to persons owning 10% or more
of our common stock or to any affiliates of ours.
We had not used any of the net proceeds from the IPO as of December 31, 2018 as we have continued to fund operations
from proceeds received through our preferred stock financings. We have invested the unused net proceeds from the offering
in money market accounts.
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Item 6. Selected Financial Data.
You should read the following selected financial data together with our financial statements and companying notes
appearing elsewhere in this Annual Report on Form 10-K and the “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” section of this Annual Report on Form 10-K. We have derived the statement of
operations data for the years ended December 31, 2018, 2017,and 2016 and the balance sheet data as of December 31, 2018
and 2017 from our audited financial statements included elsewhere in this Annual Report on Form 10(cid:5)K. Our historical
results for any prior period are not necessarily indicative of the results that may be expected in any future period.
Consolidated Statement of Operations Data:
Revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Change in fair value of preferred stock tranche liability
Total other income (expense), net
Net loss and comprehensive loss
Cumulative dividends on convertible preferred stock
Net loss attributable to common stockholders
Net loss per share attributable to common stockholders, basic and
diluted
Weighted average common shares outstanding,basic and diluted
Pro forma net loss per share attributable to common stockholders,
basic and diluted (unaudited)
Pro forma weighted average common shares outstanding, basic and
diluted (unaudited)
2018
Years Ended December 31,
2017
(in thousands, except per share data)
2016
$
— $
— $
—
48,769
12,475
61,244
(61,244)
1,547
(228)
—
1,319
(59,925)
—
(59,925)
(5.00)
11,984,293
$
$
$
$
32,617
6,471
39,088
(39,088)
169
(901)
4,443
3,711
(35,377)
(18,390)
$
(53,767)
27,881
5,777
33,658
(33,658)
53
(1,345)
417
(875)
(34,533)
(14,932)
(49,465)
(56.10)
958,447
$
(53.19)
929,982
$
(3.40)
11,689,795
(1)
See Note 14 to our consolidated financial statements for further details on the calculation of net loss per share, basic and diluted, attributable to common
stockholders and the weighted(cid:16)average number of shares used in the computation of the per share amounts.
Consolidated Balance Sheet Data:
Cash and cash equivalents
Working capital (1)
Total assets
Long-term debt, net of discount, including current portion
Preferred stock warrant liability
Convertible preferred stock
Total stockholders' equity (deficit)
(1) We define working capital as current assets less current liabilities.
As of December 31,
2018
2017
(in thousands)
$
114,592 $
102,643
118,938
—
—
—
104,158
16,404
6,591
19,103
4,103
254
173,228
(165,833)
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read together with our
consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.
You should read this Annual Report on Form 10-K and the documents that we have filed as exhibits to this Annual Report on
Form 10-K completely and with the understanding that our actual future results may be materially different from what we
expect. The forward-looking statements contained in this Annual Report on Form 10-K are made as of the date of this Annual
Report on Form 10-K and we do not assume any obligation to update any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required by applicable law.
Overview
We are a clinical-stage biopharmaceutical company using our expertise in epigenetics to discover and develop novel
therapeutics that address serious unmet medical needs in patients with cancers associated with abnormal gene expression or
drug resistance. Our integrated epigenetics platform enables us to validate targets and generate small molecules against these
targets that selectively modulate gene expression in tumor and immune cells to drive anti-tumor activity. This platform
reflects our deep understanding of the biology of regulation of gene expression by epigenetic regulatory proteins, or
epigenetic regulators, the development of small-molecule product candidates that selectively modulate their activity, and the
design of clinical development programs supported by novel biomarker strategies. We are able to target a broad variety of
epigenetic regulators using our platform and have generated development candidates acting against distinct classes of those
regulators.
To date, we have financed our operations primarily through our initial public offering, which closed on July 23, 2018, sales
of our preferred stock, payments received in connection with collaboration and research agreements and borrowings under
loan agreements.
As of December 31, 2018, we have financed our operations primarily through our initial public offering, which closed on
July 23, 2018, sales of our preferred stock, payments received in connection with our collaboration and research agreements
and borrowings under loan agreements. In March 2018 and April 2018, we received gross proceeds of $99.8 million from the
issuance and sale of our Series F convertible preferred stock (see Note 8). In July 2018, we completed an initial public
offering, or IPO, of our common stock and issued and sold 4,000,000 shares of common stock at a public offering price of
$15.00 per share, resulting in net proceeds of $52.2 million after deducting underwriting discounts, commissions and offering
costs. Since our inception, we have incurred significant operating losses. Our ability to generate product revenue sufficient to
achieve profitability, if ever, will depend heavily on the successful development and eventual commercialization of one or
more of our product candidates. For the years ended December 31, 2018 and 2017, we reported a net loss of $59.9 million
and $35.4 million, respectively. As of December 31, 2018, we had an accumulated deficit of $233.8 million. We expect to
continue to incur significant expenses and increasing operating losses for at least the next several years. We expect that our
expenses and capital requirements will increase substantially in connection with our ongoing activities, particularly if and as
we:
• continue our Phase 1b/2 clinical trial of CPI-1205 for the treatment of metastatic castration-resistant prostate cancer in
combination with either enzalutamide or abiraterone acetate, which we refer to as the ProSTAR trial, and our Phase 2
clinical trial of CPI-0610 as a monotherapy or in combination with ruxolitinib in patients with myelofibrosis, which we
refer to as the MANIFEST trial;
• complete IND-enabling studies and prepare for a planned Phase 1 clinical trial of CPI-0209, our second-generation
EZH2 inhibitor;
• advance our clinical-stage product candidates into later state trials;
• continue the research and development of our other product candidates;
•
•
seek to discover and develop additional product candidates;
seek regulatory approvals for any product candidates that successfully complete clinical trials;
• ultimately establish a sales, marketing and distribution infrastructure to commercialize any products for which we may
obtain regulatory approval;
91
•
scale up our manufacturing processes and capabilities, or arrange for a third party to do so on our behalf, to support our
clinical trials of our product candidates and commercialization of any of our product candidates for which we obtain
marketing approval;
• acquire or in-license products, product candidates or technologies;
• maintain, expand, enforce, defend and protect our intellectual property portfolio;
• hire additional clinical, quality control and scientific personnel; and
• add operational, financial and administrative personnel, including personnel to support our product development and
planned future commercialization efforts and our operations as a public company.
We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain
regulatory approval for our product candidates. If we obtain regulatory approval for any of our product candidates, we expect
to incur significant expenses related to developing our commercialization capability to support product sales, marketing and
distribution. Further, we expect to incur additional costs associated with operating as a public company.
As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy.
Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations
through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or
licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements
when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we
may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our
product candidates.
Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to
accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain
profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or
are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels
and be forced to reduce or terminate our operations.
As of December 31, 2018, we had cash and cash equivalents of $114.6 million. We believe that our cash and cash equivalents
will enable us to fund our operating expenses and capital expenditure requirements into the second quarter of 2020. We have
based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner
than we expect. See “Liquidity and Capital Resources.”
Components of our Results of Operations
Revenue
To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of
products in the foreseeable future. If our development efforts for our product candidates are successful and result in
regulatory approval, we may generate revenue in the future from product sales. We have entered into, and we may in the
future enter into, license or collaboration agreements for our product candidates or intellectual property, and we may generate
revenue in the future from payments as a result of such license or collaboration agreements. To date, all of our revenue has
been derived from one collaboration arrangement. We cannot predict if, when, or to what extent we will generate revenue
from the commercialization and sale of our product candidates. We may never succeed in obtaining regulatory approval for
any of our product candidates.
To date, our revenue has been derived from our license and collaboration arrangement with Genentech, Inc. and F.
Hoffmann-La Roche Ltd., collectively referred to as Genentech, under which we licensed certain technology to Genentech
and performed certain specified services. We completed our performance obligations under the collaboration arrangement in
2015 and we have not recognized revenue from Genentech since 2015. We are entitled to future milestone and royalty
payments from Genentech if Genentech pursues further development of the technology licensed from us under the
collaboration arrangement and if Genentech achieves specified development and sales-based milestones relating to such
licensed technology. We cannot provide assurance as to the timing of milestone or royalty payments or if we will ever receive
such payments from Genentech.
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Operating Expenses
Research and development expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our drug
discovery efforts, and the development of our product candidates, which include:
• employee-related expenses, including salaries, related benefits and stock-based compensation expense for employees
engaged in research and development functions;
• expenses incurred in connection with the preclinical and clinical development of our product candidates and research
programs, including under agreements with third parties, such as consultants and contractors and contract research
organizations, or CROs;
•
•
•
the cost of developing and scaling our manufacturing process and manufacturing drug products for use in our
preclinical studies and clinical trials, including under agreements with third parties, such as consultants and contractors
and contract manufacturing organizations, or CMOs;
laboratory supplies and research materials;
facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of
facilities and insurance; and
• payments made under third-party licensing agreements.
In July 2012, we entered into a Research, Development and Commercialization Agreement, or the LLS Agreement, with the
Leukemia & Lymphoma Society, or LLS, pursuant to which LLS committed to provide funding to us for research and
development services, conditional on (i) the achievement of milestones in accordance with the LLS Agreement and (ii) equal
funding being provided by us. We recognize the nonrefundable payments received under the LLS Agreement as a reduction to
the research and development expenses incurred, based on a proportional methodology comparing the total expenses incurred in
the period under the project to the total expenses expected to be incurred under the project. Through December 31, 2018, we had
received funding totaling $7.3 million from LLS upon the achievement of specified milestones including $0.1 million and $0.6
million received in 2018 and 2017, respectively, which were recorded as a reduction of our research and development expenses.
We expense research and development costs as incurred. Advance payments that we make for goods or services to be
received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts
are expensed as the related goods are delivered or the services are performed.
Our direct external research and development expenses are tracked on a program-by-program basis and consist of costs that
include fees, reimbursed materials and other costs paid to consultants, contractors, CMOs and CROs in connection with our
preclinical, clinical development and manufacturing activities. We do not allocate employee costs, costs associated with our
discovery efforts, laboratory supplies and facilities expenses, including depreciation or other indirect costs, to specific
product development programs because these costs are deployed across multiple programs and our platform technology and,
as such, are not separately classified.
Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of
clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research
and development expenses will increase substantially in connection with our planned clinical and preclinical development
activities in the near term and in the future as our current development programs progress and new programs are added. At this
time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the
preclinical and clinical development of any of our product candidates. The successful development and commercialization of our
product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development
and commercialization, including the following:
•
•
the timing and progress of preclinical and clinical development activities;
the number and scope of preclinical and clinical programs we decide to pursue;
• our ability to raise additional funds necessary to complete clinical development of and commercialize our product
candidates;
•
the progress of the development efforts of parties with whom we may enter into collaboration arrangements;
93
• our ability to maintain our current research and development programs and to establish new ones;
• our ability to establish new licensing or collaboration arrangements;
•
•
•
the successful initiation and completion of clinical trials with safety, tolerability and efficacy profiles that are
satisfactory to the U.S. Food and Drug Administration, or FDA, or any comparable foreign regulatory authority;
the receipt and related terms of regulatory approvals from applicable regulatory authorities;
the availability of raw materials for use in production of our product candidates;
• our ability to consistently manufacture our product candidates for use in clinical trials;
• our ability to establish and operate a manufacturing facility, or secure manufacturing supply through relationships with
third parties;
• our ability to obtain and maintain intellectual property protection and regulatory exclusivity, both in the United States
and internationally;
• our ability to maintain, enforce, defend and protect our rights in our intellectual property portfolio;
•
the commercialization of our product candidates, if and when approved;
• our ability to obtain and maintain third-party coverage and adequate reimbursement;
•
the acceptance of our product candidates, if approved, by patients, the medical community and third-party payors;
• competition with other products; and
• a continued acceptable safety profile of our therapies following approval.
A change in the outcome of any of these variables with respect to the development of any of our product candidates could
significantly change the costs and timing associated with the development of that product candidate. We may never succeed
in obtaining regulatory approval for any of our product candidates.
General and administrative expenses
General and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for
personnel in executive, finance and administrative functions. General and administrative expenses also include direct and
allocated facility-related costs as well as professional fees for legal, patent, consulting, investor and public relations,
accounting and audit services. We anticipate that our general and administrative expenses will increase in the future as we
increase our headcount to support our continued research activities and development of our product candidates. We also
anticipate that we will incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance
costs as well as investor and public relations expenses associated with operating as a public company.
Other Income (Expense)
Interest income
Interest income consists of interest earned on our invested cash balances. We expect our interest income to increase as we
invest the cash received from the sale of Series F preferred stock and the net proceeds from our IPO.
Interest expense
Interest expense consists of interest expense on outstanding borrowings under our April 2016 loan and security agreement
with Oxford Finance LLC and Silicon Valley Bank, or the 2016 Loan Agreement, as well as amortization of debt discount
and debt issuance costs. Interest expense also consists of the change in the fair value of our preferred stock warrants. In
connection with the 2016 Loan Agreement, we issued warrants to purchase Series B preferred stock. We classified these
warrants as a liability on our balance sheet that we remeasured to fair value at each reporting date, and we recognized
changes in the fair value of the warrant liability as interest expense in our statements of operations and comprehensive loss.
94
Upon the closing of our IPO, the preferred stock warrants became exercisable for common stock instead of preferred stock,
and the fair value of the warrant liability at that time was reclassified to additional paid-in capital. As a result, we no longer
remeasure the fair value of the warrant liability at each reporting date.
Change in fair value of preferred stock tranche liability
The Series E-1 preferred stock purchase agreement entered into in September 2016 provided the investors with the right to
participate in a subsequent closing of Series E-1 preferred stock upon the earlier of one year from the issuance date or the
achievement of a strategic event as determined by our board of directors. We refer to this right as the Series E-1 Tranche
Right. The Series E-1 Tranche Right was classified as a liability and initially recorded at fair value. The liability was subject
to revaluation at each balance sheet date prior to the exercise or expiration of the Series E-1 Tranche Right. The change in
fair value of our preferred stock tranche liability consists of the re-measurement gains or losses associated with changes in the
fair value of the Series E-1 Tranche Right. Upon issuance of the additional shares of Series E-1 preferred stock in July 2017,
the Series E-1 Tranche Right was settled. As a result, we no longer measure the fair value of the Series E-1 Tranche Right at
each balance sheet date.
Income Taxes
Since our inception, we have not recorded any income tax benefits for the net losses we have incurred in each year or for our
research and development tax credits, as we believe, based upon the weight of available evidence, that it is more likely than
not that all of our net operating loss carryforwards and tax credits will not be realized. As of December 31, 2018, we had U.S.
federal and state net operating loss carryforwards of $224.5 million and $221.6 million, respectively, which may be available
to offset future income tax liabilities and begin to expire in 2028. As of December 31, 2018, we also had U.S. federal and
state research and development tax credit carryforwards of $8.8 million and $3.5 million, respectively, which begin to expire
in 2028 and 2025, respectively. We have recorded a full valuation allowance against our net deferred tax assets at each
balance sheet date.
On December 22, 2017, the Tax Cuts and Jobs Act, or the TCJA, was signed into U.S. law. The TCJA includes a number of
changes to existing tax law, including, among other things, a permanent reduction in the federal corporate income tax rate
from 35% to 21%, effective as of January 1, 2018, as well as limitation of the deduction for net operating losses to 80% of
current year taxable income and elimination of net operating loss carrybacks, in each case, for losses arising in taxable years
beginning after December 31, 2017 (though any such net operating losses may be carried forward indefinitely).
In connection with the TCJA, we remeasured certain deferred tax assets and liabilities based on the rates at which they are
expected to reverse in the future, which is generally 21%. The remeasurement of our deferred tax balance was primarily
offset by application of our valuation allowance. As of December 31, 2018, we had completed our accounting for all of the
tax effects of the enactment of the TCJA; including the effects on our existing deferred tax balances. We had not recognized
any material adjustment to the provisional estimate that was previously recorded related to the TCJA.
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Results of Operations
Comparison of the Years Ended December 31, 2018 and 2017
The following table summarizes our results of operations for the years ended December 31, 2018 and 2017:
Revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Change in preferred stock tranche liability
Total other income (expense), net
Net loss
Research and development expenses
Direct research and development expenses by program:
CPI-1205
CPI-0610
CPI-0209
Preclinical pipeline
Unallocated expenses:
Year Ended December 31,
2017
2018
(in thousands)
Change
$
— $
— $
—
48,769
12,475
61,244
(61,244)
1,547
(228)
—
1,319
(59,925) $
32,617
6,471
39,088
(39,088)
169
(901)
4,443
3,711
(35,377) $
16,152
6,004
22,156
(22,156)
1,378
673
(4,443)
(2,392)
(24,548)
Year Ended December 31,
2017
2018
(in thousands)
Change
14,919 $
4,835
5,319
3,301
13,210
2,503
4,682
48,769 $
5,339 $
3,154
1,927
3,919
10,852
2,584
4,842
32,617 $
9,580
1,681
3,392
(618)
2,358
(81)
(160)
16,152
$
$
Personnel related (including stock-based compensation)
Laboratory supplies and consumables
Facility related and other
Total research and development expenses
$
Research and development expenses were $48.8 million for the year ended December 31, 2018 compared to $32.6 million for
the year ended December 31, 2017. The increase in costs related to our CPI-1205 program was primarily due to our
ProSTAR trial, which we initiated in the fourth quarter of 2017, and our ORIOn-E trial, which we initiated in the first quarter
of 2018. The increase in costs related to our second-generation EZH2 inhibitor was primarily due to costs related to the
manufacturing of CPI-0209 drug substance and IND-enabling study expenses. The decrease in preclinical pipeline expenses
was primarily due to the stage of development of our current pipeline candidates.
The increase in personnel related costs was primarily due to an increase in stock-based compensation expense and overall
compensation in our research and development function. Personnel-related costs for year ended December 31, 2018 and 2017
included stock-based compensation expense of $1.7 million and $0.6 million, respectively.
General and administrative expenses
Personnel related (including stock-based compensation)
Professional and consultant fees
Facility related and other
Total general and administrative expenses
Year Ended December 31,
2017
2018
(in thousands)
Change
$
$
6,736 $
2,942
2,797
12,475 $
2,875 $
1,969
1,627
6,471 $
3,861
973
1,170
6,004
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General and administrative expenses for the year ended December 31, 2018 were $12.5 million, compared to $6.5 million for
the year ended December 31, 2017. The increase in personnel related costs was primarily due to increased headcount and
increased stock-based compensation expense. Personnel-related costs for the years ended December 31, 2018 and 2017
included stock-based compensation expense of $2.3 million and $0.6 million, respectively. Facility related and other costs
increased by $1.2 million primarily due to franchise taxes, insurance expense and ongoing business activities, including
increased costs to operate as a public company.
Other Income (Expense)
Interest income
Interest income increased to $1.5 million for the year ended December 31, 2018 from $0.2 million for year ended
December 31, 2017 due to higher invested balances.
Interest expense
Interest expense was $0.2 million and $0.9 million for the years ended December 31, 2018 and 2017, respectively. The
decrease in interest expense was due to the repayment of amounts owed under the 2016 Loan Agreement in July 2018.
Change in fair value of preferred stock tranche liability
The change in the fair value of our preferred stock tranche liability resulted in income of $4.4 million for the year ended
December 31, 2017. The decrease in income was a result of the decrease in fair value of the Series E-1 Tranche Right
(liability) as a result of its settlement in July 2017.
Comparison of the Years Ended December 31, 2017 and 2016
The following table summarizes our results of operations for the years ended December 31, 2017 and 2016:
Research and development expenses
Revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Change in preferred stock tranche liability
Total other income (expense), net
Net loss
Year Ended December 31,
2016
2017
(in thousands)
Change
$
— $
— $
—
32,617
6,471
39,088
(39,088)
169
(901)
4,443
3,711
(35,377) $
27,881
5,777
33,658
(33,658)
53
(1,345)
417
(875)
(34,533) $
4,736
694
5,430
(5,430)
116
444
4,026
4,586
(844)
$
97
Direct research and development expenses by program:
CPI-1205
CPI-0610
CPI-0209
Preclinical pipeline
Unallocated expenses:
$
Personnel related (including stock-based compensation)
Laboratory supplies and consumables
Facility related and other
Total research and development expenses
$
Year Ended December 31,
2016
2017
(in thousands)
Change
5,339 $
3,154
1,927
3,919
10,852
2,584
4,842
32,617 $
4,296 $
4,532
—
4,434
9,178
2,101
3,340
27,881 $
1,043
(1,378)
1,927
(515)
1,674
483
1,502
4,736
Research and development expenses were $32.6 million for the year ended December 31, 2017 compared to $27.9 million for
the year ended December 31, 2016. The increase in costs related to our CPI-1205 program was primarily due to preparation
for and commencement of our ProSTAR trial, which we initiated in the fourth quarter of 2017 and preparation for our
ORIOn-E trial, which we initiated in the first quarter of 2018. The decrease in costs related to our CPI-0610 program was
primarily due to having only one ongoing Phase 2 clinical trial for CPI-0610 in 2017 as compared to three ongoing Phase 1
clinical trials for CPI-0610 in 2016. Costs related to our second-generation EZH2 inhibitor program in 2017 were primarily
related to the identification and optimization of our lead compound CPI-0209. The decrease in preclinical pipeline expenses
was primarily due to decreased costs resulting from programs that we chose not to progress in 2017.
The increase in personnel related costs was primarily due to an increase in headcount in our research and development
function. The increase in laboratory supplies and consumables was primarily due to increased research and discovery efforts.
The increase in facility related and other expenses was primarily due to increased rent from our leads extension that we
entered into in September 2016 and increased depreciation expense from equipment and software purchased in 2017.
General and administrative expenses
Personnel related (including stock-based compensation)
Professional and consultant fees
Facility related and other
Total general and administrative expenses
Year Ended December 31,
2016
2017
(in thousands)
Change
$
$
2,875 $
1,969
1,627
6,471 $
3,050 $
1,362
1,365
5,777 $
(175)
607
262
694
General and administrative expenses for the year ended December 31, 2017 were $6.5 million, compared to $5.8 million for
the year ended December 31, 2016. The increase in general and administrative expenses was primarily due to an increase in
professional and consultant fees, including those related to investor and public relations, business development and ongoing
business activities. We also incurred increased legal fees for maintaining and enforcing our intellectual property rights and
for ongoing business activities. Facility-related and other expenses increased primarily due to increased rent from our lease
extension that we entered into in September 2016 and product support costs for software and hardware purchased during
2017.
Other Income (Expense)
Interest income
Interest income was $0.2 million for the year ended December 31, 2017, compared to $0.1 million for year ended
December 31, 2016. The increase in interest income was primarily due to higher interest rates in 2017 as compared to 2016.
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Interest expense
Interest expense was $0.9 million for the year ended December 31, 2017, compared to $1.3 million for the year ended
December 31, 2016. The decrease in interest expense was due to the lower outstanding balance of debt as a result of
repayment of principal balance.
Change in fair value of preferred stock tranche liability
The change in the fair value of our preferred stock tranche liability resulted in income of $4.4 million for the year ended
December 31, 2017, compared to income of $0.4 for the year ended December 31, 2016. The increase in income was a result
of the decrease in fair value of the Series E-1 Tranche Right (liability) as a result of its settlement in July 2017.
Liquidity and Capital Resources
Since our inception, we have incurred significant operating losses. Through December 31, 2018, we have financed our
operations primarily through our initial public offering, which closed on July 23, 2018, sales of our preferred stock, payments
received in connection with our collaboration and research agreements and borrowings under loan agreements. As of
December 31, 2018, we had cash and cash equivalents of $114.6 million. On July 3, 2018, we repaid the remaining
outstanding principal balance and final payment of $1.2 million under the 2016 Loan Agreement. No amounts remain
available for borrowing under the 2016 Loan Agreement. In March 2018 and April 2018, we received gross proceeds of
$99.8 million from the issuance and sale of our Series F convertible preferred stock (see Note 8). In July 2018, we completed
an IPO of our common stock and issued and sold 4,000,000 shares of common stock at a public offering price of $15.00 per
share, resulting in net proceeds of $52.2 million after deducting underwriting discounts, commissions and offering costs.
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented:
Cash used in operating activities
Cash used in investing activities
Cash provided by financing activities
Net increase (decrease) in cash, cash equivalents and
restricted cash
Operating activities
2018
Year Ended December 31,
2017
(in thousands)
2016
$
(48,823) $
(476)
147,670
(37,586) $
(582)
17,652
(32,775)
(945)
19,105
$
98,371 $
(20,516) $
(14,615)
During the year ended December 31, 2018, operating activities used $48.8 million of cash, primarily resulting from our net
loss of $59.9 million, partially offset by net non-cash expense of $4.7 million and net cash provided by changes in our
operating assets and liabilities of $6.4 million. Net cash provided by changes in our operating assets and liabilities for the
year ended December 31, 2018 consisted primarily of a $7.9 million increase in accounts payable and accrued expenses and
other current liabilities, partially offset by a $1.5 million increase in prepaid expenses and other current assets.
During the year ended December 31, 2017, operating activities used $37.6 million of cash, primarily resulting from our net
loss of $35.4 million and net non-cash income of $2.5 million, partially offset by net cash provided by changes in our
operating assets and liabilities of $0.3 million. Net cash provided by changes in our operating assets and liabilities for the
year ended December 31, 2017 consisted primarily of a $1.0 million increase in accounts payable and accrued expenses and
other current liabilities, partially offset by a $0.8 million increase in prepaid expenses and other current assets.
During the year ended December 31, 2016, operating activities used $32.8 million of cash, primarily resulting from our net
loss of $34.5 million, partially offset by net non-cash charges of $1.2 million and net cash provided by changes in our
operating assets and liabilities of $0.6 million. Net cash provided by changes in our operating assets and liabilities for the
year ended December 31, 2016 consisted primarily of a $0.7 million increase in accounts payable and accrued expenses and
other current liabilities, partially offset by a $0.3 million increase in prepaid expenses and other current assets.
Changes in accounts payable, accrued expenses and other current liabilities and prepaid expenses in all periods were
generally due to growth in our business, the advancement of our research programs and the timing of vendor invoicing and
payments.
99
Investing activities
During the years ended December 31, 2018, 2017 and 2016, net cash used in investing activities was $0.5 million, $0.6
million, and $0.9 million, respectively, due to purchases of property and equipment. The purchases of property and
equipment during the year ended December 31, 2018 related to equipment and software purchases to expand our discovery
activities. The purchases of property and equipment during the year ended December 31, 2017 related to purchases of new
laboratory equipment.
Financing activities
During the year ended December 31, 2018, net cash provided by financing activities was $147.7 million, consisting primarily
of net proceeds from the issuance of Series F preferred stock of $99.6 million and net proceeds from our IPO of $52.2
million, partially offset by payments of $4.7 million on long-term debt and the final payment under the 2016 Loan
Agreement.
During the year ended December 31, 2017, net cash provided by financing activities was $17.7 million, consisting primarily
$24.2 million in proceeds from the issuance of convertible preferred stock, partially offset by payments of $6.6 million on
long-term debt under the 2016 Loan Agreement.
During the year ended December 31, 2016, net cash provided by financing activities was $19.1 million, consisting primarily
of net proceeds from the issuance of preferred stock of $24.2 million, partially offset by payments of $3.0 million on long-
term debt under our loan and security agreement and repayment of a $1.2 million liability to Genentech.
Loan and Security Agreement
We previously had outstanding amounts due under a 2013 loan and security agreement, or the 2013 Loan Agreement, with
Oxford Finance LLC and Silicon Valley Bank. In April 2016, we entered into the 2016 Loan Agreement, with the same
lenders. Under the 2016 Loan Agreement, the amount outstanding under the 2013 Loan Agreement of $10.8 million, the
portion of the final payment under the 2013 Loan Agreement then due of $0.9 million and issuance costs due to the lenders
were paid to the lenders with proceeds from the 2016 Loan Agreement and payment terms of the new principal balance of
$11.8 million were extended through July 2018. Borrowings under the 2016 Loan Agreement bore interest at an annual rate
of 7.6% and were repaid in full on July 3, 2018. In addition, a final payment equal to 5% of the original principal amount was
paid upon the final principal payment.
Borrowings under the 2016 Loan Agreement were collateralized by substantially all of our personal property, other than our
intellectual property, and by a negative pledge on intellectual property. There were no financial covenants associated with the
2016 Loan Agreement; however, we were subject to certain negative covenants until maturity. These covenants included
limitations on dispositions, mergers or acquisitions, incurring indebtedness or liens, paying dividends or making investments
and certain other business transactions. Obligations under the 2016 Loan Agreement were subject to acceleration upon the
occurrence of specified events of default, including a material adverse change in our business, operations or financial or other
condition.
Funding Requirements
We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the
preclinical activities and clinical trials for our product candidates in development. In addition, as a result of our IPO, we
expect to incur additional costs associated with operating as a public company. The timing and amount of our operating
expenditures will depend largely on:
•
•
•
the timing and progress of preclinical and clinical development activities;
the commencement, enrollment or results of the planned clinical trials of our product candidates or any future clinical
trials we may conduct, or changes in the development status of our product candidates;
the timing and outcome of regulatory review of our product candidates;
• our decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial;
• changes in laws or regulations applicable to our product candidates, including but not limited to clinical trial
requirements for approvals;
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• developments concerning our contract manufacturers;
• our ability to obtain materials to produce adequate product supply for any approved product or inability to do so at
acceptable prices;
• our ability to establish additional collaborations if needed;
•
•
the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and
distribution, for any of our product candidates for which we obtain marketing approval;
the legal patent costs involved in preparing, filing and prosecuting patent applications and maintaining, defending and
enforcing patent claims and other intellectual property claims;
• additions or departures of key scientific or management personnel;
• unanticipated serious safety concerns related to the use of our product candidates; and
•
the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any
milestone payments thereunder.
As of December 31, 2018, we had cash and cash equivalents of $114.6 million. We believe that our cash and cash
equivalents, will enable us to fund our operating expenses and capital expenditure requirements into the second quarter of
2020. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital
resources sooner than we expect.
Until such time as we can generate substantial product revenue, if ever, we expect to finance our operations through a
combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing
arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities,
ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that
adversely affect rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve
agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt,
making acquisitions or capital expenditures or declaring dividends. If we raise additional funds through collaborations,
strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable
rights to our technologies, future revenue streams, research programs or drug candidates, or grant licenses on terms that may
not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements
when needed, we may be required to delay, limit, reduce or terminate our research, product development or future
commercialization efforts, or grant rights to develop and market drug candidates that we would otherwise prefer to develop
and market ourselves.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2018 and the effects that such obligations are
expected to have on our liquidity and cash flows in future periods:
Operating lease commitment (1)
Total
Total
(in thousands)
$
$
6,342 $
6,342 $
Payments Due By Period
Less Than 1
Year
1 to 3
Years
4 to 5
Years
More Than
5 Years
3,174 $
3,174 $
3,018 $
3,018 $
150 $
150 $
—
—
(1) Amounts in table reflects payments due for our lease of office and laboratory space in Cambridge, Massachusetts under an operating lease agreement that expires
in June 2020 with respect to 36,309 square feet and February 2022 with respect to 11,237 square feet.
We enter into contracts in the normal course of business with CROs, CMOs and other third parties for clinical trials,
preclinical research studies and testing and manufacturing services. These contracts do not contain minimum purchase
commitments and are cancelable by us upon prior written notice. Payments due upon cancellation consist only of payments
for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of
cancellation. These payments are not included in the preceding table as the amount and timing of such payments are not
known.
101
The LLS Agreement requires us to make certain milestone payments to LLS, that could total up to $25.0 million in
aggregate, upon our receipt of payments associated with the licensing or transfer of rights to the related compound (or a
product) to a third party, upon first regulatory approval of a product in the U.S., or upon the first regulatory approval of a
product in Europe or Japan. We have not included future payments under this agreement in the table of contractual
obligations above since these obligations are contingent upon future events. As of December 31, 2018, we were unable to
estimate the timing or likelihood of achieving these milestones.
We have also entered into license agreements with third parties, which are in the normal course of business. We have not
included future payments under these agreements in the table of contractual obligations above since obligations under these
agreements are contingent upon future events such as our achievement of specified development, regulatory and commercial
milestones, or royalties on net product sales. As of December 31, 2018, we were unable to estimate the timing or likelihood
of achieving these milestones or generating future product sales.
Critical Accounting Policies and Significant Judgments and Estimates
Our financial statements are prepared in accordance with generally accepted accounting principles in the United States. The
preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that
affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We believe that of our
critical accounting policies described under the heading “Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Critical Accounting Policies and Significant Judgments and Estimates” in our final prospectus for our
IPO filed pursuant to Rule 424(b)(4) under the Securities Act with the SEC on July 19, 2018, the following involve the most
judgment and complexity:
• accrued research and development expenses;
•
stock-based compensation;
• valuation of warrants to purchase preferred stock; and
• valuation of preferred stock tranche liability.
Accordingly, we believe the policies set forth above are critical to fully understanding and evaluating our financial condition
and results of operations. If actual results or events differ materially from the estimates, judgments and assumptions used by
us in applying these policies, our reported financial condition and results of operations could be materially affected. There
have been no significant changes to our critical accounting policies from those described in our final prospectus for our IPO
filed pursuant to Rule 424(b)(4) under the Securities Act with the SEC on July 19, 2018.
Accrued Research and Development Expenses
As part of the process of preparing our financial statements, we are required to estimate our accrued research and
development expenses. This process involves reviewing open contracts and purchase orders, communicating with our
applicable personnel to identify services that have been performed on our behalf and estimating the level of service
performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual
costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or
when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses
as of each balance sheet date in the financial statements based on facts and circumstances known to us at that time. We
periodically confirm the accuracy of the estimates with the service providers and make adjustments if necessary. Examples of
estimated accrued research and development expenses include fees paid to:
• vendors in connection with preclinical development activities;
• CMOs in connection with the process development and scale up activities and the production of preclinical and clinical
trial materials; and
• CROs in connection with clinical trials.
102
We base the expense recorded related to contract research and manufacturing on our estimates of the services received and
efforts expended pursuant to quotes and contracts with multiple CMOs and CROs that supply materials and conduct services.
The financial terms of these agreements are subject to negotiation, vary from contract 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 services provided
and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be
performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the
level of effort varies from the estimate, we adjust the accrual or prepaid expense accordingly. Although we do not expect our
estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services
performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that
are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates
of accrued research and development expenses.
Stock-based Compensation
We measure stock-based awards granted to employees and directors based on their fair value on the date of the grant using
the Black-Scholes option-pricing model. Compensation expense for those awards is recognized over the requisite service
period, which is generally the vesting period of the respective award. We use the straight-line method to record the expense
of awards with service-based vesting conditions. We use the graded-vesting method to record the expense of awards with
both service-based and performance-based vesting conditions, commencing when achievement of the performance condition
becomes probable. We measure the fair value of stock-based awards granted to nonemployees on the date at which the
related service is complete, which is generally the vesting date of the award. Prior to the service completion date,
compensation expense is recognized over the period during which services are rendered by such nonemployees. At the end of
each financial reporting period prior to the service completion date, the fair value of these awards is remeasured using the
then-current fair value of our common stock and updated assumption inputs in the Black-Scholes option-pricing model.
The Black-Scholes option-pricing model uses as inputs the fair value of our common stock and assumptions we make for the
volatility of our common stock, the expected term of our common stock options, the risk-free interest rate for a period that
approximates the expected term of our common stock options, and our expected dividend yield.
Common Stock Valuation
Prior to our IPO, there was no public market for our common stock. The estimated fair value of our common stock was
determined by our Board of Directors as of the date of each option grant, with input from management, considering our most
recently available third-party valuations of common stock and our board of directors’ assessment of additional objective and
subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation
through the date of the grant. These third-party valuations were performed in accordance with the guidance outlined in the
American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company
Equity Securities Issued as Compensation.
Our common stock valuations were prepared using either a hybrid method, which used market approaches to estimate our
enterprise value, or a probability-weighted expected return method, or PWERM, which used a combination of market
approaches and a cost approach to estimate our enterprise value. The hybrid method is a PWERM where the equity value in
one or more of the scenarios is calculated using an option-pricing method, or OPM. Under the PWERM methodology, the
fair value of common stock was estimated based upon an analysis of future values for the Company, assuming various
outcomes. The common stock value was based on the probability-weighted present value of expected future investment
returns considering each of the possible outcomes available as well as the rights of each class of stock. The future value of the
common stock under each outcome is discounted back to the valuation date at an appropriate risk-adjusted discount rate and
probability weighted to arrive at an indication of value for the common stock.
In addition to considering the results of these third-party valuations, our board of directors considered various objective and
subjective factors to determine the fair value of our common stock as of each grant date, which may have been as of a date
later than the most recent third-party valuation date, including the prices at which we sold shares of preferred stock and the
superior rights and preferences of securities senior to our common stock at the time of each grant, the progress of our
research and development programs, external market conditions affecting trends within the biotechnology industry and the
likelihood of achieving a liquidity event.
The assumptions underlying these valuations represented management’s best estimates, which involved inherent uncertainties
and the application of judgment by management.
103
Following the closing of our IPO, we have determined the fair value of our common stock based on the quoted market price
of our common stock.
Stock option grants in connection with initial public offering
Our board of directors has approved, effective upon the commencement of trading of our common stock on the Nasdaq
Global Select Market, grants of stock options to purchase an aggregate of 2,779,544 shares of common stock at a purchase
price per share equal to the closing price of our common stock on the Nasdaq Global Select Market on the date of grant.
Valuation of Warrants to Purchase Preferred Stock
The Company issued warrants to purchase preferred stock in 2013 and 2014 for the purchase of 375,000 shares of Series B
Preferred Stock. Upon the closing of the IPO in July 2018, these warrants converted into warrants to purchase 34,062 shares
of common stock at which time the Company reclassified the carrying value of the warrants to additional paid-in capital.
Prior to the warrants becoming warrants to purchase common stock, the Company was required to remeasure the fair value of
the liability for these preferred stock warrants at each reporting date since their grant date, with any adjustments recorded in
interest expense. The warrants outstanding at each reporting date were remeasured using the Black-Scholes option-pricing
model, and the resulting change in fair value was recorded as interest expense in the Company’s statements of operations and
comprehensive loss.
Valuation of Preferred Stock Tranche Liability
The Series E-1 preferred stock purchase agreement provided the Series E-1 investors with the right to participate in a
subsequent closing of Series E-1 preferred stock upon the earlier of one year from the issuance date or the achievement of a
strategic event as determined by the board of directors. The Series E-1 Tranche Right met the definition of a freestanding
financial instrument as the Series E-1 Tranche Right was legally detachable and separately exercisable from the Series E-1
preferred stock. The Series E-1 Tranche Right was classified as a liability and initially recorded at fair value. The Series E-1
Tranche Right liability was subject to revaluation at each balance sheet date until its exercise in July 2017. We utilized the
Black-Scholes option-pricing model, which incorporated assumptions and estimates to value the Series E-1 Tranche Right
liability prior to its exercise. We assessed these assumptions and estimates on a quarterly basis as additional information
impacting the assumptions was obtained. Changes in fair value were included as a line item within other income (expense) in
the accompanying statements of operations and comprehensive loss.
Off-balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined
in the rules and regulations of the SEC.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of
operations is disclosed in Note 2 to our financial statements appearing elsewhere in this Annual Report on Form 10-K.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act of 2012 permits an “emerging growth company” such as us to take advantage of an
extended transition period to comply with new or revised accounting standards applicable to public companies until those
standards would otherwise apply to private companies. We have elected not to “opt out” of such extended transition period,
which means that when a standard is issued or revised and it has different application dates for public or private companies,
we will adopt the new or revised standard at the time private companies adopt the new or revised standard and will do so
until such time that we either (i) irrevocably elect to “opt out” of such extended transition period or (ii) no longer qualify as
an emerging growth company.
104
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As of December 31, 2018, we had cash and cash equivalents of $114.6 million. Interest income is sensitive to changes in the
general level of interest rates; however, due to the nature of these investments, an immediate 10% change in interest rates
would not have a material effect on the fair market value of our investment portfolio.
We are not currently exposed to significant market risk related to changes in foreign currency exchange rates; however, we
have contracted with and may continue to contract with foreign vendors. Our operations may be subject to fluctuations in
foreign currency exchange rates in the future.
Inflation would generally affect us by increasing our cost of labor and clinical trial costs. We do not believe that inflation had
a material effect on our business, financial condition or results of operations during the years ended December 31, 2018, 2017
and 2016.
105
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
Report of Independent Registered Public Accounting Firm...........................................................................................
Consolidated Balance Sheets..........................................................................................................................................
Consolidated Statements of Operations and Comprehensive Loss ................................................................................
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) ......................................
Consolidated Statements of Cash Flows.........................................................................................................................
Notes to Consolidated Financial Statements ..................................................................................................................
Page
107
108
109
110
111
112
106
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Constellation Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Constellation Pharmaceuticals, Inc. (the Company) as of
December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive loss, convertible
preferred stock and stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31,
2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company at December
31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2018, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due
to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial
reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2008.
Boston, Massachusetts
March 14, 2019
107
Constellation Pharmaceuticals, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Amounts)
Assets
Current assets:
Cash and cash equivalents
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Restricted cash
Other assets
Total assets
Liabilities, Convertible Preferred Stock and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Current portion of long-term debt, net of discount
Total current liabilities
Preferred stock warrant liability
Deferred rent, net of current portion
Other long-term liabilities
Total liabilities
$
$
$
December 31,
2018
2017
114,592 $
2,711
117,303
1,210
425
—
118,938 $
5,723 $
8,937
—
14,660
—
118
2
14,780
16,404
1,318
17,722
1,121
242
18
19,103
2,799
4,229
4,103
11,131
254
317
6
11,708
Commitments and contingencies (Note 8)
Convertible preferred stock (Series A, B, D, E, E-1 and F), $0.001 par value; no
shares and 119,391,806 shares authorized at December 31, 2018 and 2017,
respectively; no shares and 118,867,177 shares issued and outstanding at
December 31, 2018 and 2017, respectively; aggregate liquidation preference
of $0 and $178,762 at December 31, 2018 and 2017, respectively
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; 5,000,000 shares authorized;
no shares issued or outstanding at December 31, 2018 and 2017
Common stock, $0.0001 par value; 200,000,000 and 161,162,923 shares
authorized at December 31, 2018 and 2017, respectively; 25,803,475 and
1,193,259 shares issued at December 31, 2018 and 2017, respectively;
25,803,135 and 962,898 shares outstanding at December 31, 2018 and 2017,
respectively
Additional paid-in capital
Accumulated deficit
Total stockholders' equity (deficit)
Total liabilities, convertible preferred stock and stockholders' equity (deficit) $
—
173,228
—
—
3
337,992
(233,837)
104,158
118,938 $
—
8,079
(173,912)
(165,833)
19,103
The accompanying notes are an integral part of these consolidated financial statements.
108
Constellation Pharmaceuticals, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(In Thousands, Except Share and Per Share Amounts)
Revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Change in fair value of preferred stock tranche liability
Total other income (expense), net
Net loss and comprehensive loss
Cumulative dividends on convertible preferred stock
Net loss attributable to common stockholders
Net loss per share attributable to common stockholders, basic and
diluted
Weighted average common shares outstanding, basic and diluted
2018
Years Ended December 31,
2017
2016
$
—
$
—
$
—
48,769
12,475
61,244
(61,244)
1,547
(228)
—
1,319
(59,925)
—
(59,925)
$
(5.00)
$
11,984,293
32,617
6,471
39,088
(39,088)
169
(901)
4,443
3,711
(35,377)
(18,390)
(53,767)
(56.10)
958,447
$
$
27,881
5,777
33,658
(33,658)
53
(1,345)
417
(875)
(34,533)
(14,932)
(49,465)
(53.19)
929,982
$
$
The accompanying notes are an integral part of these consolidated financial statements.
109
Constellation Pharmaceuticals, Inc.
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(In Thousands, Except Share Amounts)
Balances at December 31, 2016
Issuance of Series E-1 convertible preferred
stock
Stock-based compensation expense
Vesting of common stock issued upon early
exercise of unvested options
Stock option exercises
Net loss
Balances at December 31, 2017
Issuance of Series F convertible preferred
stock, net of issuance costs of $144
Conversion of convertible preferred
stock into common stock upon closing of
the initial public offering
Conversion of preferred stock warrants to
common stock warrants upon closing of
initial public offering
Issuance of common stock sold in initial
public offering, net of underwriting
discounts, commissions and offering
costs
Repayment of promissory notes issued
upon early exercise of unvested options
Stock-based compensation expense
Vesting of common stock issued upon early
exercise of unvested options
Exercise of common stock warrant
Stock option exercises
Net loss
Balances at December 31, 2018
Convertible Preferred Stock
(Series A, B, D, E, E-1 and F)
Amount
Shares
105,021,003 $ 148,997
Common Stock
Amount
Shares
944,743 $
Additional
Paid-in
Capital
Total
Stockholders'
Equity
(Deficit)
Accumulated
Deficit
— $
6,864
$ (138,535) $ (131,671)
13,846,174
—
24,231
—
—
—
—
—
—
1,151
—
—
—
1,151
—
—
—
—
—
—
118,867,177 $ 173,228
1,635
16,520
—
962,898 $
—
—
—
— $
9
55
—
8,079
—
—
9
55
(35,377)
$ (173,912) $ (165,833)
(35,377)
99,750,000
99,606
—
—
—
—
—
(218,617,177) (272,834)
20,501,927
2 272,832
—
272,834
—
—
—
—
364
—
364
—
—
—
—
—
—
—
— $
—
4,000,000
1
52,162
—
52,163
—
—
229,357
—
—
—
290
3,952
—
—
290
3,952
664
—
51,032
—
57,257
—
—
—
— 25,803,135 $
4
—
79
—
230
—
—
—
3 $ 337,992
—
—
—
4
79
230
(59,925)
$ (233,837) $ 104,158
(59,925)
The accompanying notes are an integral part of these consolidated financial statements.
110
Constellation Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
2018
Years Ended December 31,
2017
2016
$
(59,925) $
(35,377) $
(34,533)
Depreciation and amortization expense
Stock-based compensation expense
Non-cash interest expense
Change in fair value of preferred stock warrant liability
Change in fair value of preferred stock tranche liability
Gain on disposal of equipment
Changes in operating assets and liabilities:
Prepaid expenses and other current assets
Accounts payable
Accrued expenses and other current liabilities
Deferred rent
Other assets
Net cash used in operating activities
Cash flows from investing activities:
Purchases of property and equipment
Proceeds from sale of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from modification of long-term debt
Proceeds from initial public offering, net of underwriting discounts and
commissions
Proceeds from issuance of convertible preferred stock, net of
issuance costs
Payments on long-term debt, including final payment
Tax indemnification payment to stockholders
Payments of offering costs on long-term debt
Payments on Genentech letter agreement
Proceeds from repayment of promissory notes issued upon early exercise
of stock options
Payments of initial public offering costs
Proceeds from issuance of common stock upon stock option exercises
Proceeds from exercises of common stock warrants
Net cash provided by financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash at end of period
Supplemental disclosure of cash flow information:
Interest paid
Supplemental disclosure of noncash investing and financing
information:
Cashless exercise of Series A preferred stock warrants
Purchases of property and equipment included in accounts payable
Vesting of common stock subject to repurchase
Refinancing of final payment on 2013 Loan Agreement as long-term debt
$
$
$
$
$
$
562
3,952
45
110
—
—
(1,393)
2,751
5,184
(127)
18
(48,823)
(476)
—
(476)
—
55,801
99,606
(4,698)
—
—
—
290
(3,638)
230
79
147,670
98,371
16,646
115,017 $
474
1,151
326
28
(4,443)
—
(803)
67
915
94
(18)
(37,586)
(582)
—
(582)
—
—
24,231
(6,634)
—
—
—
—
—
55
—
17,652
(20,516)
37,162
16,646 $
105 $
546 $
— $
180 $
4 $
— $
— $
5 $
9 $
— $
The accompanying notes are an integral part of these financial statements.
203
848
631
(94)
(417)
(4)
(274)
423
274
163
5
(32,775)
(948)
3
(945)
48
—
24,213
(2,961)
(982)
(30)
(1,243)
—
—
60
—
19,105
(14,615)
51,777
37,162
809
86
19
23
884
111
Constellation Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
1. Nature of the Business and Basis of Presentation
Constellation Pharmaceuticals, Inc. (“Constellation” or the “Company”) is a clinical-stage biopharmaceutical company using
its expertise in epigenetics to discover and develop novel therapeutics that address serious unmet medical needs in patients
with cancers associated with abnormal gene expression or drug resistance. The Company was incorporated in January 2008
as EpiGenetiX, Inc. under the laws of the State of Delaware. On March 31, 2008, the Company changed its name to
Constellation Pharmaceuticals, Inc.
The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including,
but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of
proprietary technology, compliance with government regulations and the ability to secure additional capital to fund
operations. Product candidates currently under development will require significant additional research and development
efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts
require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting
capabilities. Even if the Company’s drug development efforts are successful, it is uncertain when, if ever, the Company will
realize significant revenue from product sales.
In March 2018 and April 2018, the Company received gross proceeds of $99.8 million from the issuance and sale of its
Series F convertible preferred stock (see Note 8).
On July 6, 2018, the Company effected a 1-for-11.009 reverse stock split of its issued and outstanding shares of common
stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s convertible preferred
stock (see Note 8). Accordingly, all share and per share amounts for all periods presented in the accompanying financial
statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and
adjustment of the convertible preferred stock conversion ratios.
On July 23, 2018, the Company completed an initial public offering (“IPO”) of its common stock and issued and sold
4,000,000 shares of common stock at a public offering price of $15.00 per share, resulting in net proceeds of $52.2 million
after deducting underwriting discounts, commissions and offering costs.
Upon closing of the IPO, the Company’s outstanding convertible preferred stock automatically converted into shares of
common stock (see Note 8). Upon conversion of the convertible preferred stock, the Company reclassified the carrying value
of the convertible preferred stock to common stock and additional paid-in capital. The accompanying financial statements
have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities and
commitments in the ordinary course of business. Since inception, the Company has funded its operations with the sales of
convertible preferred stock, payments received in connection with collaboration agreements, borrowings under loan
agreements, and most recently, with proceeds from the IPO completed in July 2018. The Company has incurred recurring
losses since inception, including net losses of $59.9 million and $35.4 million for the year ended December 31, 2018 and
2017, respectively. As of December 31, 2018, the Company had an accumulated deficit of $233.8 million. The Company
expects to continue to generate operating losses in the foreseeable future. As of March 14, 2019, the Company expects that its
cash and cash equivalents will be sufficient to fund its operating expenses and capital expenditure requirements through at
least 12 months from the issuance date of the financial statements.
The Company’s financial statements have been prepared in conformity with accounting principles generally accepted in the
United States of America (“GAAP”).
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Constellation
Securities Corporation, which was established on December 21, 2018. All significant intercompany balances and transactions
have been eliminated in consolidation.
112
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates
and assumptions reflected in these financial statements include, but are not limited to, revenue recognition, the accrual of
research and development expenses, the valuation of common stock, preferred stock warrants, preferred stock tranche
liability and stock-based awards. The Company bases its estimates on historical experience, known trends and other market-
specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management
evaluates its estimates, as there are changes in circumstances, facts and experience. Actual results may differ from those
estimates or assumptions.
Unaudited pro forma information
The accompanying unaudited pro forma balance sheet as of December 31, 2017 has been prepared to give effect to the
automatic conversion of all shares of convertible preferred stock then outstanding into 10,731,348 shares of common stock
and all warrants to purchase convertible preferred stock then outstanding becoming warrants to purchase common stock as if
the proposed initial public offering had occurred on December 31, 2017.
In the accompanying statements of operations and comprehensive loss, the unaudited pro forma basic and diluted net loss per
share attributable to common stockholders for the year ended December 31, 2017 has been prepared to give effect to the
automatic conversion of all shares of convertible preferred stock outstanding into shares of common stock and all warrants to
purchase convertible preferred stock becoming warrants to purchase common stock as if the proposed initial public offering
had occurred on the later of January 1, 2017 or the issuance date of the convertible preferred stock or preferred stock warrant.
Concentrations of credit risk and of significant suppliers
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash
equivalents. The Company maintains most of its cash and cash equivalents at two accredited financial institutions in amounts
that could exceed federally insured limits. Cash equivalents are invested in an institutional money market fund. The
Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial
banking relationships.
The Company is dependent on third-party manufacturers to supply products for research and development activities in its
programs. In particular, the Company relies and expects to continue to rely on a small number of manufacturers to supply it
with its requirements for the active pharmaceutical ingredients and formulated drugs related to these programs. These
programs could be adversely affected by a significant interruption in the supply of active pharmaceutical ingredients and
formulated drugs.
Deferred offering costs
The Company capitalizes certain legal, accounting and other third-party fees that are directly associated with in-process
equity financings as deferred offering costs until such financings are consummated. After consummation of such equity
financing, these costs are recorded in stockholders’ equity (deficit) as a reduction of additional paid-in capital generated as a
result of the offering. Should the in-process equity financing be abandoned, the deferred offering costs will be expensed
immediately as a charge to operating expenses in the statements of operations and comprehensive loss.
Deferred financing costs
The Company capitalizes lender, legal and other third-party fees that are directly associated with obtaining access to capital
under credit facilities. Debt issuance costs incurred in connection with obtaining access to capital are recorded in prepaid
expenses and other current assets and are amortized over the availability period or term of the credit facility. Debt issuance
costs related to a recognized debt liability are recorded as a direct reduction of the carrying amount of the debt liability.
113
Cash equivalents
The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase
to be cash equivalents.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization
expense is recognized using the straight-line method over the estimated useful life of each asset as follows:
Laboratory equipment
Computer equipment and software
Furniture and fixtures
Leasehold improvements
Estimated Useful Life
3 years
3 years
3 years
Shorter of useful life or remaining lease term
Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation and amortization are removed
from the accounts and any resulting gain or loss is included in loss from operations. Expenditures for repairs and maintenance
that do not improve or extend the lives of the respective assets are charged to expense as incurred, while costs of major
additions and betterments are capitalized.
Impairment of long-lived assets
Long-lived assets consist of property and equipment. Long-lived assets to be held and used are tested for recoverability
whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully
recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant
underperformance of the business in relation to expectations, significant negative industry or economic trends and significant
changes or planned changes in the use of the assets. An impairment loss would be recognized in loss from operations when
estimated undiscounted future cash flows expected to result from the use of an asset group are less than its carrying amount.
The impairment loss would be based on the excess of the carrying value of the impaired asset group over its fair value,
determined based on discounted cash flows. The Company did not record any impairment losses on long-lived assets during
the years ended December 31, 2018 or 2017.
Fair value measurements
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to
measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets
and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value
hierarchy, of which the first two are considered observable and the last is considered unobservable:
• Level 1—Quoted prices in active markets for identical assets or liabilities.
• Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar
assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other
inputs that are observable or can be corroborated by observable market data.
• Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining
the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar
techniques.
The Company’s cash equivalents and preferred stock warrant liability are carried at fair value, determined according to the
fair value hierarchy described above (see Note 3). The carrying values of the Company’s accounts payable and accrued
expenses approximate their fair values due to the short-term nature of these liabilities. The carrying value of the Company’s
outstanding debt as of December 31, 2017 (see Note 7) approximated fair value (a Level 3 measurement) based on interest
rates currently available to the Company.
114
Preferred stock tranche right
The Series E-1 preferred stock purchase agreement provided the investors with the right to participate in a subsequent closing
of Series E-1 preferred stock upon the earlier of one year from the issuance date or the achievement of a strategic event as
determined by the Company’s board of directors (the “Series E-1 Tranche Right”). The Series E-1 Tranche Right met the
definition of a freestanding financial instrument as the Series E-1 Tranche Right was legally detachable and separately
exercisable from the Series E-1 preferred stock. The Series E-1 Tranche Right was classified as a liability and initially
recorded at fair value. The preferred stock tranche liability was subject to revaluation at each balance sheet date until its
exercise. Changes in fair value are included as a line item within other income (expense) in the accompanying statements of
operations and comprehensive loss.
Preferred stock warrant liability
The Company accounts for warrant instruments that either conditionally or unconditionally obligate the issuer to transfer
assets as liabilities regardless of the timing of the redemption feature or price, even though the underlying shares may be
classified as permanent or temporary equity. These warrants are subject to revaluation at each balance sheet date until the
earlier of their exercise or expiration or the completion of a liquidation event. Changes in fair value of warrants for
convertible preferred stock are recorded as interest expense in the accompanying statements of operations and comprehensive
loss.
Segment information
The Company manages its operations as a single segment for the purposes of assessing performance and making operating
decisions. The Company’s singular focus is the development of novel therapeutics in the field of epigenetics. All of the
Company’s tangible assets are held in the United States.
Revenue recognition
On January 1, 2018, the Company adopted the new revenue standard, discussed below under the heading “Recently Adopted
Accounting Pronouncements”, which amended revenue recognition principles and provides a single, comprehensive set of
criteria for revenue recognition within and across all industries (“ASC 606”). Under ASC 606, an entity recognizes revenue
when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity
expects to receive in exchange for those goods or services. To determine the appropriate amount of revenue to be recognized
for arrangements determined to be within the scope of ASC 606, the Company performs the following five steps: (i)
identification of the contract(s) with the customer, (ii) identification of the promised goods or services in the contract and
determination of whether the promised goods or services are performance obligations, (iii) measurement of the transaction
price, (iv) allocation of the transaction price to the performance obligations, and (v) recognition of revenue when (or as) the
Company satisfies each performance obligation. The Company only applies the five-step model to contracts when it is
probable that it will collect consideration it is entitled to in exchange for the goods or services it transfers to the customer.
The Company accounts for a contract with a customer that is within the scope of ASC 606 when all of the following criteria
are met: (i) the arrangement has been approved by the parties and the parties are committed to perform their respective
obligations, (ii) each party’s rights regarding the goods or services to be transferred can be identified, (iii) the payment terms
for the goods or services to be transferred can be identified, (iv) the arrangement has commercial substance and (v) collection
of substantially all of the consideration to which the Company will be entitled in exchange for the goods or services that will
be transferred to the customer is probable.
The Company estimates the transaction price based on the amount of consideration the Company expects to be received for
transferring the promised goods or services in the contract. The consideration may include both fixed consideration and
variable consideration. At the inception of each arrangement that includes variable consideration, the Company evaluates the
amount of the potential payments and the likelihood that the payments will be received. The Company utilizes either the most
likely amount method or expected value method to estimate the transaction price based on which method better predicts the
amount of consideration expected to be received. If it is probable that a significant revenue reversal would not occur, the
variable consideration is included in the transaction price.
115
For arrangements that include development and regulatory milestone payments, the Company evaluates whether the
milestones are considered probable of being reached and estimates the amount to be included in the transaction price using
the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone
value is included in the transaction price. Milestone payments that are not within the Company’s control or the licensee’s
control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. At the
end of each reporting period, the Company re-evaluates the probability of achievement of such milestones and any related
constraint, and if necessary, adjusts the estimate of the overall transaction price. Any such adjustments are recorded on a
cumulative catch-up basis, which would affect collaboration revenue and net income (loss) in the period of adjustment.
For sales-based royalties, including milestone payments based on the level of sales, the Company determines whether the
sole or predominant item to which the royalties relate is a license. When the license is the sole or predominant item to which
the sales-based royalty relates, the Company recognizes revenue at the later of: (i) when the related sales occur, or (ii) when
the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
The Company allocates the transaction price based on the estimated standalone selling price. The Company must develop
assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the
contract. The Company utilizes key assumptions to determine the standalone selling price, which may include other
comparable transactions, pricing considered in negotiating the transaction and the estimated costs. Certain variable
consideration is allocated specifically to one or more performance obligations in a contract when the terms of the variable
consideration relate to the satisfaction of the performance obligation and the resulting amounts allocated to each performance
obligation are consistent with the amounts the Company would expect to receive for each performance obligation.
For performance obligations which consist of licenses and other promises, the Company utilizes judgment to assess the
nature of the combined performance obligation in order to determine whether the combined performance obligation is
satisfied over time or at a point in time. The Company determines the appropriate method of measuring progress of combined
performance obligations satisfied over time for purposes of recognizing revenue. The Company evaluates the measure of
progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. If the
license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified
in the arrangement, the Company will recognize revenue from non-refundable, up-front fees allocated to the license when the
license is transferred to the customer and the customer is able to use and benefit from the license.
The Company receives payments from customers based on billing schedules established in each contract. Up-front payments
and fees are recorded as deferred revenue upon receipt or when due until the Company performs its obligations under these
arrangements. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional.
Collaboration agreements
For collaboration agreements with a third party, to determine the appropriate statement of operations classification of the
recognized funding, the Company first assesses whether the collaboration arrangement is within the scope of the accounting
guidance for collaboration arrangements. If it is, the Company evaluates the collaborative arrangement for proper
classification in the statement of operations based on the nature of the underlying activity and the Company assesses the
payments to and from the collaborative partner. If the payments to and from the collaborative partner are not within the scope
of other authoritative accounting guidance, the Company bases the statement of operations classification for the payments
received on a reasonable, rational analogy to authoritative accounting guidance, applied in a consistent manner. Conversely,
if the collaboration arrangement is not within the scope of accounting guidance for collaboration arrangements, the Company
assesses whether the collaboration arrangement represents a vendor/customer relationship. If the collaborative arrangement
does not represent a vendor/customer relationship, the Company then classifies the funding payments received in the
statement of operations and comprehensive loss as a reduction of the related expense that is incurred.
In July 2012, the Company entered into a Research, Development and Commercialization Agreement (the “LLS Agreement”)
with the Leukemia & Lymphoma Society (“LLS”) pursuant to which LLS committed to provide financial support (the
“Funding”) to the Company for research and development services, conditional on (i) the achievement of milestones in
accordance with the LLS Agreement and (ii) equal funding being provided by the Company. The Company concluded that
the LLS Agreement was not within the scope of the accounting guidance for collaboration arrangements (see Note 13). Due
to the co-funded nature of the payments and the Company’s assessment that it did not have a vendor/customer relationship
with LLS, the Company recognized the nonrefundable payments received under the agreement as a reduction to the research
and development expenses incurred, based on a proportional methodology comparing the total expenses incurred in the
period under the project to the total expenses expected to be incurred under the project.
116
Research and development costs
Research and development costs are expensed as incurred. Research and development expenses are comprised of costs
incurred in performing research and development activities, including salaries, stock-based compensation and benefits,
facilities costs and laboratory supplies, depreciation, manufacturing expenses and external costs of outside vendors engaged
to conduct preclinical development activities and clinical trials as well as the cost of licensing technology.
Upfront payments and milestone payments made for the licensing of technology are expensed as research and development in
the period in which they are incurred. Nonrefundable advance payments for goods or services to be received in the future for
use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related
goods are delivered or the services are performed.
Research contract costs and accruals
The Company has entered into various research and development contracts with companies both inside and outside of the
United States. These agreements are generally cancelable, and related payments are recorded as research and development
expenses as incurred. The Company records accruals for estimated ongoing research costs. When evaluating the adequacy of
the accrued liabilities, the Company analyzes progress of the studies or trials, including the phase or completion of events,
invoices received and contracted costs. Significant judgments and estimates are made in determining the accrued balances at
the end of any reporting period. Actual results could differ from the Company’s estimates. The Company’s historical accrual
estimates have not been materially different from the actual costs.
Patent costs
All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to
the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative
expenses.
Stock-based compensation
The Company measures stock-based awards granted to employees and directors based on the fair value on the date of grant
using the Black-Scholes option-pricing model. Compensation expense for those awards is recognized over the requisite
service period, which is generally the vesting period of the respective award. The straight-line method of expense recognition
is applied to all awards with service-only conditions, while the graded vesting method is applied to all grants with both
service and performance conditions. The Company records the expense for stock-based compensation awards subject to
performance-based milestone vesting when management determines that achievement of the milestone is probable.
Management evaluates when the achievement of a performance-based milestone is probable based on the expected
satisfaction of the performance conditions as of the reporting date.
For stock-based awards granted to nonemployees, compensation expense is recognized over the period during which services
are rendered by such nonemployees until completed. At the end of each financial reporting period prior to completion of the
services, the fair value of these awards is remeasured using the then-current fair value of the Company’s common stock and
updated assumption inputs in the Black-Scholes option-pricing model. The Company classifies stock-based compensation
expense in its statements of operations and comprehensive loss in the same manner in which the award recipient’s payroll
costs are classified or in which the award recipient’s service payments are classified.
Comprehensive loss
Comprehensive loss includes net loss as well as other changes in stockholders’ equity (deficit) that result from transactions
and economic events other than those with stockholders. There was no difference between net loss and comprehensive loss
for each of the periods presented in the accompanying financial statements.
Net income (loss) per share
The Company follows the two-class method when computing net income (loss) per share, as the Company has issued shares
that meet the definition of participating securities. The two-class method determines net income (loss) per share for each class
of common and participating securities according to dividends declared or accumulated and participation rights in
undistributed earnings. The two-class method requires income available to common stockholders for the period to be
allocated between common and participating securities based upon their respective rights to receive dividends as if all income
for the period had been distributed.
117
Basic net income (loss) per share attributable to common stockholders is computed by dividing the net income (loss)
attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted
net income (loss) attributable to common stockholders is computed by adjusting net income (loss) attributable to common
stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net income
(loss) per share attributable to common stockholders is computed by dividing the diluted net income (loss) attributable to
common stockholders by the weighted average number of common shares outstanding for the period, including potential
dilutive common shares assuming the dilutive effect of common stock equivalents.
The Company’s convertible preferred stock contractually entitles the holders of such shares to participate in dividends but
does not contractually require the holders of such shares to participate in losses of the Company. Accordingly, in periods in
which the Company reports a net loss, such losses are not allocated to such participating securities. In periods in which the
Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common
stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common shares are
not assumed to have been issued if their effect is anti-dilutive. The Company reported a net loss attributable to common
stockholders for the years ended December 31, 2018 and 2017.
Income taxes
The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements
or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between the
financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences
are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The
Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it
believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax
assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for
recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and
feasible tax planning strategies.
The Company accounts for uncertainty in income taxes recognized in the financial statements by applying a two-step process
to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood
that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-
not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial
statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of
being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or
unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.
Recently adopted accounting pronouncements
In May 2014, the Financial Accounting Standards Board, (the “FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes the revenue recognition
requirements in ASC 605-25, Multiple-Element Arrangements and most industry-specific guidance. The new standard
requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The update
also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from
customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to
obtain or fulfill a contract. Companies have the option of applying this new guidance retrospectively to each prior reporting
period presented or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial
application. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2017 and
for interim periods within that reporting period. For nonpublic entities, the guidance is effective for annual reporting periods
beginning after December 15, 2018. The Company early-adopted ASU 2014-09 on January 1, 2018 using the modified
retrospective transition method. The adoption did not have an impact on its financial statements as the Company had met its
performance obligations under its one revenue contract prior to the adoption of ASU 2014-09. The adoption of ASU 2014-09
did not have an impact on the Company’s accounting for contingent milestone or royalty payments.
In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification
Accounting (“ASU 2017-09”), which clarifies when to account for a change to the terms or conditions of a share-based
payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the
vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or
conditions. For both public and nonpublic entities, the standard is effective for annual periods beginning after December 15,
2017, including interim periods within those fiscal years. The adoption of ASU 2017-09 on January 1, 2018 did not have a
material impact on the Company’s financial position, results of operations or cash flows.
118
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718, which provides
improvements to nonemployee share-based payment accounting. ASU 2018-07 is intended to reduce the cost and complexity
and to improve financial reporting for nonemployee share-based payments. The scope of ASC 718, Compensation-Stock
Compensation (which currently only includes share-based payments to employees) is expanded to include share-based
payments issued to nonemployees for goods or services. ASC 505-50, Equity-Equity-Based payments to Non-Employees is
superseded and consequently, the accounting for share-based payments to nonemployees and employees will be substantially
aligned. The Company early adopted this standard on a prospective basis on October 1, 2018. As a result of adopting this
standard, the fair value of outstanding nonemployee awards as of September 30, 2018 will no longer be remeasured each
reporting period. All future expense related to these awards will be recorded based on the fair value measured as of
September 30, 2018, the last period prior to the adoption of ASU 2018-07. The adoption of this guidance did not have a
material impact on the Company’s consolidated financial statements.
Recently issued accounting pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which requires lessees to recognize leases on
the balance sheet and disclose key information about leasing arrangements. Topic 842 establishes a right-of-use (ROU)
model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer
than 12 months. Topic 842 also requires disclosures to meet the objective of enabling users of financial statements to assess
the amount, timing, and uncertainty of cash flows arising from leases. Topic 842 is effective for the Company beginning
January 1, 2020, using a modified retrospective approach, with early adoption permitted. An entity may choose to use either
the effective date or the beginning of the earliest comparative period presented in the financial statements as the date of initial
application. The Company expects to early adopt Topic 842 on January 1, 2019, using a modified retrospective approach, and
to choose the effective date as the date of initial application. Consequently, financial information will not be updated, and the
disclosures required under Topic 842 will not be provided for dates and periods prior to January 1, 2019. Topic 842 provides
a number of optional practical expedients and accounting policy elections. The Company expects to elect the package of
practical expedients requiring no reassessment of whether any expired or existing contracts are or contain leases, the lease
classification of any expired or existing leases, or initial direct costs for any existing leases. Further, the Company expects to
elect accounting policies not to apply the recognition requirements under Topic 842 to any of the Company’s short-term
leases, instead recognizing the lease payments in profit or loss on a straight-line basis over the lease term. The Company is
still in the process of finalizing its calculation of the transition adjustments and the effects of Topic 842 on its consolidated
financial statements. While the Company continues to assess all of the effects of adoption, the most significant effects relate
to (1) the recognition of right-of-use (ROU) assets and lease liabilities primarily resulting from leases of office and laboratory
space; (2) the derecognition of deferred rent and (3) significant new disclosure requirements.
In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity
(Topic 480), Derivatives and Hedging (Topic 815) I. Accounting for Certain Financial Instruments with Down Round
Features II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic
Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). Part I
applies to entities that issue financial instruments such as warrants, convertible debt or convertible preferred stock that
contain down-round features. Part II replaces the indefinite deferral for certain mandatorily redeemable noncontrolling
interests and mandatorily redeemable financial instruments of nonpublic entities contained within ASC Topic 480 with a
scope exception and does not impact the accounting for these mandatorily redeemable instruments. For public entities, this
guidance is required to be adopted for annual periods beginning after December 15, 2018, including interim periods within
those fiscal years. For nonpublic entities, this guidance is effective for annual periods beginning after December 15, 2019.
Early adoption is permitted for all entities, including adoption in an interim period. The Company is currently evaluating the
impact that the adoption of ASU 2017-11 will have on its financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for
Fair Value Measurement (“ASU 2018-13”), which modifies certain disclosure requirements on fair value measurements. The
amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs
used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied
prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other
amendments should be applied retrospectively to all periods presented upon their effective date. ASU 2018-13 is effective for
fiscal years beginning after December 15, 2019 and interim periods within those years. The Company does not anticipate a
material impact to disclosures as a result of the adoption of ASU 2018-13.
119
3. Fair Value Measurements
The following tables present information about the Company’s financial assets and liabilities measured at fair value on a
recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):
Assets:
Money market funds included in cash and cash equivalents
Assets:
Money market funds included in cash and cash equivalents
Liabilities:
Preferred stock warrant liability
Level 1
Level 2
Level 3
Total
December 31, 2018
$
$
114,592 $
114,592 $
— $
— $
— $
— $
114,592
114,592
Level 1
Level 2
Level 3
Total
December 31, 2017
$
$
$
$
16,404 $
16,404 $
— $
— $
— $
— $
— $
— $
— $
— $
16,404
16,404
254 $
254 $
254
254
Money market funds were valued by the Company using quoted prices in active markets for similar securities, which
represent a Level 1 measurement within the fair value hierarchy.
During the years ended December 31, 2018 and 2017, there were no transfers between Level 1, Level 2 and Level 3.
The preferred stock warrant liability represented the fair values of warrants to purchase Series B convertible preferred stock.
The fair values of the warrants were based on significant inputs not observable in the market, which represented a Level 3
measurement within the fair value hierarchy. Prior to the IPO, the Company’s valuation of the preferred stock warrants
utilized the Black-Scholes option-pricing model, which incorporated assumptions and estimates to value the preferred stock
warrants. The Company assessed these assumptions and estimates on a quarterly basis as additional information impacting
the assumptions was obtained.
The quantitative elements associated with the Company’s Level 3 inputs impacting the fair value measurement of the
preferred stock warrant liability included the fair value per share of the underlying convertible preferred stock, the remaining
contractual term of the warrants, risk-free interest rate, expected dividend yield and expected volatility of the price of the
underlying convertible preferred stock. The Company determined the fair value per share of the underlying preferred stock by
taking into consideration its most recent sales of its convertible preferred stock as well as additional factors that the Company
deemed relevant. The Company historically has been a private company and lacked company-specific historical and implied
volatility information of its stock. Therefore, it estimated its expected stock volatility based on the historical volatility of a
representative group of public companies in the biotechnology industry for the expected terms. The risk-free interest rate was
determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the expected terms. The
Company estimated a 0% dividend yield based on the expected dividend yield and the fact that the Company has never paid
or declared dividends.
The following table provides a roll forward of the aggregate fair values of the Company’s warrants to purchase convertible
preferred stock and preferred stock tranche liability for which fair value is determined by Level 3 inputs (in thousands):
Balances at December 31, 2016
Change in fair value of warrants recorded in interest expense and
change in fair value of preferred stock tranche liability
Balances at December 31, 2017
Change in fair value of warrants recorded in interest expense
Conversion of preferred stock warrants to common stock warrants
upon closing of initial public offering
Balances at December 31, 2018
$
120
Preferred Stock
Warrant Liability
Preferred Stock
Tranche Liability
Total
$
226 $
4,443 $
4,669
28
254
110
(364)
— $
(4,443)
—
—
—
— $
(4,415)
254
110
(364)
—
4. Property and Equipment, net
Property and equipment, net consisted of the following (in thousands):
Laboratory equipment
Computer equipment and internal-use software
Furniture and fixtures
Leasehold improvements
Less: Accumulated depreciation and amortization
December 31,
2018
2017
5,603 $
2,319
289
240
8,451
(7,241)
1,210 $
5,468
1,874
289
217
7,848
(6,727)
1,121
$
$
Depreciation and amortization expense were $0.6 million and $0.5 million for the years ended December 31, 2018 and 2017,
respectively. During the year ended December 31, 2018 and 2017, the Company disposed of property and equipment with a
gross book value and accumulated depreciation of less than $0.1 million and $0.1 million, respectively. There was no gain or
loss resulting from the disposals.
5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
Accrued employee compensation and benefits
Accrued external research and development expense
Accrued professional fees
Accrued final debt payment
Other
6. Collaboration and Research Agreements
Leukemia & Lymphoma Society
December 31,
2018
2017
2,726 $
5,610
255
—
346
8,937 $
1,867
1,347
233
557
225
4,229
$
$
In July 2012, the Company entered into the LLS Agreement pursuant to which LLS committed to provide Funding to the
Company for research and development services, conditional on (i) the achievement of milestones in accordance with the
LLS Agreement and (ii) equal funding being provided by the Company. Through December 31, 2018, the Company received
Funding totaling $7.3 million from LLS upon the achievement of specified milestones including $0.1 million received in
2018 and $0.6 million received in 2017, which were recorded as a reduction of research and development expense in those
periods.
The LLS Agreement requires the Company to make payments to LLS upon the Company’s achievement of specified
milestones that could total up to $25.0 million in aggregate (see Note 13).
Genentech
The Company, Genentech, Inc. (“Genentech”) and F. Hoffman-La Roche Ltd, the Swiss parent company of Genentech,
entered into three agreements effective January 9, 2012; a License and Collaboration Agreement, an Option Agreement, and
a Merger Agreement (collectively the “GNE Arrangement”). Pursuant to the GNE Arrangement, the parties agreed to
conduct a research collaboration program under which they would work together over a three-year research term, which
could be extended by one year upon written notice by Genentech to discover and validate epigenetic targets and to discover
and develop compounds suitable for clinical development and commercialization that bind to and modulate such targets. The
GNE Arrangement also included an exclusive option for Genentech to acquire the outstanding shares of the Company (the
“GNE Option”) for pre-determined payments. The activities under the GNE Arrangement were evaluated in accordance with
ASC 605-25 to identify deliverables and non-contingent consideration of $95.0 million was allocated to the units of
accounting and recognized upon delivery of each unit of accounting. Prior to December 31, 2015, the Company’s
performance obligations under the GNE Arrangement were complete, Genentech had notified the Company that they were
not exercising the GNE Option, and all non-contingent revenue as well as milestone payments received had been recognized
as revenue by the Company. No additional consideration was received, due or earned after December 31, 2015.
121
The GNE Arrangement includes milestone payments and future sales-based milestones and royalties payable to the Company
by Genentech upon achievement of specified milestones and sales targets by Genentech. The Company determined certain
milestone payments to be substantive and other milestone payments to not be substantive. However, as the Company’s
performance obligations were completed prior to December 31, 2015, any future milestone payments received by the
Company will be recorded as revenue if and when they become probable and estimable. The Company did not receive any
milestone payments or royalties from Genentech during the years ending December 31, 2018 or 2017, nor did any payments
from Genentech become probable or estimable.
As a result of Genentech not exercising the GNE Option, the Company was required to repay $1.2 million of reimbursed
expenses previously received from Genentech that could otherwise have been used to offset payment if the GNE Option had
been exercised. The Company repaid the liability in February 2016.
7. Debt
Long-term debt consisted of the following (in thousands):
Principal amount of term loans
Debt discount current portion
Less: Current portion
Debt discount net of current portion
Long-term debt, net of discount and current portion
December 31,
2018
2017
— $
—
—
—
— $
4,116
(13)
(4,103)
—
—
$
$
The Company entered into a loan and security agreement with Oxford Finance LLC and Silicon Valley Bank in April 2016
(the “2016 Loan Agreement”), pursuant to which the Company borrowed $11.8 million. The 2016 Loan Agreement obligated
the Company to make monthly, interest-only payments until November 1, 2016 and, thereafter, to pay 21 consecutive, equal
monthly installments of principal plus interest from November 1, 2016 through July 1, 2018. The 2016 Loan Agreement bore
interest at an annual rate of 7.6%. In addition, a final payment equal to 5.0% of the original principal amount was due upon
the final principal payment for the tranche, which amount was being accreted over the term of the debt, using the effective
interest method. As of December 31, 2017, the total amount accrued included in accrued expenses and other current liabilities
was $0.6 million. The effective annual interest rate of the outstanding debt under the 2016 Loan Agreement was
approximately 12%. Borrowings under the 2016 Loan Agreement matured on July 1, 2018 and were collateralized by
substantially all of the Company’s personal property, other than its intellectual property, and by a negative pledge on
intellectual property. The remaining outstanding principal balance and final payment of $1.2 million in aggregate were paid
on July 3, 2018 in accordance with the terms of the 2016 Loan Agreement.
8. Convertible Preferred Stock
As of January 1, 2018, the Company had issued Series A, Series B, Series D, Series E, and Series E-1 convertible preferred
stock (collectively the “Preferred Stock”). Prior to the IPO, the Preferred Stock was classified outside of stockholders’ equity
(deficit) because the shares contained redemption features that were not solely within the control of the Company.
In March 2018, the Company issued and sold an aggregate of 68,500,000 shares of Series F convertible preferred stock (the
“Series F Preferred Stock”), at a price of $1.00 per share, for proceeds of $68.4 million, net of issuance costs of $0.1 million.
In April 2018, the Company issued and sold an aggregate of 31,250,000 shares of Series F Preferred Stock in two additional
closings, at a price of $1.00 per share for proceeds of $31.2 million, net of issuance costs of less than $0.1 million. In
connection with the issuance of the Series F Preferred Stock, the holders of the previously outstanding Preferred Stock agreed
to remove their cumulative dividend rights and waive certain anti-dilution rights. The Company assessed whether this change
to the previously outstanding shares of Series A, B, D, E and E-1 Preferred Stock was an extinguishment or modification.
Based on qualitative analysis, there were no substantive changes in cash flows to the previously issued securities as a result
of the additional issuance and therefore the change was accounted for as a modification. This modification did not have any
impact on the Company’s financial statements.
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As of December 31, 2017, the Preferred Stock consisted of the following (in thousands, except share amounts):
December 31, 2017
Preferred Stock
Authorized
Preferred Stock
Issued and
Outstanding Carrying Value
Series A preferred stock
Series B preferred stock
Series D preferred stock
Series E preferred stock
Series E-1 preferred stock
3,125,000
32,270,000 32,158,888 $
31,416,665 31,041,665
3,125,000
24,810,759 24,810,759
27,769,382 27,730,865
119,391,806 118,867,177 $
Common Stock
Issuable Upon
Liquidation
Conversion
Preference
2,921,133
32,159
32,024 $
2,819,656
37,250
36,933
283,855
5,000
4,938
2,897,577
55,824
55,749
2,518,915
48,529
43,584
173,228 $ 178,762 11,441,136
On July 23, 2018, upon the closing of the Company’s IPO, all outstanding convertible preferred stock automatically
converted into shares of common stock.
Prior to the closing of the IPO, the holders of the Preferred Stock had the following rights and preferences:
Voting
The holders of Preferred Stock were entitled to vote, together with the holders of common stock, on matters submitted to
stockholders for a vote. The holders of Preferred Stock were entitled to the number of votes equal to the number of shares of
common stock into which each such share of Preferred Stock could then convert.
Conversion
Each share of Preferred Stock was convertible at the option of the holder at any time after the date of issuance. Each share of
Preferred Stock would have been automatically converted into shares of common stock at the applicable conversion ratio then
in effect (i) upon the closing of a firm commitment public offering with at least $35 million of gross proceeds to the
Company, and at a price of at least $1.00 per share, subject to appropriate adjustment in the event of any stock split, stock
dividend, combination or other similar recapitalization, or, (ii) upon the written consent of at least a majority of the holders of
the then-outstanding shares of Preferred Stock voting together as a single class on an as-converted basis. The conversion ratio
of each series of Preferred Stock was determined by dividing the Original Issue Price of each series by the Conversion Price
of each series. The Original Issue Price was $1.00 per share for Series A convertible preferred stock, (“Series A”), $1.20 per
share for Series B convertible preferred stock (“Series B”), $1.60 per share for Series D convertible preferred stock (“Series
D”), $2.25 per share for Series E convertible preferred stock (“Series E”), $1.75 per share for Series E-1 convertible preferred
stock and $1.00 per share for Series F convertible preferred stock (“Series F”). The Conversion Price, as adjusted for Series E
in 2016 as a result of the issuance of Series E-1 preferred stock at a price per share of less than the conversion price of Series
E preferred stock, was $11.01 per share for Series A, $13.21 per share for Series B, $17.61 per share for Series D, $19.27 per
share for Series E, $19.27 per share for Series E-1 and $11.01 per share for Series F, subject, in each case, to appropriate
adjustment in the event of any stock split, stock dividend, combination or other similar recapitalization and other adjustments
as set forth in the Company’s certificate of incorporation, as amended and restated.
Dividends
As of December 31, 2017, the holders of Series E and Series E-1 Preferred Stock were entitled to receive, prior to or
simultaneously with the holders of Series A, Series B and Series D Preferred Stock, cumulative dividends at the rate of eight
percent (8%), compounded quarterly, of the Series E and Series E-1 Original Issue Price, as applicable, per annum on each
then-outstanding share of Series E and Series E-1 Preferred Stock. The holders of Series A, Series B and Series D Preferred
Stock were entitled to receive dividends at the rate of eight percent (8%), compounded quarterly, of the Original Issue Price,
as applicable, per annum on each then-outstanding share, subject to the rights of the Series E and Series E-1 described above.
Holders of Series A, Series B, Series D, Series E and Series E-1 Preferred Stock were entitled to receive dividends only
when, as, and if declared by the Company’s board of directors. The Company could not declare, pay or set aside any
dividends on shares of any other series of capital stock of the Company, other than dividends on common stock payable in
common stock, unless the holders of the Preferred Stock first received, or simultaneously received, a dividend on each
outstanding share of Preferred Stock in an amount at least equal to the greater of (i) 8% per share, as compounded quarterly,
on a calendar-year basis, subject to appropriate adjustment in the event of any stock split, stock dividend, combination or
other similar recapitalization with respect to such shares, and (ii) the amount of dividend payable on the Preferred Stock
calculated as if all shares of Preferred Stock had been converted to common stock. No dividends were declared or paid during
2017. As of December 31, 2017, cumulative undeclared and unpaid dividends totaled $76.6 million.
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As of March 22, 2018, the holders of Preferred Stock were no longer entitled to cumulative dividends. Prior to the closing of
the IPO, the holders of Series E, Series E-1 and Series F Preferred Stock were entitled to receive, prior to or simultaneously
with the holders of Series A, Series B and Series D Preferred Stock, non-cumulative dividends at the rate of eight percent
(8%) per annum, of the Series E, Series E-1 and Series F Original Issue Price, as applicable, per annum on each then-
outstanding share of Series E, Series E-1 and Series F Preferred Stock. The holders of Series A, Series B and Series D
Preferred Stock were entitled to receive non-cumulative dividends at the rate of eight percent (8%) per annum, of the Original
Issue Price, as applicable, per annum on each then-outstanding share, subject to the rights of the Series E, Series E-1 and
Series F described above. Holders of Series A, Series B, Series D, Series E, Series E-1 and Series F Preferred Stock were
entitled to receive dividends only when, as, and if declared by the Company’s board of directors. The Company could not
declare, pay or set aside any dividends on shares of any other series of capital stock of the Company, other than dividends on
common stock payable in common stock, unless the holders of the Preferred Stock first received, or simultaneously received,
a dividend on each outstanding share of Preferred Stock in an amount at least equal to the greater of (i) 8% per share, on a
calendar-year basis, subject to appropriate adjustment in the event of any stock split, stock dividend, combination or other
similar recapitalization with respect to such shares, and (ii) the amount of dividend payable on the Preferred Stock calculated
as if all shares of Preferred Stock had been converted to common stock. No dividends had been declared or paid as of July
23, 2018.
Liquidation
In the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company or Liquidating Event (as
described below), the holders of shares of Series E, Series E-1 and Series F Preferred Stock would have received, in
preference to the holders of the Series A, Series B and Series D Preferred Stock or common stock, an amount equal to the
Original Issue Price per share of the respective share of Preferred Stock, plus all dividends declared but unpaid, or other
dividends required to be paid, on such shares. In the event that the assets available for distribution to the Company’s
stockholders were not sufficient to permit payment to the holders of Series E, Series E-1 and Series F Preferred Stock in the
full amount to which they were entitled, the assets available for distribution would have been distributed on a pro rata basis
among the holders of the Series E, Series E-1 and Series F Preferred Stock.
After the payment of the full liquidation amounts to the holders of the Series E, Series E-1 and Series F Preferred Stock, but
before any distribution or payment to holders of common stock, the holders of Series A, Series B and Series D Preferred
Stock would have received an amount equal to the Original Issue Price per share of the respective share of Preferred Stock,
plus all dividends declared but unpaid, or other dividends required to be paid, on such shares. In the event that the assets
available for distribution to the Company’s stockholders were not sufficient to permit payment to the holders of Series A,
Series B, Series D, Series E, Series E-1 and Series F Preferred Stock in the full amount to which they were entitled, then,
after the payment of any preferential amounts required to be paid to the Series E, Series E-1 and Series F Preferred Stock, the
assets available for distribution would be distributed on a pro rata basis among the holders of the Series A, Series B and
Series D Preferred Stock. After the payment of all preferential amounts to the holders of the Preferred Stock then, to the
extent available, the remaining assets available for distribution would have been distributed among the holders of common
stock, pro rata based on the number of shares held by each such holder.
Unless the holders of a majority of the then-outstanding shares of Series A, Series B and Series D Preferred Stock, voting
together as a single class on an as-converted to common stock basis and a majority of the outstanding shares of Series E,
Series E-1 and Series F Preferred Stock voting together as a single class on an as-converted basis, elected otherwise, a
Liquidating Event includes a merger or consolidation (other than one in which stockholders of the Company own a majority
by voting power of the outstanding shares of the surviving or acquiring corporation) or a sale, lease, transfer, exclusive
license or other disposition of all or substantially all of the assets of the Company.
9. Warrants to Purchase Convertible Preferred Stock
The Company issued warrants to purchase convertible preferred stock in 2013 and 2014 for the purchase of 375,000 shares of
Series B Preferred Stock. Upon the closing of the IPO in July 2018, these warrants became warrants to purchase
34,062 shares of common stock at which time the Company reclassified the carrying value of the warrants to additional paid-
in capital.
Prior to the warrants becoming warrants to purchase common stock, the Company was required to remeasure the fair value of
the liability for these preferred stock warrants at each reporting date since their grant date, with any adjustments recorded in
interest expense. The warrants outstanding at each reporting date were remeasured using the Black-Scholes option-pricing
model, and the resulting change in fair value was recorded in interest expense in the Company’s statements of operations and
comprehensive loss.
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The following table summarizes the Company’s outstanding preferred stock warrants as of December 31, 2017 (in thousands,
except share and per share amounts):
Number of
Preferred Shares
Term
(in Years)
10
10
Convertible
Preferred
Stock
Issuable
under
Warrant
Exercise
Price
Warrant
Fair Value
Series B
Series B
125,000 $
250,000 $
375,000
1.20 $
1.20
$
84
170
254
Issuance
Date
June 28, 2013
September 30, 2014
10. Equity
Common Stock
As of December 31, 2018, the Company’s certificate of incorporation, as amended and restated, authorized the Company to
issue 200,000,000 shares of common stock, $0.0001 par value per share.
Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders.
Common stockholders are not entitled to receive dividends, unless declared by the Company’s board of directors. No
dividends have been declared or paid by the Company since its inception.
Warrants to Purchase Common Stock
As of December 31, 2017, the Company had outstanding warrants to purchase 112,900 shares of common stock with an
exercise price of $1.55 per share. Upon the closing of the IPO in July 2018, the Company’s preferred stock warrants became
warrants to purchase 34,062 shares of common stock with an exercise price of $13.22 per share. In August 2018, 51,032
warrants with an exercise price of $1.55 per share were exercised. As of December 31, 2018, the Company has outstanding
warrants to purchase common stock as follows:
Term
(in years)
10
10
10
Exercise
Price
$
$
$
1.55
13.22
13.22
Number of
Common Shares
Issuable under
Warrant
61,868
11,354
22,708
95,930
Issuance Date
May 23, 2011
June 28, 2013
September 30, 2014
11. Stock-based Compensation
2008 Stock Incentive Plan
The Company’s 2008 Stock Incentive Plan (the “2008 Plan”) provided for the Company to grant incentive stock options or
nonqualified stock options, restricted stock, restricted stock units and other equity awards to employees, directors, consultants
and advisors of the Company. The 2008 Plan was administered by the board of directors or, at the discretion of the board of
directors, by a committee of the board of directors. The board of directors could also delegate to one or more officers of the
Company the power to grant awards to employees and certain officers of the Company. The exercise prices, vesting and other
restrictions were determined at the discretion of the board of directors, or its committee if so delegated. Stock options granted
under the 2008 Plan with service-based vesting conditions generally vest over four years and expire after ten years.
The total number of shares of common stock that were authorized for issuance under the 2008 Plan was 4,039,829 shares.
Upon effectiveness of the Company’s 2018 Equity Incentive Plan, the (“2018 Plan”) in July 2018, the remaining 245,557
shares available under the 2008 Plan became available for issuance under the 2018 Plan and no future issuance will be made
under the 2008 Plan. Additionally, outstanding options under the 2008 Plan that expired, terminated, are surrendered or
canceled without having been fully exercised will be available for future awards under the 2018 Plan.
The exercise price for stock options granted is not less than the fair value of common shares as determined by the board of
directors as of the date of grant. The Company’s board of directors valued the Company’s common stock, taking into
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consideration its most recently available valuation of common stock performed by third parties as well as additional factors
which may have changed since the date of the most recent contemporaneous valuation through the date of grant.
2018 Equity Incentive Plan
In June 2018, the Company’s stockholders approved the 2018 Plan, which became effective on July 18, 2018. The 2018 Plan
provides for the grant of incentive stock options, non-qualified options, stock appreciation rights, restricted stock awards,
restricted stock units and other stock-based awards. The number of shares initially reserved for issuance under the 2018 Plan
is 2,779,544 plus the 245,557 shares of common stock remaining available for issuance under the 2008 Plan as of that date.
The number of shares reserved shall be annually increased on January 1, 2019 and each January 1 thereafter through
January 1, 2028 by the least of (i) 2,216,368 shares, (ii) 4% of the number of shares of the Company’s common stock
outstanding on the first day of the year or (iii) an amount determined by the Company’s board of directors. The shares of
common stock underlying any awards that are expired, forfeited, canceled, held back upon exercise or settlement of an award
to satisfy the exercise price or tax withholding, repurchased or are otherwise terminated by the Company under the 2018 Plan
or the 2008 Plan will be added back to the shares of common stock available for issuance under the 2018 Plan. As of
December 31, 2018, 1,823,905 shares remained available for future issuance under the 2018 Plan. In January 2019, the shares
under the 2018 Plan were increased by 1,032,125 shares pursuant to the annual increase described above.
2018 Employee Stock Purchase Plan
In June 2018, the Company’s stockholders approved the 2018 Employee Stock Purchase Plan which became effective on
July 18, 2018. A total of 272,504 shares of common stock were reserved for issuance under this plan. The number of shares
reserved shall be annually increased on January 1, 2020 and each January 1 thereafter through January 1, 2028 by the least of
(i) 545,008 shares, (ii) 1% of the number of shares of the Company’s common stock outstanding on the first day of the year
or (iii) an amount determined by the Company’s board of directors.
Stock option valuation
The fair value of stock option grants is estimated using the Black-Scholes option-pricing model. The Company historically
has been a private company and lacks company-specific historical and implied volatility information. Therefore, it estimates
its expected stock volatility based on the historical volatility of a representative group of public companies in the
biotechnology industry and expects to continue to do so until such time as it has adequate historical data regarding the
volatility of its own traded stock price. For options with service-based vesting conditions, the expected term of the
Company’s stock options has been determined utilizing the simplified method as prescribed by the SEC Staff Accounting
Bulletin No. 107, Share-Based Payment, for awards that qualify as “plain-vanilla” options. The expected term of stock
options granted to nonemployees is equal to the contractual term of the option award. The risk-free interest rate is determined
by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal
to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash
dividends and does not expect to pay any cash dividends in the foreseeable future.
The following table presents, on a weighted average basis, the assumptions used in the Black-Scholes option-pricing model
to determine the fair value of stock options granted to employees and directors:
Risk-free interest rate
Expected volatility
Expected dividend yield
Expected term (in years)
2018
Year Ended December 31,
2017
2016
2.79%
81.06%
—
6.05
2.04%
79.82%
—
6.00
1.51%
75.34%
—
6.35
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The following table summarizes the Company’s option activity since December 31, 2017:
Weighted
Average
Exercise
Price
Number
of Shares
Weighted
Average
Contractual
Term
(in years)
Outstanding as of December 31, 2017
Granted
Exercised
Forfeited
Outstanding as of December 31, 2018
Vested and expected to vest as of December 31, 2018
Options exercisable as of December 31, 2018
1,728,731 $
2,195,002
(57,921)
(86,409)
3,779,403 $
3,779,403 $
977,825 $
5.51
9.39
4.02
6.76
7.78
7.78
6.14
Aggregate
Intrinsic
Value
(in thousands)
1,296
8.87 $
8.80 $
8.80 $
7.78 $
110
110
110
Prior to July 2016, the Company’s stock option agreements allowed for the exercise of unvested stock option awards. The
unvested shares are subject to repurchase by the Company if the employees cease to provide service to the Company, with or
without cause. The table above reflects unvested stock options as exercised on the dates that the shares are no longer subject
to repurchase. Payment for unvested shares is recorded as a long-term liability in the accompanying balance sheets. The
liability for unvested common stock subject to repurchase is then reclassified into stockholders’ equity as the shares vest. As
of December 31, 2018 and 2017, options for the purchase of 340 and 1,004 shares of common stock, respectively, had been
exercised but were unvested and subject to repurchase. As December 31, 2018 and 2017, the long-term liability related to the
payments for unvested shares was less than $0.1 million. For options granted after July 2016, the Company’s stock option
agreements no longer allow for early exercise of the options.
The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options
and the fair value of the Company’s common stock for those stock options that had strike prices lower than the fair value of
the Company’s common stock. The aggregate intrinsic value of stock options exercised during the years ended December 31,
2018 and 2017 was $0.2 million and less than $0.1 million, respectively.
The weighted average grant-date fair value of awards granted during each of the years ended December 31, 2018 and 2017
were $6.66 and $4.58 per share, respectively.
As of December 31, 2018, there were outstanding unvested service-based stock options held by nonemployees for the
purchase of 48,114 shares of common stock.
Stock-based compensation
The Company recorded stock-based compensation expense in the following expense categories of its statements of operations
and comprehensive loss (in thousands):
Research and development expenses
General and administrative expenses
Total
2018
Year Ended December 31,
2017
2016
$
$
1,668 $
2,284
3,952 $
559 $
592
1,151 $
589
259
848
As of December 31, 2018, total unrecognized compensation cost related to the unvested stock-based awards was $15.8
million, which is expected to be recognized over a weighted average period of 3.11 years.
12. Income Taxes
2017 U.S. tax reform
On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was signed into U.S. law. The TCJA includes a number of
changes to existing tax law, including, among other things, a permanent reduction in the federal corporate income tax rate
from 35% to 21%, effective as of January 1, 2018, as well as limitation of the deduction for net operating losses to 80% of
current year taxable income and elimination of net operating loss carrybacks, in each case, for losses arising in taxable years
beginning after December 31, 2017 (though any such net operating losses may be carried forward indefinitely).
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In connection with the TCJA, the Company remeasured certain deferred tax assets and liabilities based on the rates at which
they are expected to reverse in the future, which is generally 21%. The remeasurement of the Company' deferred tax balance
was primarily offset by application of its valuation allowance. As of December 31, 2018, the Company had completed its
accounting for all of the tax effects of the enactment of the TCJA; including the effects on its existing deferred tax balances.
The Company had not recognized any material adjustment to the provisional estimate that was previously recorded related to
the TCJA.
Income taxes
During the years ended December 31, 2018 and 2017, the Company recorded no income tax benefits for the net operating
losses incurred or for the research and development tax credits generated in each year due to its uncertainty of realizing a
benefit from those items.
A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:
Federal statutory income tax rate
State taxes, net of federal benefit
Federal and state research and development tax credit
Warrant Settlement
Permanent items
Impact of the Tax Cuts and Jobs Act
Other
Change in deferred tax asset valuation allowance
Effective income tax rate
Net deferred tax assets consisted of the following (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Research and development tax credit carryforwards
Depreciation and amortization
Other
Total deferred tax assets
Valuation allowance
Net deferred tax assets
Year Ended December 31,
2018
2017
2016
21.0 %
6.2
4.1
—
(0.3)
—
(0.1)
(30.9)
0.0 %
34.0 %
5.7
5.6
4.3
(2.6)
(56.9)
(0.2)
10.1
0.0 %
34.0 %
5.2
3.6
—
(0.2)
—
—
(42.6)
0.0 %
December 31,
2018
2017
$
$
61,147 $
11,574
39
1,593
74,353
(74,353)
— $
45,999
9,137
40
637
55,813
(55,813)
—
As of December 31, 2018, the Company had U.S. federal and state net operating loss carryforwards of $224.5 million and
$221.6 million, respectively, which may be available to offset future income tax liabilities. Federal net operating loss
carryforwards of $168.9 million will expire at various dates from 2028 to 2037. $55.6 million of the federal net operating
loss can be carried forward indefinitely. State net operating loss carryforwards of $221.6 million will expire at various dates
from 2030 to 2038. As of December 31, 2018, the Company also had U.S. federal and state research and development tax
credit carryforwards of $8.8 million and $3.5 million, respectively, which may be available to offset future income tax
liabilities and begin to expire in 2028 and 2025, respectively.
Utilization of the U.S. federal and state net operating loss carryforwards and research and development tax credit
carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986, and
corresponding provisions of state law, due to ownership changes that have occurred previously or that could occur in the
future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable
income. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of
certain stockholders or public groups in the stock of a corporation by more than 50% over a three-year period. The Company
completed several financings through December 31, 2011, which resulted in ownership changes in excess of 50%. The
Company prepared an analysis to determine the effect of the ownership change limitation on its ability to utilize its net
operating loss and tax credit carryforwards, and concluded that as a result of ownership changes that occurred during 2008,
there are restrictive limitations on approximately $1.9 million of the Company’s net operating loss carryforwards and
approximately $0.1 million of the Company’s tax credit carryforwards. These limitations are reflected in the Company’s net
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operating loss carryforwards and tax credit carryforwards presented herein. Subsequent ownership changes may further affect
the limitation in future years. The Company has not conducted a study to assess whether a change of control has occurred
since 2011 due to the significant complexity and cost associated with such a study. If the Company has experienced a change
of control, as defined by Section 382, at any time since 2011, utilization of the net operating loss carryforwards or research
and development tax credit carryforwards generated since 2011 would be subject to an annual limitation under Section 382,
which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the
applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may
result in expiration of a portion of the net operating loss carryforwards or research and development tax credit carryforwards
before utilization. Further, until an additional study is completed by the Company and any limitation is known, no amounts
are being presented as an uncertain tax position.
The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets.
Management has considered the Company’s history of cumulative net losses incurred since inception and its lack of
commercialization of any products or generation of any revenue from product sales since inception and has concluded that it
is more likely than not that the Company will not realize all of the benefits of the deferred tax assets. Accordingly, a full
valuation allowance has been established against the deferred tax assets as of December 31, 2018 and 2017. Management
reevaluates the positive and negative evidence at each reporting period.
Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2018 and 2017 related
primarily to the increase in net operating loss carryforwards and research and development tax credit carryforwards in 2018
and 2017, and the impact of the TCJA in 2017, and were as follows (in thousands):
Valuation allowance as of beginning of year
Decreases recorded as benefit to income tax provision
Increases recorded to income tax provision
Valuation allowance as of end of year
Year Ended December 31,
2018
2017
$
$
55,813 $
—
18,540
74,353 $
59,236
(3,423)
—
55,813
As of December 31, 2018 and 2017, the Company had not recorded any amounts for unrecognized tax benefits. The
Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision. As of
December 31, 2018 and 2017, the Company had no accrued interest or penalties related to uncertain tax positions and no
amounts had been recognized in the Company’s statements of operations and comprehensive loss. The Company files income
tax returns in the United States and Massachusetts. The federal and state income tax returns are generally subject to tax
examinations for the tax years ended December 31, 2015 through December 31, 2018. To the extent the Company has tax
attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the
Internal Revenue Service or state taxing authorities to the extent utilized in a future period. No federal or state tax audits are
currently in process.
13. Commitments and Contingencies
Operating leases
The Company previously leased its facility under a non-cancellable operating lease that would have expired in June 2017. In
September 2016, the Company amended the lease to extend the lease term until June 2020. Under the terms of the original
lease and the amended lease, the Company secured a $0.2 million letter of credit as security for its leased facility. The
underlying cash securing this letter of credit has been classified as non-current restricted cash in the accompanying balance
sheets. Both the original lease and the amended lease include annual rent escalations and rent holidays, which are accrued,
such that rent expense is recognized on a straight-line basis over the terms of occupancy.
In September 2018, the Company executed the Fourth Amendment to its non-cancellable operating lease. The terms of the
amendment expanded the size of the leased premises to include additional space in the leased facility as of February 2019.
The lease for the original leased premises expires in June 2020. The lease term for the expansion premises expires in
February 2022. Under the terms of the lease as amended, the Company maintains a $0.4 million letter of credit as security for
its leased facility. The underlying cash securing this letter of credit has been classified as non-current restricted cash in the
accompanying consolidated balance sheets. The lease as amended includes annual rent escalations and rent holidays, which
are accrued, such that rent expense is recognized on a straight-line basis over the terms of occupancy.
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Future minimum lease payments under the operating lease as of December 31, 2018 are as follows (in thousands):
Year Ending December 31,
2019
2020
2021
2022
3,174
2,122
896
150
6,342
$
Rent expense for the years ended December 31, 2018 and 2017 was $2.3 million, respectively.
Research agreements
The LLS Agreement requires the Company to make certain milestone payments to LLS, that could total up to $25.0 million
in aggregate, upon the receipt of payments by the Company associated with the licensing or transfer of rights to the related
compound (or a product) to a third party, upon first regulatory approval of a product in the U.S., or upon the first regulatory
approval of a product in Europe or Japan. As of December 31, 2018, no events have occurred that would require payment of
the milestones.
The Company has several in-license agreements with academic organizations. The Company is obligated to pay annual
license maintenance fees of less than $0.1 million per year as well as reimburse certain institutions for costs incurred related
to the filing, prosecution and maintenance of patent rights licensed under the agreements. In addition, the Company may be
obligated to pay contingent milestone payments of up to a maximum of $15.7 million upon the achievement of certain
defined events as well as royalties of low single-digit percentages of sales of licensed products. In certain cases, the
maximum payments to the academic organizations are capped. If the Company grants any sublicense rights under the license
agreements, the Company has agreed to pay a percentage of sublicense fees received by the Company to the licensors. The
Company recorded less than $0.1 million in license fees as research and development expense in each of the years ended
December 31, 2018 and 2017. As of December 31, 2018, no events have occurred that would require payment of the
milestones, royalties, or sublicense fees.
Indemnification agreements
In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors,
business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of
such agreements or from intellectual property infringement claims made by third parties. The maximum potential amount of
future payments the Company could be required to make under these indemnification agreements is, in many cases,
unlimited. To date, the Company has not incurred any material costs as a result of such indemnifications. The Company does
not believe that the outcome of any claims under indemnification arrangements will have a material effect on its financial
position, results of operations or cash flows, and it has not accrued any liabilities related to such obligations in its financial
statements as of December 31, 2018 or 2017.
Legal proceedings
At each reporting date, we evaluate whether or not a potential loss amount or a potential range of losses is probable and
reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. We
expense as incurred the costs related to such legal proceedings. On January 17, 2017, a participant dosed in one of our
clinical trials filed a complaint against us in the United States District Court for the District of Arizona, alleging negligence,
lack of informed consent, strict products liability and loss of consortium. We filed an answer in March 2017. A dispositive
motion is currently pending with the District Court and has yet to be decided. The plaintiff claims damages of $1.5
million. We are working with counsel and our insurer to vigorously defend our position. We believe that we have
meritorious defenses however unfavorable outcome of some amount is reasonably possible.
130
14. Net Loss and Unaudited Pro Forma Net Loss Per Share
Net loss per share
Basic and diluted net loss per share attributable to common stockholders was calculated as follows (in thousands, except
share and per share amounts):
Numerator:
Net loss
Plus: Cumulative dividends on convertible preferred stock
Net loss attributable to common stockholders
Year Ended December 31,
2018
2017
$
$
(59,925) $
—
(59,925) $
(35,377)
(18,390)
(53,767)
Denominator:
Weighted average common shares outstanding, basic and diluted
11,984,293
958,447
Net loss per share attributable to common stockholders, basic and diluted
$
(5.00) $
(56.10)
The Company’s potential dilutive securities, which include convertible preferred stock, warrants for the purchase of
convertible preferred shares, warrants for the purchase of common stock and common stock options, have been excluded
from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the
weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share
attributable to common stockholders is the same. The Company excluded the following potential common shares, presented
based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common
stockholders for the periods indicated because including them would have had an anti-dilutive effect:
Convertible preferred shares (as converted to common stock)
Warrants for the purchase of convertible preferred stock (as converted to common
stock)
Warrants for the purchase of common stock
Common stock issued for promissory notes
Options to purchase common stock
December 31,
2018
—
—
95,930
—
3,779,403
3,875,333
2017
11,441,136
34,062
113,541
229,357
1,728,731
13,546,827
15. Retirement Plan
The Company has a defined-contribution plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The
401(k) Plan covers all employees who meet defined minimum age and service requirements and allows participants to defer a
portion of their annual compensation on a pre-tax basis. As currently established, the Company is not required to make
contributions to the 401(k) Plan. The Company made matching contributions of $0.3 million and $0.2 million for the years
ended December 31, 2018 and 2017.
131
16. Selected Quarterly Financial Data (unaudited)
The following table contains selected consolidated quarterly financial information from 2018 and 2017. The Company
believes that the following information reflects all normal recurring adjustments necessary for a fair statement of the
information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any
future period.
Three months ended
March 31,
2018
June 30,
2018
September 30,
2018
December 31,
2018
Total revenue
Total operating expenses
Total other income (expense), net
Net loss and comprehensive loss
Net loss attributable to common stockholders
Net loss per share attributable to common stockholders, basic
and diluted (1)
$
$
$
$
— $
12,177
75
(12,102) $
(12,102) $
(In thousands, except per share data)
— $
12,022
81
(11,941) $
(11,941) $
— $
16,413
475
(15,938) $
(15,938) $
—
20,632
688
(19,944)
(19,944)
(12.44) $
(9.96) $
(0.81) $
(0.77)
(1)
The explanation for major variances of net loss per share from the first and second quarters for the year ended December 31, 2018 are: On July 23, 2018, upon
the closing of the Company’s IPO, all outstanding convertible preferred stock automatically converted into shares of common stock.
Three months ended
March 31,
2017
June 30,
2017
September 30,
2017
December 31,
2017
Total revenue
Total operating expenses
Total other income (expense), net
Net loss and comprehensive loss
Cumulative dividends on convertible preferred stock
Net loss attributable to common stockholders
Net loss per share attributable to common stockholders, basic
and diluted
$
$
$
$
17. Related-party Transactions
(In thousands, except per share data)
— $
9,512
1,520
(7,992) $
(4,327)
(12,319) $
— $
9,671
(111)
(9,782) $
(4,818)
(14,600) $
— $
8,017
2,346
(5,671) $
(4,197)
(9,868) $
—
11,888
(44)
(11,932)
(5,048)
(16,980)
(10.41) $
(12.81) $
(15.18) $
(17.64)
The Company has entered into promissory notes with two of its former officers to fund the early exercise of unvested stock
options. The notes are accounted for as stock options, as they are collateralized solely by the shares of common stock issued,
and the Company has a history of not requiring repayment of the notes upon termination from the Company. As of
December 31, 2017, the outstanding promissory notes totaled $0.3 million. The promissory notes were fully repaid in the first
quarter of 2018.
The Company had an agreement with its stockholders in which it agreed to indemnify each stockholder of the Company to
the extent of any tax liabilities incurred rising directly out of the non-exercise by Genentech of the GNE Option to acquire the
Company (Note 6). As a result of Genentech not exercising its option, the Company paid $3.3 million to the stockholders
representing the estimated tax liability resulting from the non-exercise of the GNE Option of which $2.3 million was paid in
2015, and the remaining $1.0 million was paid in 2016. This amount was recorded as a reduction to additional paid-in capital
as it was considered a return of capital to the stockholders.
132
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive
officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as
of December 31, 2018. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that
are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and
forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of December 31, 2018 at the reasonable assurance level.
In preparation of our financial statements to meet the requirements applicable to our initial public offering, we identified a
material weakness in the internal controls over our financial reporting. A “material weakness” is defined under SEC rules as a
deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or
detected on a timely basis by the company’s internal controls. Specifically, we did not design and maintain effective controls
over the completeness and review of the presentation and computation of net loss per share attributable to common
stockholders as well as over the presentation of outstanding common shares in the statement of equity. This control
deficiency could result in a misstatement of our accounts or disclosures that could result in a material misstatement of our
annual or interim financial statements that would not be prevented or detected on a timely basis, and accordingly, we
determined that the control deficiency constituted a material weakness.
The material weakness also resulted in immaterial changes to our previously reported net loss attributable to common
stockholders and net loss per share attributable to common stockholders, basic and diluted, for the years ended December 31,
2017 and 2016. These immaterial errors were corrected prior to the filing of our Registration Statement on Form S-1 with the
SEC on June 22, 2018.
To remediate this material weakness, we implemented the following controls:
• Formalized our financial close process and documentation
• Strengthened supervisory reviews by our financial management
• Expanded our accounting and finance team to add additional qualified accounting and finance resources
The implementation of these controls remediated the material weakness as of December 31, 2018.
Changes in Internal Control over Financial Reporting
Other than as described above, there were no changes in our internal control over financial reporting (as defined in Rules 13a-
15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended December 31, 2018 that have
materially affected, or is are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
133
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Except to the extent provided below, the information required by this Item 10 will be included in the section captioned
“Corporate Governance Matters” and the subsections thereof, “Class I Director Nominees,” “Class II Directors,” “Class III
Directors,” “Executive Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance,” in our definitive proxy
statement to be filed with the Securities and Exchange Commission (“SEC”) with respect to our 2019 Annual Meeting of
Stockholders within 120 days of the end of the fiscal year to which this report relates, which information is incorporated
herein by reference
We post our code of business conduct and ethics, which applies to all employees, including all executive officers, senior
financial officers and directors, in the “Corporate Governance” sub-section of the “Investor Relations” section
(ir.constellationpharma.com) of our corporate website at www.constellationpharma.com. Our code of business conduct and
ethics complies with Item 406 of SEC Regulation S-K and the rules of Nasdaq. We intend to disclose any changes to the code
that affect the provisions required by Item 406 of Regulation S-K, and any waivers of the code of ethics for our executive
officers, senior financial officers or directors, on our corporate website.
Item 11. Executive Compensation.
The information required by this Item 11 will be included in the section captioned “Executive Compensation” in our
definitive proxy statement to be filed with the SEC with respect to our 2019 Annual Meeting of Stockholders within 120 days
of the end of the fiscal year to which this report relates, which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item 12 will be included in the sections captioned “Security Ownership of Certain
Beneficial Owners and Management” and “Securities Authorized for Issuance under Equity Compensation Plans” in our
definitive proxy statement to be filed with the SEC with respect to our 2019 Annual Meeting of Stockholders within 120 days
of the end of the fiscal year to which this report relates, which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 will be included in the sections captioned “Related Person Transactions,” “Policies
and Procedures for Related Person Transactions” and “Board Determination of Independence” in our definitive proxy
statement to be filed with the SEC with respect to our 2019 Annual Meeting of Stockholders within 120 days of the end of
the fiscal year to which this report relates, which information is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this Item 14 will be included in the section captioned “Audit Fees and Services” and the
subsection thereof in our definitive proxy statement to be filed with the SEC with respect to our 2019 Annual Meeting of
Stockholders within 120 days of the end of the fiscal year to which this report relates, which information is incorporated
herein by reference.
134
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(1)
Consolidated Financial Statements
See Index to Consolidated Financial Statements at Item 8 herein.
(2)
Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial
statements or notes thereto.
(3)
Exhibits
The following is a list of exhibits filed as part of this Annual Report on Form 10-K.
Exhibit
Number
3.1
3.2
4.1
10.1
10.2+
10.3+
10.4+
10.5+
10.6+
10.7+
10.8+
10.9†
10.10†
10.11
Description of Exhibit
Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of
the Registrant’s Current Report on Form 8-K, filed with the SEC on July 23, 2018)
Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2 of the Registrant’s
Current Report on Form 8-K, filed with the SEC on July 23, 2018)
Specimen Stock Certificate evidencing the shares of common stock (incorporated by reference to Exhibit 4.1 of
the Registrant’s Registration Statement on Form S-1, filed with the SEC on June 22, 2018)
Fifth Amended and Restated Investor Rights Agreement, dated as of March 22, 2018, by and among the
Registrant and the other parties thereto (incorporated by reference to Exhibit 10.1 of the Registrant’s Registration
Statement on Form S-1, filed with the SEC on June 22, 2018)
Amended and Restated 2008 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 of the Registrant’s
Registration Statement on Form S-1, filed with the SEC on June 22, 2018)
Form of Incentive Stock Option Agreement under the 2008 Stock Incentive Plan (incorporated by reference to
Exhibit 10.3 of the Registrant’s Registration Statement on Form S-1, filed with the SEC on June 22, 2018)
Form of Nonstatutory Stock Option Agreement under the 2008 Stock Incentive Plan (incorporated by reference to
Exhibit 10.4 of the Registrant’s Registration Statement on Form S-1, filed with the SEC on June 22, 2018)
2018 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 of the Registrant’s Registration Statement
on Form S-1, filed with the SEC on June 22, 2018)
Form of Stock Option Agreement under the 2018 Equity Incentive Plan (incorporated by reference to Exhibit 10.6
of the Registrant’s Registration Statement on Form S-1, filed with the SEC on June 22, 2018)
2018 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.7 of the Registrant’s Registration
Statement on Form S-1, filed with the SEC on June 22, 2018)
Summary of Non-Employee Director Compensation Program (incorporated by reference to Exhibit 10.8 of the
Registrant’s Registration Statement on Form S-1, filed with the SEC on June 22, 2018)
License and Collaboration Agreement, dated as of January 9, 2012, by and among Genentech, Inc., F. Hoffman-
La Roche Ltd. and the Registrant (incorporated by reference to Exhibit 10.9 of the Registrant’s Amendment No. 1
to Registration Statement on Form S-1, filed with the SEC on July 9, 2018)
Research, Development and Commercialization Agreement, dated as of July 31, 2012, by and between the
Registrant and The Leukemia & Lymphoma Society, as amended (incorporated by reference to Exhibit 10.10 of
the Registrant’s Registration Statement on Form S-1, filed with the SEC on June 22, 2018)
Loan and Security Agreement, dated as of April 26, 2016, by and among the Registrant, Oxford Finance LLC and
Silicon Valley Bank (incorporated by reference to Exhibit 10.11 of the Registrant’s Registration Statement on
Form S-1, filed with the SEC on June 22, 2018)
135
Warrant to purchase shares of Series B preferred stock issued on June 28, 2013 by the Registrant to Oxford
Finance LLC (incorporated by reference to Exhibit 10.12 of the Registrant’s Registration Statement on Form S-1,
filed with the SEC on June 22, 2018)
Warrant to purchase shares of Series B preferred stock issued on June 28, 2013 by the Registrant to Silicon Valley
Bank (incorporated by reference to Exhibit 10.13 of the Registrant’s Registration Statement on Form S-1, filed
with the SEC on June 22, 2018)
Warrant to purchase shares of Series B preferred stock issued on September 30, 2014 by the Registrant to Oxford
Finance LLC (incorporated by reference to Exhibit 10.14 of the Registrant’s Registration Statement on Form S-1,
filed with the SEC on June 22, 2018)
Warrant to purchase shares of Series B preferred stock issued on September 30, 2014 by the Registrant to Oxford
Finance LLC (incorporated by reference to Exhibit 10.15 of the Registrant’s Registration Statement on Form S-1,
filed with the SEC on June 22, 2018)
Form of Common Stock Purchase Warrant, dated May 24, 2011 (incorporated by reference to Exhibit 10.16 of the
Registrant’s Registration Statement on Form S-1, filed with the SEC on June 22, 2018)
Lease Agreement, dated as of February 5, 2010, by and between the Registrant and ARE-MA Region No. 38
LLC, as amended (incorporated by reference to Exhibit 10.17 of the Registrant’s Registration Statement on Form
S-1, filed with the SEC on June 22, 2018)
Letter Agreement, dated March 13, 2017, by and between the Registrant and Jigar Raythatha (incorporated by
reference to Exhibit 10.18 of the Registrant’s Registration Statement on Form S-1, filed with the SEC on June 22,
2018)
Letter Agreement, dated August 30, 2017, by and between the Registrant and Emma Reeve (incorporated by
reference to Exhibit 10.19 of the Registrant’s Registration Statement on Form S-1, filed with the SEC on June 22,
2018)
10.12
10.13
10.14
10.15
10.16
10.17
10.18+
10.19+
Amended and Restated Letter Agreement, dated June 28, 2018, by and between the Registrant and Adrian
Senderowicz (incorporated by reference to Exhbit 10.5 of the Registrant’s Quarterly Report on Form 10-Q, filed
with the SEC on August 14, 2018)
10.20+†
10.21+
Amended and Restated Change in Control Severance Plan (incorporated by reference to Exhibit 10.21 of the
Registrant’s Registration Statement on Form S-1, filed with the SEC on June 22, 2018)
Consulting Agreement, dated as of May 2, 2017, by and between the Registrant and Oncology Drug
Development, LLC (incorporated by reference to Exhibit 10.22 of the Registrant’s Registration Statement on
Form S-1, filed with the SEC on June 22, 2018)
Consulting Agreement, dated as of July 15, 2017, by and between the Registrant and Dr. James Audia
(incorporated by reference to Exhibit 10.23 of the Registrant’s Registration Statement on Form S-1, filed with the
SEC on June 22, 2018)
Form of Indemnification Agreement between the Registrant and each of its Executive Officers and Directors
(incorporated by reference to Exhibit 10.24 of the Registrant’s Registration Statement on Form S-1, filed with the
SEC on June 22, 2018)
10.22+
10.23+
10.24+
21.1*
Subsidiaries of the Registrant
23.1*
Consent of Ernst & Young LLP, independent registered public accounting firm
31.1*
31.2*
32.1*
32.2*
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities
Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities
Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
136
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
+
†
*
Indicates a management contract or any compensatory plan, contract or arrangement.
Confidential treatment granted as to portions of the exhibit. Confidential materials omitted and filed separately with
the Securities and Exchange Commission.
Filed herewith.
Item 16. Form 10-K Summary.
None.
137
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 14, 2019
CONSTELLATION PHARMACEUTICALS, INC
By:
/s/ Jigar Raythatha
Jigar Raythatha
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this has been signed below by the following persons on behalf of
the Registrant in the capacities and on the dates indicated.
Name
Title
Date
SIGNATURES
/s/ Jigar Raythatha
Jigar Raythatha
President and Chief Executive Officer. Director
(Principal Executive Officer)
March 14, 2019
/s/ Emma Reeve
Emma Reeve
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 14, 2019
/s/ Mark A. Goldsmith
Mark A. Goldsmith, M.D., Ph.D.
Chairman of the Board
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
/s/ James E. Audia
James E. Audia, Ph. D
/s/ Scott Braunstein
Scott Braunstein, M.D.
/s/ Anthony Evnin
Anthony Evnin, Ph. D.
/s/ Steven L. Hoerter
Steven L. Hoerter
/s/ Peter Svennilson
Peter Svennilson
/s/ Robert Tepper
Robert Tepper, M.D.
/s/ Elizabeth G. Tréhu
Elizabeth G. Tréhu, M.D.
Director
Director
Director
Director
Director
Director
Director
138
Corporate Information
Board of Directors
Chairman, Mark Goldsmith, M.D., Ph.D. Founding President, CEO and Director, Revolution Medicines
Jigar Raythatha, President and CEO, Constellation Pharmaceuticals
James E. Audia, Ph.D., Executive Director, Chicago Biomedical Consortium
Scott Braunstein, M.D., Operating Partner, Aisling Capital
Anthony Evnin, Ph.D., Partner, Venrock
Steven L. Hoerter, President and CEO, Deciphera Pharmaceuticals
Peter Svennilson, Managing Partner and Founder, The Column Group
Robert Tepper, M.D., Partner and Co-Founder, Third Rock Ventures
Elizabeth G. Tréhu, M.D., Chief Medical Officer, Jounce Therapeutics
Executive Officers
Jigar Raythatha, President and Chief Executive Officer
Emma Reeve, Senior Vice President and Chief Financial Officer
Adrian Senderowicz, M.D., Senior Vice President and Chief Medical Officer
Patrick Trojer, Ph.D., Senior Vice President and Chief Scientific Officer
Karen H. Valentine, Senior Vice President, Chief Legal Officer and General Counsel
Jessica Christo, Senior Vice President and Chief Product Development Officer
Brad Prosek, Senior Vice President, Corporate Development
Brenda J. Sousa, Senior Vice President of Human Resources and Operations
Corporate Headquarters
215 First Street
Suite 200
Cambridge, MA 02142
Website
http://www.constellationpharma.com
Ticker Symbol
CNST: NASDAQ
Transfer Agent
Computershare, Inc.,
P.O. Box 43078,
Providence, RI 02940
Independent Registered Public Accounting Firm
Ernst & Young Global, LLP
200 Clarendon Street
Boston, MA 02116
Outside Legal Counsel
Wilmer Cutler Pickering Hale and Dorr LLP.
60 State Street
Boston, MA 02109
Investor Relations
Investor Relations
Constellation Pharmaceuticals
215 First Street
Cambridge, MA 02142
(617) 714-0539
email: ir@constellationpharma.com
Copies of our annual report on Form 10-K, proxy statements, quarterly reports on Form 10-Q, and
current reports on Form 8-K are available to shareholders upon request without charge. Please visit our
website at http://www.constellationpharma.com, send requests by e-mail to ir@constellationpharma.com
or send a written request to: Constellation Pharmaceuticals, 215 First Street, Suite 200, Cambridge,
MA 02142, Attn: Investor Relations.
Forward-Looking Statements
This Annual Report contains “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 that involve substantial risks and uncertainties, including statements
regarding the implications of preliminary clinical data, the development status of the Company’s product
candidates, the Company’s plans for future data presentations, its anticipated achievement of milestones,
including determination of proof of concept and its financial guidance regarding the period in which it will
have capital available to fund its operations. All statements, other than statements of historical facts,
contained in this Annual Report, including statements regarding the Company’s strategy, future
operations, future financial position, prospects, plans and objectives of management, are forward-looking
statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,”
“plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and similar expressions are
intended to identify forward-looking statements, although not all forward-looking statements contain these
identifying words. Any forward-looking statements are based on management’s current expectations of
future events and are subject to a number of risks and uncertainties that could cause actual results to
differ materially and adversely from those set forth in, or implied by, such forward-looking statements.
These risks and uncertainties include, but are not limited to, risks associated with Constellation’s ability
to: obtain and maintain necessary approvals from the FDA and other regulatory authorities; continue to
advance its product candidates in clinical trials; whether preliminary or interim results from a clinical trial
will be predictive of the final results of the trial; replicate in later clinical trials positive results found in
preclinical studies and early-stage clinical trials of CPI-1205, CPI-0610 and its other product candidates;
advance the development of its product candidates under the timelines it anticipates, or at all, in current
and future clinical trials; obtain, maintain or protect intellectual property rights related to its product
candidates; manage expenses; and raise the substantial additional capital needed to achieve its business
objectives. For a discussion of other risks and uncertainties, any of which could cause the Company’s
actual results to differ from those contained in the forward-looking statements, see the “Risk Factors”
section of this Annual Report, as well as discussions of potential risks, uncertainties, and other important
factors, in the Company’s most recent filings with the Securities and Exchange Commission. In addition,
the forward- looking statements included in this Annual Report represent the Company’s views as of the
date hereof and should not be relied upon as representing the Company’s views as of any date
subsequent to the date hereof. The Company anticipates that subsequent events and developments will
cause the Company’s views to change. However, while the Company may elect to update these forward-
looking statements at some point in the future, the Company specifically disclaims any obligation to do
so. CPI-1205, CPI-0610, CPI-0209, and other product candidates are investigational in nature and have
not yet been approved by the FDA or other regulatory authorities.