UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM TO
Commission File Number 001-38890
Cortexyme, Inc.
(Exact name of registrant as specified in its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
269 East Grand Ave.
South San Francisco, California
(Address of principal executive offices)
90-1024039
(I.R.S. Employer
Identification No.)
94080
(Zip Code)
Registrant’s telephone number, including area code: (415) 910-5717
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001 per share
Trading
Symbol(s)
CRTX
Name of each exchange on which registered
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
Emerging growth company
☒
☐
☐
Accelerated filer
Smaller reporting company
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7265(b)) by the registered public accounting firm that prepared or issued
its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2020 (the last business day of the registrant’s most recently completed second fiscal
quarter) was approximately $1.37 billion, based on the closing price of the registrant’s common stock, as reported by the Nasdaq Global Select Market on June 30, 2020 of $46.30 per share.
The number of shares of the registrant’s common stock outstanding as of February 24, 2021 was 29,552,123.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference certain information from the registrant’s definitive proxy statement (the “Proxy Statement”) relating to its 2021 Annual Meeting of Stockholders. The Proxy
Statement will be filed with the United States Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
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Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements. All statements other than statements of historical facts contained in
this report, including statements regarding our future results of operations and financial position, business strategy, product candidates, planned preclinical
studies and clinical trials, research and development costs, regulatory approvals, timing and likelihood of success, as well as plans and objectives of
management for future operations, are forward-looking statements. In some cases, forward-looking statements may be identified by words such as
"believe," "may," "will," "estimate," "continue," "anticipate," "intend," "could," "would," "expect," "objective," "plan," "potential," "seek," "grow," "target,"
"if," and similar expressions intended to identify forward-looking statements.
We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we
believe may affect our financial condition, results of operations, business strategy short-term and long-term business operations and objectives and
financial needs. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions, including risks described in the
section titled “Risk Factors” set forth in Part I, Item 1A of this Annual Report on Form 10-K and in our other filings with the Securities and Exchange
Commission (the "SEC"). It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent
to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may
make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Annual Report on Form 10-K may not occur, and
actual results may differ materially and adversely from those anticipated or implied in the forward-looking statements. Forward-looking statements
contained in this Annual Report on Form 10-K include, but are not limited to, statements about:
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our financial performance;
the sufficiency of our existing cash and cash equivalents to fund our future operating expenses and capital expenditure requirements;
our ability to obtain funding for our operations, including funding necessary to develop and commercialize our drug candidates;
the ability of our clinical trials to demonstrate safety and efficacy of our drug candidates, and other positive results;
the success, cost and timing of our development activities, preclinical studies and clinical trials
the timing and focus of our future clinical trials, and the reporting of data from those trials;
our plans relating to commercializing our drug candidates, if approved;
our plans and ability to establish sales, marketing and distribution infrastructure to commercialize any drug candidates for which we
obtain approval;
our ability to attract and retain key scientific and clinical personnel;
our ability to contract with third-party suppliers and manufacturers and their ability to perform adequately;
our reliance on third parties to conduct clinical trials of our drug candidates, and for the manufacture of our drug candidates for
preclinical studies and clinical trials;
our ability to expand our drug candidates into additional indications and patient populations;
the success of competing therapies that are or may become available;
the beneficial characteristics, safety and efficacy of our drug candidate;
regulatory developments in the United States and other jurisdictions;
our ability to obtain and maintain regulatory approval of our drug candidates, and any related restrictions, limitations and/or warnings
in the label of any approved drug candidate;
our plans relating to the further development and manufacturing of our drug candidates, including additional indications for which we
may pursue;
our plans and ability to obtain or protect intellectual property rights, including extensions of existing patent terms where available;
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the scope of protection we are able to establish and maintain for intellectual property rights covering our drug candidates and
technology and;
potential claims relating to our intellectual property.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-
looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we do not intend to update any of these
forward-looking statements after the date of this Annual Report on Form 10-K or to conform these statements to actual results or revised expectations.
You should read this Annual Report on Form 10-K with the understanding that our actual future results, levels of activity, performance and
events and circumstances may be materially different from what we expect.
This Annual Report on Form 10-K contains estimates, projections and other information concerning our industry, our business and the markets
for our product candidates. We obtained the industry, market and similar data set forth in this report from our own internal estimates and research and from
academic and industry research, publications, surveys and studies conducted by third parties, including governmental agencies. Information that is based on
estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may
differ materially from events and circumstances that are assumed in this information. While we believe that the data we use from third parties are reliable,
we have not separately verified these data. Further, while we believe our internal research is reliable, such research has not been verified by any third party.
You are cautioned not to give undue weight to any such information, projections and estimates.
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We may be unable for many reasons, including those that are beyond our control, to implement our business strategy successfully. The
occurrence of any single risk or any combination of risks could materially and adversely affect our business, financial condition, results of operations, cash
flows and the trading price of our common stock. Some of these risks are:
Summary of Risk Factors
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We are a clinical stage biopharmaceutical company with a limited operating history. We have no drug candidates approved for
commercial sale, we have never generated any revenue from sales, and we may never be profitable.
We have concentrated our research and development and clinical efforts on the treatment of Alzheimer’s and other degenerative diseases,
a field that has seen very limited success in drug development. Our drug candidates are based on new therapeutic approaches and novel
technology, which also makes it difficult to predict the time and cost of drug candidate development and the regulatory approval process
and exposes us to unforeseen risks.
If clinical trials of our drug candidates fail to demonstrate safety and efficacy to the satisfaction of the FDA or similar regulatory
authorities outside the United States or do not otherwise produce positive results, we may incur additional costs or experience delays in
completing, or ultimately be unable to complete, the development and commercialization of our drug candidates.
We will require substantial additional funding to finance our operations, complete the development and commercialization of atuzaginstat
(COR388) and evaluate future drug candidates. If we are unable to raise this funding when needed, we may be required to significantly
curtail, delay, reduce or eliminate one or more of our drug development programs or other operations.
We are substantially dependent on the success of atuzaginstat, which will require significant additional clinical testing before we can seek
regulatory approval and potentially launch commercial sales, receive regulatory approval or be successfully commercialized, even if
approved. If we are not successful in commercializing atuzaginstat, or are significantly delayed in doing so, our business will be
materially harmed.
We may not be successful in our efforts to create a pipeline of drug candidates or to develop commercially successful drugs. If we fail to
successfully identify, acquire, develop and commercialize additional drug candidates, our commercial opportunity may be limited.
Adverse side effects or properties, clinical holds imposed by the FDA, or other safety risks associated with atuzaginstat or any future drug
candidates could delay or preclude approval, cause us to suspend or discontinue clinical trials, abandon further development, limit the
commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.
We rely on third parties to conduct our clinical trials and some aspects of our research and preclinical testing and on third-party contract
manufacturing organizations to manufacture and supply our preclinical and clinical materials, and those third parties may not perform
satisfactorily, including failing to meet deadlines for the completion of such trials, research, manufacturing or testing.
We cannot be certain that atuzaginstat or any of our future drug candidates will receive regulatory approval, and without regulatory
approval we will not be able to market our drug candidates.
If we or any of our third-party manufacturers encounter difficulties in production of our current or any future drug candidate, or fail to
meet rigorously enforced regulatory standards, our ability to provide supply of our drug candidates for clinical trials or for patients, if
approved, could be delayed or stopped, or we may be unable to maintain a commercially viable cost structure.
If, in the future, we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market
any drug candidates we may develop, we may not be successful in commercializing those drug candidates if and when they are approved.
The COVID-19 pandemic, as well as other public health crises, catastrophic events or other events outside of our control, may adversely
affect our capabilities or the capabilities of third parties on which we depend.
We are currently conducting and in the future may conduct clinical trials for our drug candidates outside the United States, and the U.S.
Food and Drug Administration (FDA), European Medicines Agency and applicable foreign regulatory authorities may not accept data
from such trials.
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If we are unable to obtain and maintain sufficient intellectual property protection for our drug candidates, or if the
scope of the intellectual property protection is not sufficiently broad, our competitors could develop and commercialize drug candidates
similar or identical to ours, and our ability to successfully commercialize our drug candidates may be adversely affected.
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Item 1. Business.
PART I
We are a clinical stage biopharmaceutical company pioneering a novel disease-modifying therapeutic approach to treat what we believe to be a
key underlying cause of Alzheimer’s and other degenerative diseases. Our approach is based on the seminal discovery of the presence of Porphyromonas
gingivalis, or P. gingivalis, and its secreted toxic virulence factor proteases, called gingipains, in the relevant brain areas of both Alzheimer’s and
Parkinson’s disease patients. Additionally, we and other researchers have observed that P. gingivalis infection causes Alzheimer’s and Parkinson’s
pathology in animal models, and these effects have been successfully treated with a gingipain inhibitor in preclinical studies. Our proprietary lead drug
candidate, atuzaginstat (COR388), is an orally administered, brain-penetrating small molecule gingipain protease inhibitor. Atuzaginstat was well-tolerated
with no concerning safety signals in our Phase 1a and Phase 1b clinical trials conducted to date, which enrolled a total of 74 subjects, including nine
patients with mild to moderate Alzheimer’s disease.
We have fully enrolled a global pivotal Phase 2/3 clinical trial of atuzaginstat, called the GAIN (GingipAIN Inhibitor for Treatment of
Alzheimer’s Disease) trial, in mild to moderate Alzheimer’s patients. We conducted an interim analysis in December 2020 after approximately 100 patients
in each of the GAIN trial’s three arms completed 24 weeks of treatment. Based on the successful interim analysis, topline data for the fully enrolled
population of 643 subjects after the full 1-year treatment period is expected in Q4 2021. Topline efficacy data in periodontal disease is expected from a
prospective sub-study of 233 GAIN Trial subjects in Q4 2021.
The GAIN Trial included an open-label extension (OLE) in the United States that began enrollment in April 2020. On February 12, 2021, we
received a letter from the FDA stating that a partial clinical hold has been placed on atuzaginstat impacting the OLE phase of the GAIN Trial. The partial
clinical hold was initiated following the review of hepatic adverse events in the atuzaginstat trial by the FDA. These events have been reversible and
without any known long-term adverse effects for the participants. Under the hold, we have stopped enrollment and dosing in the OLE phase of the GAIN
Trial.
Atuzaginstat is the first and only selective inhibitor of gingipain activity being investigated in clinical trials for the treatment of
neurodegenerative disease. Atuzaginstat is designed to target an upstream driver of multiple pathological pathways, including amyloid beta production,
inflammation and neurodegeneration, in contrast to mechanisms of action targeting downstream effects, such as amyloid plaques and tau tangles, which
have been largely unsuccessful in clinical trials to date. Accordingly, we believe atuzaginstat could represent a disease-modifying therapy for the chronic
treatment of neurodegenerative disease.
COR588 is a second generation brain penetrant lysine gingipain inhibitor currently in IND enabling studies that will initially be positioned in
periodontal disease with potential efficacy in multiple indications. We anticipate initiating clinical studies in Q3 2021. COR788 and COR822 are lead
arginine gingipain inhibitors with therapeutic potential in various P. gingivalis related diseases.
Alzheimer’s disease represents one of the most significant unmet medical needs of our time and there are no marketed treatments that address the
underlying cause of the disease. The disease afflicts an estimated 5.7 million people in the United States and more than 30 million people worldwide and is
expected to grow to 14.0 million people in the United States by 2050. The direct costs of caring for individuals with Alzheimer’s disease and other
dementias in the United States were estimated to total $300 billion in 2020 and are projected to increase to $1.1 trillion by 2050, according to the
Alzheimer’s Association. Historical challenges in developing effective therapeutics for this disease include a poor understanding of disease causation and
animal models that do not translate to efficacy in humans. We believe our novel approach can overcome these challenges by targeting an upstream cause of
neuroinflammation and neurodegeneration. Our drug candidate has demonstrated proof of concept in a new physiological animal model that we believe is
representative of human Alzheimer’s disease pathology.
Parkinson’s disease affects more than 1 million people in the United States and 10 million worldwide. Currently approved treatments are
limited to primarily managing symptoms. Based upon the evidence to date, our Start-up activities for a Phase 2 study in early Parkinson’s disease called the
PEAK (Gingipain inhibitor for treatment of PArKinsons’ disease) Trial have been initiated and first patient in is expected in Q3 2021.
P. gingivalis has been identified as a key pathogen in the development of periodontal disease. Periodontal disease is a common age-
related disease affecting nearly 50% of the population over 50 years of age, or 65 million people, in the United States. The disease presents with symptoms
including chronic inflammation, degeneration of gum tissue and tooth loss. Periodontal disease is associated with increased risk of cardiovascular disease,
diabetes and certain cancers. The disease is often chronic and recurring due to persistent bacterial infection and antibiotic resistance. Current standard of
care for the treatment of periodontal disease commonly involves scaling and root planning to remove bacterial plaque and tartar, in addition to local
delivery of antibiotics in some cases. Atuzaginstat (COR388) reduced periodontal disease and associated bone loss in multiple animal models of
periodontal disease. Target engagement and efficacy data for atuzaginstat (COR388) in aged dogs was published in January 2020 in the journal
Pharmacology Research and Perspectives.
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Partial Clinical Hold
On February 12, 2021 the Company received a letter from the FDA stating that a partial clinical hold has been placed on atuzaginstat (COR388)
impacting the open-label extension (OLE) phase of the company’s ongoing Phase 2/3 study, the GAIN Trial. Under the hold, no new participants will be
enrolled in the OLE and currently enrolled OLE participants will be discontinued. Participants in the fully enrolled (N=643) double-blind, placebo-
controlled randomized phase of the GAIN Trial will continue to receive study drug at their assigned dose. The partial clinical hold was initiated following
the review of hepatic adverse events in the atuzaginstat trial by the FDA. These events have been reversible and without any known long-term adverse
effects for the participants. Cortexyme will continue to collaborate with the FDA on the overall development program for atuzaginstat.
Business Update Regarding COVID-19
The current COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our
employees, patients, communities and business operations, as well as the U.S. economy and financial markets. The full extent to which the COVID-19
pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly
uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its
impact and the economic impact on local, regional, national and international markets.
To date, our employees, vendors and clinical trial sites have been able to advance our GAIN clinical trial, complete enrollment and continue
the Open Label Extension for eligible patients completing the GAIN trial. At this time the impact of the COVID-19 pandemic has not resulted in changes
to our previously stated analysis timelines for the GAIN trial. We are continuing to assess the potential impact of the COVID-19 pandemic on our business
and operations, including our expenses, preclinical operations and clinical trials. Our office-based employees have been working primarily from home since
mid-March 2020, while ensuring essential staffing levels in our operations remain in place, including maintaining key personnel in our lab facility. We have
developed plans to enable all employees to voluntarily return to work in our offices and lab facility which include safety protocols, such as face coverings,
social distancing, frequent cleaning, and COVID-19 testing. We continue to assess the risks which take into account applicable public health authority and
local government guidelines and are designed to ensure community and employee safety. However, the effects of the COVID-19 pandemic continue to
rapidly evolve and even if our employees more broadly return to work in our offices and lab facility, we may have to resume a more restrictive remote work
model, whether as a result of spikes or surges in COVID-19 infection or hospitalization rates or public authority mandates. We are not currently
experiencing any significant supply chain disruptions and have drug supply for the full GAIN Trial on hand. We have diversified our vendor relationships
geographically for both starting materials and manufacturing. However, in the future, the ongoing COVID-19 pandemic, may result in the inability of
some of our suppliers to deliver drug supplies on a timely basis. We have taken and continues to take proactive measures to maintain the integrity of its
ongoing clinical trial. To potentially mitigate some of the risks of COVID-19 and based on interest and the ability to maintain milestone timelines, we
enrolled approximately an additional 70 subjects in the GAIN trial. Despite these efforts, the COVID-19 pandemic could impact timelines, subject follow
up visits and study completion. We will continue to monitor the COVID-19 situation and its impact on the ability to continue the development of, and seek
regulatory approvals for, our product candidates.
For additional information on the various risks posed by the COVID-19 pandemic, please read Item 1A. Risk Factors included in this report.
Our Lead Drug Candidate - Atuzaginstat (COR388)
We have discovered and developed a proprietary library of protease inhibitors from which we have selected our lead drug candidate,
atuzaginstat (COR388), an orally administered, brain-penetrating small molecule being developed for chronic treatment of Alzheimer’s disease,
Parkinson’s disease and periodontal disease.
We believe that the development of this compound represents a new paradigm for disease modification, based on our published and
unpublished data, as well as a large body of third-party research. We maintain rights to atuzaginstat and hold two issued U.S. patents providing composition
of matter coverage through at least 2037 and pending U.S. and foreign patent applications, which, if issued, could extend coverage.
Summary of Our Clinical and Preclinical Data
We have completed three Phase 1 a/b clinical trials for atuzaginstat which enrolled 74 subjects, including nine patients with mild to moderate
Alzheimer’s disease. We believe the following clinical and preclinical data generated to date by atuzaginstat support its development as a potential disease-
modifying treatment for Alzheimer’s disease:
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We have tested atuzaginstat in two placebo-controlled and one open label Phase 1 clinical trials: (i) a Phase 1a single ascending dose, or
SAD, study in 34 healthy volunteers (ii) a Phase 1b multiple ascending dose, or MAD, study in 24 older healthy volunteers and nine
Alzheimer’s patients and (iii) a Phase 1 open label single dose study to determine the absorption, metabolism, and excretion (AME) of
[C14]-atuzaginstat (COR388) in healthy male volunteers. We observed atuzaginstat to be well-tolerated with no concerning safety
signals.
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Our Phase 1 clinical trials also demonstrated that atuzaginstat affected a number of pharmacodynamic biomarkers associated with
Alzheimer’s disease, including blood levels of RANTES and fragments of ApoE in the CSF. Additionally, although not powered for
statistical significance, in our Phase 1b clinical trial, data from the small group of Alzheimer’s patients treated with atuzaginstat showed
improvements across several exploratory cognitive tests including:
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a statistically significant improvement in three measures on the Winterlight speech-based cognitive assessment, or
WLA, relative to baseline;
a numerical improvement in Mean Mini-Mental State Exam, or MMSE, scores relative to both baseline and placebo,
which was not statistically significant; and
an improvement in several measures of cognitive function in the Cambridge Neuropsychological Test Automated
Battery, or CANTAB, relative to both baseline and placebo, which was not statistically significant.
Using a proprietary polymerase chain reaction, or PCR, method, we identified fragmented bacterial DNA unique to P.
gingivalis bacteria in the CSF of all nine mild to moderate Alzheimer’s patients in our Phase 1b clinical trial, as well as all 50
Alzheimer’s patients in a separate human observational study. We believe that finding fragments of this specific bacterial DNA in the
CSF is consistent with a bacterial brain infection with P. gingivalis.
We and other research organizations have separately demonstrated that oral infection of wild type mice by P. gingivalis results in brain
infiltration, neuroinflammation, amyloid beta production and plaque formation. This model and pathological reproduction closely
resembles non-familial, or sporadic, Alzheimer’s disease, which represents over 95% of Alzheimer’s disease cases in humans. As a
result, we believe our new physiological animal model is representative of Alzheimer’s disease in human patients, unlike other animal
models to date, which have historically not translated to successful disease modifying treatment in humans.
In our preclinical studies using wild type mice infected with P. gingivalis, we have observed that gingipain inhibitors, including
atuzaginstat, prevented further neurodegeneration, reduced amyloid beta levels and reduced markers of neuroinflammation.
In our preclinical chronic toxicology studies, ranging from six to nine months in length, we observed a large potential therapeutic
window with no adverse findings or dose-limiting toxicities after chronic administration.
Our Phase 2/3 GAIN Clinical Trial of atuzaginstat in Mild to Moderate Alzheimer’s Patients
We have fully enrolled an ongoing global Phase 2/3 randomized, double-blind, placebo-controlled study which was initiated in April 2019,
called the GAIN Trial (GingipAIN Inhibitor for the Treatment of Alzheimer’s Disease). This study is designed to assess the efficacy, safety and tolerability
of two dose levels of atuzaginstat (40 mg and 80 mg twice daily) in subjects with mild to moderate Alzheimer’s disease compared to placebo. The study
enrolled 643 male and female subjects between the ages of 55 and 80. Enrolled subjects have a diagnosis of mild to moderate Alzheimer’s disease
dementia, with MMSE scores between 12 and 24 points, a range that is documented to provide an average decline in the placebo group sufficient to show
efficacy of a disease slowing treatment over a one-year treatment period. Randomization was stratified by baseline MMSE and ApoE4 genotype to assure
balanced distribution of mild and moderate Alzheimer’s disease and a balanced distribution of ApoE4 carriers, across treatment arms. Patients are able to
remain on stable doses of background medications, including symptomatic Alzheimer’s disease treatments, during the trial. The study consists of a
treatment period of up to 48 weeks and a safety follow-up period of 6 weeks. Periodic safety reviews are conducted by an independent Data Monitoring
Committee (“DMC”) throughout the study. An interim analysis was conducted when approximately 300 patients reached 6 months of treatment. As part of
the interim analysis, the DMC looked for futility (p< 0.05 favoring placebo), overwhelming efficacy (p< 0.005 on both co-primary outcomes), a sample
size increase if needed to improve powering, as well as safety. Based on the interim analysis, the DMC recommended continuation without a sample size
adjustment and topline data for the fully enrolled population of 643 subjects after the 1-year treatment period is expected on time in Q4 2021.
The co-primary endpoints will be the mean change in ADAS-Cog11 and change in Alzheimer’s Disease Cooperative Study Group-Activities
of Daily Living, or ADCS-ADL from baseline to the end of treatment period at 48 weeks versus placebo. A secondary endpoint in all subjects will include
change in Clinical Dementia Rating-Sum of Boxes, CDR-SB. Exploratory endpoints will include change from baseline to the end of treatment period in the
following measures: (i) MMSE score; (ii) Neuropsychiatric Inventory, or NPI; (iii) blood, saliva and CSF biomarkers; (iv) WLA measures; and (v) MRI
brain measurements. Additionally, periodontal disease, including pocket depth and bleeding on probing, are being measured at 6 months and 1 year in a
subset of 233 patients. For the interim analysis, the co-primary endpoints were the change from baseline in ADAS-Cog11 and CDR-SB versus placebo.
Placebo and treated patients who complete our Phase 2/3 GAIN trial in the United States may be eligible to participate in an open label
extension in which patients will receive 40 or 80 mg atuzaginstat (COR388) twice daily. The purpose of this extension study is to evaluate the long-term
safety and tolerability of atuzaginstat as well as encourage patient enrollment and retention.
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The Planned Phase 2 PEAK trial in early Parkinson’s disease
We recently initiated start-up activities for a potential Phase 2 study of atuzaginstat in Parkinson’s disease and expect our first patient to start
being dosed in Q3 2021.
Our Strategy
Our objective is to transform the treatment of Alzheimer’s and other degenerative diseases by creating a broad portfolio of innovative
therapeutics that target significant unmet medical needs. Our novel therapeutic approach is focused on targets that show evidence of disease causation with
impacts on multiple downstream pathways, rather than targeting downstream effects or rare genetic risk factors that are unlikely to have a large impact on
the course of disease progression. To achieve this objective, we are pursuing the following strategies:
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Rapidly advance atuzaginstat through clinical development and NDA filing for treatment of Alzheimer’s disease.
Develop atuzaginstat for other diseases. P. gingivalis infection and associated protein-cleaving, or proteolytic, gingipain activity have
been implicated in multiple disease pathologies in preclinical and epidemiological studies. We plan to conduct clinical trials of
atuzaginstat in other indications where both human observational data and preclinical experiments support its therapeutic potential.
Expand our portfolio by developing additional compounds. A key element of our portfolio strategy is to advance additional molecules
from our proprietary library. We have initiated several other protease inhibitor programs including COR588 for potential treatment of
periodontal disease and 3CL pro inhibitors for potential treatment of coronaviruses. Additionally, we are developing a positron
emission tomography, or PET, imaging agent for detection of gingipains in the human brain and advancing candidate compounds
through lead optimization.
Optimize value of atuzaginstat and future drug candidates in major markets. We own rights to COR388, COR588, COR788 and our
entire library of compounds. We plan to develop and pursue approval of atuzaginstat and other future drug candidates in major markets.
Where appropriate, we may use strategic collaborations and partnerships to accelerate the development and maximize the commercial
potential of our programs.
Pipeline Compounds
We have a library of small molecule protease inhibitors, including additional gingipain inhibitors with structures that are distinct from
atuzaginstat. P. gingivalis expresses two types of gingipains, lysine and arginine gingipain, both of which appear to be essential for toxicity and bacterial
survival. The most advanced of the lysine gingipain (Kgp) inhibitors, aside from atuzaginstat, have been shown to be potent at less than 100 picomolar
concentrations, highly selective for Kgp versus human anti-targets and to possess good oral bioavailability, favorable pharmacokinetic profiles and
sufficient brain levels in multiple preclinical species. In a 28-day toxicology study in mice, these compounds were dosed with exposures significantly
above predicted levels needed for efficacy with no changes in clinical pathology laboratory parameters, no clinical observations and no brain
histopathology findings. Based on these beneficial properties, COR588 has been selected to enter IND enabling studies and first in human clinical trials are
expected in Q3 2021.
Our library of inhibitors also includes a series of arginine gingipain (Rgp) inhibitor lead compounds. Key compounds in this series are potent
and highly selective for Rgp vs human anti-targets, with efficacy demonstrated in a mouse model of P. gingivalis brain infection. We are advancing
multiple lead compounds. Our compound collection was also used to develop activity-based probe reagents that bind the active sites of Kgp and Rgp,
enabling the detection of their activity as well as potential target engagement and inhibition by therapeutic compounds. These probe reagents are utilized in
biomarker studies helping to establish target potency and inhibition in studies.
Coronavirus, including SARS-COV2, which causes COVID-19 express a protease that is critical for viral replication called 3CL protease (also
called Main Protease, or MPro). We have invented novel small molecule inhibitors of the 3CL protease of SARS-CoV-2 and other coronaviruses which
block viral replication in cells. Cortexyme is continuing to screen analogs for potency, selectivity, pharmacokinetics, in vivo efficacy and toxicology to
identify candidate molecules for futher progression.
Additionally, we are leveraging our library of inhibitors to work towards development of a positron emission tomography, or PET, imaging
agent for detection of gingipains in the human brain. We are currently screening potential candidate compounds.
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Additional Markets of Interest
P. gingivalis infection has been associated with disease pathology in a number of large market opportunities including atherosclerosis, diabetes,
cancer, pre-term birth and arthritis. We continue to conduct preclinical research in physiological animal models representing these disease states to assess
the potential for gingipain inhibitors in our portfolio to be disease modifying.
Manufacturing
We do not currently own or operate facilities for manufacturing, storing, distributing or testing our drug candidates. We rely on third-party
contract manufacturing organizations, or CMOs, to manufacture and supply our preclinical and clinical materials to be used during the development of our
drug candidates.
We currently have sufficient atuzaginstat on hand in the United States to complete our Phase 2/3 GAIN trial in Alzheimer’s disease as currently
planned and ongoing preclinical studies. Additional cGMP drug substance campaigns with our contract manufacturers and suppliers in various countries in
Asia and Europe are in process to ensure full supply for ongoing product development campaigns and additional clinical studies of atuzaginstat.
Atuzaginstat is a low molecular weight compound isolated as a stable crystalline solid. We believe the synthesis of atuzaginstat is reliable and
reproducible from readily available starting materials, and the synthetic routes are amenable to large-scale production and do not require unusual equipment
or handling in the manufacturing process. We are in the process of further optimizing the synthetic route for commercial manufacturing as well as
developing related methodologies for the production of analog compounds in our pipeline. We expect to continue to identify and develop drug candidates
that are amenable to cost-effective production at CMOs.
Our atuzaginstat drug product is currently neat powder in a capsule which has demonstrated stability for 12 months enabling a shelf life of 24
months at room temperature. Drug substance has demonstrated stability for 36 months enabling a retest date of 48 months when stored refrigerated. We
have optimized a new formulated drug product to be marketed which we plan to use in future clinical studies. Currently our drug substance is stored
refrigerated, out of an abundance of caution while stability studies are ongoing, while the storage condition for our drug product is room temperature.
We have established relationships with several key CMOs to enable both the non-clinical and clinical supply lines for atuzaginstat active
pharmaceutical ingredient, or drug substance, as well as drug product under cGMP protocols. To date the cGMP drug substance manufacturing process has
been completed with a single vendor from readily available commercial starting materials and reagents. We currently have arrangements in place for
redundant supply of bulk drug substance with a second GMP manufacturer. The drug product capsule filling and formulation can be readily accomplished
at multiple vendors.
Commercialization Plan
We do not currently have any approved drugs and we do not expect to have any approved drugs in the near term. Therefore, we have no sales,
marketing or commercial product distribution capabilities and have no experience as a company in marketing drugs.
When and if any of our drug candidates are approaching commercialization, we intend to develop a commercialization infrastructure for those
drug candidates in the United States and potentially in certain other key markets. We may also rely on partnerships to provide commercialization
infrastructure, including sales and marketing and commercial distribution.
Competition
We face competition from a number of different sources, including large and specialty pharmaceutical and biotechnology companies, academic
research institutions, governmental agencies and public and private research institutions. We believe that the key competitive factors affecting the success
of atuzaginstat and any other drug candidates will include efficacy, safety profile, method of administration, cost, level of promotional activity and
intellectual property protection. We know of no competitors developing clinical stage therapeutics targeting P. gingivalis or gingipains for the chronic
treatment of Alzheimer’s disease.
Our drug candidates, if successfully developed and approved, will compete with current therapies approved for the treatment of Alzheimer’s
disease, which to date have been primarily targeted at treating the symptoms of such diseases rather than halting or slowing the progression of the disease.
However, in addition to such currently approved therapies, we believe that our drug candidates, if approved, may also compete with other potential
therapies intended to halt or slow the progression of neurodegenerative disease that are being developed by a number of companies and institutions,
including but not limited to potentially disease modifying therapeutics that are being developed by several large and specialty pharmaceutical and
biotechnology companies, including AbbVie Inc., Biogen Inc., Eli Lilly and Company, Eisai Co., Ltd., Merck & Company, Inc., Denali Therapeutics, Inc.,
Alector, Inc., Cassava Sciences, Inc., Biohaven Pharmaceuticals, Inc., Novartis AG and Roche Holding AG (including Genentech, its wholly owned
subsidiary), as well as companies pursuing a dysfunctional immune system approach to Alzheimer’s disease or other types of therapies.
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Intellectual Property
We maintain rights to atuzaginstat and hold issued U.S. patents providing composition of matter and method of treatment coverage of
atuzaginstat through 2037. We hold issued foreign patents providing composition of matter and medical use coverage of atuzaginstat in Australia, Austria,
Belgium, China, Colombia, Croatia, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, Iceland, Ireland, Italy,
Japan, Luxembourg, the Netherlands, Norway, Poland, Portugal, Romania, Russia, Spain, Sweden, Switzerland, Turkey, and the United Kingdom through
2035. We also hold pending U.S. and foreign patent applications, which, if issued, could create new protection or extend coverage for atuzaginstat
(COR388) and pipeline molecules: COR588, and COR788. Our foreign patent applications are currently pending in Argentina, Australia, Brazil, Canada,
Chile, China, Colombia, the European Patent Office, Hong Kong, Israel, India, Japan, South Korea, Mexico, Malaysia, New Zealand, Peru, the Philippines,
Russia, Singapore, Taiwan, and South Africa, and at the World Intellectual Property Organization.
Other patent families in our patent portfolio disclose and claim other small-molecule inhibitors of lysine gingipain and arginine gingipain,
gingipain activity probes for biological imaging, coronavirus protease inhibitors, and assay methods for the detection of microbial pathogens in
cerebrospinal fluid and other bodily fluids. As with other biotechnology and pharmaceutical companies, our ability to maintain and solidify our proprietary
and intellectual property position for our drug candidates and technologies will depend on our success in obtaining effective patent claims and enforcing
those claims if granted. However, our pending patent applications, and any patent applications that we may in the future file or license from third parties
may not result in the issuance of patents. We cannot guarantee that our owned pending patent applications, or any patent applications that we may in the
future file or license from third parties, will result in the issuance of patents. We also cannot predict the scope of claims that may be allowed or enforced in
our patents. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be
reinterpreted after issuance. Consequently, we may not obtain or maintain adequate patent protection for any of our programs and drug candidates. Any
issued patents that we may receive in the future may be challenged, invalidated or circumvented. For example, we cannot be certain of the priority rights of
inventions covered by pending third-party patent applications. If third parties prepare and file patent applications in the United States or other jurisdictions
that also claim technology or therapeutics to which we have rights, we may have to participate in interference proceedings, post-grant review, reissue, or
reexamination in the USPTO and equivalent foreign courts to determine priority rights of invention, which could result in substantial costs to us even if the
eventual outcome, which is highly unpredictable, is favorable to us. In addition, because of the extensive time required for clinical development and
regulatory review of a drug candidate we may develop, it is possible that, before any of our drug candidates can be commercialized, any related patent may
expire or remain in force for only a short period following commercialization, thereby limiting any protection such patent would afford the respective
product and any competitive advantage such patent may provide. For more information regarding the risks related to our intellectual property, see “Risk
Factors—Risks Related to Our Intellectual Property.”
The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most countries in
which we file, the patent term is 20 years from the earliest date of filing a non-provisional patent application in the United States. In the United States, the
patent term of a patent that covers an FDA-approved drug may also be eligible for patent term extension, which permits patent term restoration as
compensation for the patent term lost during the FDA regulatory review process. The 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
term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval, 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 foreign jurisdictions to extend the term of a patent that covers an approved drug. In the
future, if and when our drug candidates receive FDA approval, we expect to apply for patent term extensions on patents covering those drug candidates. We
plan to seek patent term extensions to any of our issued patents in any jurisdiction where these are available, however there is no guarantee that the
applicable authorities, including the FDA in the United States, will agree with our assessment of whether such extensions should be granted, and if granted,
the length of such extensions. For more information regarding the risks related to our intellectual property, see “Risk Factors—Risks Related to Our
Intellectual Property.”
In addition to patent protection, we also rely on trademark registration, trade secrets, know how, other proprietary information and continuing
technological innovation to develop and maintain our competitive position. We seek to protect and maintain the confidentiality of proprietary information
to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection. Although we take steps to protect
our proprietary information and trade secrets, including through contractual means with our employees and consultants, third parties may independently
develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose our technology. Thus, we
may not be able to meaningfully protect our trade secrets and we cannot guarantee, however, that these agreements will afford us adequate protection of our
intellectual property and proprietary information rights. It is our policy to require our employees, consultants, outside scientific collaborators, sponsored
researchers and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These
agreements provide that all confidential information concerning our business or financial affairs developed or made known to the individual during the
course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. Our agreements
with employees also provide that all inventions conceived by the employee in the course of employment with us or from the employee’s use of our
confidential information are our exclusive property. However, such confidentiality agreements and invention assignment agreements can be breached, and
we may not have adequate remedies for any such breach. Additionally, some of our trade secrets and know-how for which we decide to not pursue
additional patent protection may, over time, be disseminated within the industry through independent development and public presentations describing the
methodology. For more information regarding the risks related to our intellectual property, see “Risk Factors—Risks Related to Our Intellectual Property.”
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The patent positions of biotechnology companies like ours are generally uncertain and involve complex legal, scientific and factual questions.
Our commercial success will also depend in part on not infringing upon the proprietary rights of third parties. It is uncertain whether the issuance of any
third-party patent would require us to alter our development or commercial strategies, or our drugs or processes, obtain licenses or cease certain activities.
Our breach of any license agreements or our failure to obtain a license to proprietary rights required to develop or commercialize our future drug candidates
may have a material adverse impact on us. If third parties prepare and file patent applications in the United States that also claim technology to which we
have rights, we may have to participate in interference or derivation proceedings in the USPTO to determine priority of invention. For more information,
see “Risk Factors—Risks Related to Our Intellectual Property.”
Regulatory Matters
Government authorities in the United States at the federal, state and local level, and in other countries and jurisdictions, including the European
Union, extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage,
record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing, sampling and export and import of pharmaceutical
products. Generally, before a new drug can be marketed, considerable data demonstrating its quality, safety and efficacy must be obtained, organized into a
format specific for each regulatory authority, submitted for review and approved by the regulatory authority.
U.S. Drug Development
In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and its implementing regulations.
The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations
requires the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product
development process, approval process or post-market may subject an applicant to administrative or judicial sanctions. These sanctions could include,
among other actions, the FDA’s refusal to approve pending applications, withdrawal of an approval, a clinical hold, untitled or warning letters, product
recalls or market withdrawals, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government
contracts, restitution, disgorgement and civil or criminal penalties.
An applicant seeking approval to market and distribute a new drug product in the United States must typically undertake the following:
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completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s good laboratory
practice, or GLP, regulations;
submission to the FDA of an Investigational New Drug application, or IND, which must take effect before human clinical trials may
begin;
approval by an independent institutional review board, or IRB, representing each clinical site before each clinical trial may be initiated;
performance of adequate and well-controlled human clinical trials in accordance with good clinical practices, or GCP, to establish the
safety and efficacy of the proposed drug product for each proposed indication;
preparation and submission to the FDA of a New Drug Application, or NDA, requesting marketing for one or more proposed
indications;
review by an FDA advisory committee, where appropriate or if applicable;
satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities at which the product, or components
thereof, are produced to assess compliance with current Good Manufacturing Practices, or cGMP, requirements and to assure that the
facilities, methods and controls are adequate to preserve the product’s identity, strength, quality and purity;
satisfactory completion of FDA audits of clinical trial sites to assure compliance with GCPs and the integrity of the clinical data;
payment of user fees and securing FDA approval of the NDA; and
compliance with any post-approval requirements, including the potential requirement to implement a Risk Evaluation and Mitigation
Strategy, or REMS, and the potential requirement to conduct post-approval studies.
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Preclinical Studies
Before an applicant begins testing a compound with potential therapeutic value in humans, the drug candidate enters the preclinical testing
stage. Preclinical studies include laboratory evaluation of product chemistry, toxicity and formulation, as well as in vitro and animal studies to assess the
potential safety and activity of the drug for initial testing in humans and to establish a rationale for therapeutic use. The conduct of preclinical studies is
subject to federal regulations and requirements, including GLP regulations. The results of the preclinical tests, together with manufacturing information,
analytical data, any available clinical data or literature and plans for clinical 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, may continue after the IND is submitted.
The IND and IRB Processes
The authorization for an IND must be secured prior to interstate shipment and administration of any new drug 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, are submitted to the FDA as part of an IND. The FDA requires a 30-
day waiting period after the filing of each IND before clinical trials may begin. This waiting period is designed to allow the FDA to review the IND to
determine whether human research subjects will be exposed to unreasonable health risks. At any time during this 30-day period, the FDA may raise
concerns or questions about the conduct of the trials as outlined in the IND and impose a clinical hold. In this case, 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. 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 is not
allowed to proceed, while other protocols may do so. Following issuance of a clinical hold or partial clinical hold, an investigation may only resume after
the FDA has notified the sponsor that the investigation may proceed. The FDA will base that determination on information provided by the sponsor
correcting the deficiencies previously cited or otherwise satisfying the FDA that the investigation 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 IND requirements must be met unless waived. When the foreign clinical study is not conducted under an IND, the sponsor must ensure that the
study complies with certain FDA regulatory requirements in order to use the study as support for an IND or application for marketing approval.
Specifically, the FDA has promulgated regulations governing the acceptance of foreign clinical studies not conducted under an IND, establishing that such
studies will be accepted as support for an IND or application for marketing approval if the study was conducted in accordance with GCP including review
and approval by an independent ethics committee, or IEC, and informed consent from subjects, and the FDA is able to validate the data from the study
through an on-site inspection if the FDA deems such inspection necessary. The GCP requirements 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. If a marketing application is based solely on foreign clinical data, the FDA requires that the foreign data be applicable to the U.S.
population and U.S. medical practice; the studies must have been performed by clinical investigators of recognized competence; and the FDA must be able
to validate the data through an on-site inspection or other appropriate means, if the FDA deems such an inspection to be necessary.
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 drug candidate has been associated with unexpected serious
harm to patients.
Additionally, some trials are overseen by an independent group of qualified experts organized by the trial sponsor, known as a data safety
monitoring board or committee. This group provides authorization for whether or not a trial may move forward at designated check points based on access
that only the group maintains to available data from the 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 competitive climate.
Information about certain clinical trials must be submitted within specific timeframes to the National Institutes of Health, or NIH, for public
dissemination on its ClinicalTrials.gov website.
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Human Clinical Studies in Support of an NDA
Clinical trials involve the administration of the investigational product to human subjects under the supervision of qualified investigators in
accordance with GCP requirements, which include, among other things, the requirement that all research subjects provide their informed consent in writing
before their participation in any clinical trial. Clinical trials are conducted under written study protocols detailing, among other things, the inclusion and
exclusion criteria, the objectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated.
Human clinical trials are typically conducted in the following sequential phases, which may overlap or be combined:
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Phase 1: The drug is initially introduced into healthy human subjects or, in certain indications such as cancer, patients with the target
disease or condition and tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an
early indication of its effectiveness and to determine optimal dosage.
Phase 2: The drug is administered to a limited patient population to identify possible adverse effects and safety risks, to preliminarily
evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.
Phase 3: The drug is administered to an expanded patient population, generally at geographically dispersed clinical trial sites, in well-
controlled clinical trials to generate enough data to statistically evaluate the efficacy and safety of the product for approval, to establish
the overall risk-benefit profile of the product, and to provide adequate information for the labeling of the product.
Phase 4: Post-approval studies, which are conducted following initial approval, are typically conducted to gain additional experience
and data from treatment of patients in the intended therapeutic indication.
The clinical drug development phases described above are general guidelines. The phases are not clearly delineated from each other in every
regard, and it is common practice to separate (e.g., Phase 1a and 1b trials) or combine (e.g., a Phase 2/3 trial) phases, which is accepted by the FDA and
other global regulatory agencies. As one example of overlapping definitions, both Phase 2 and Phase 3 involve patient populations with assessments of
both efficacy and safety. The GAIN trial combines a Phase 2 dose-finding design to identify the optimal dosage, with a Phase 3 magnitude of enrollment
adequate to statistically evaluate the efficacy and safety. For indications like Alzheimer’s disease with cognitive endpoints requiring a large number of
subjects for sufficient powering to demonstrate convincing efficacy, it may be beneficial to advance rapidly to Phase 3 when the investigational drug is
relatively well tolerated and is not producing concerning safety signals. In other indications or for other therapeutics, a smaller Phase 2 (or even a Phase 2a
followed by a Phase 2b) may be useful and appropriate prior to progression to a larger Phase 3 study.
Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse
events occur. In addition, IND safety reports must be submitted to the FDA for any of the following: serious and unexpected suspected adverse reactions;
findings from other studies or animal or in vitro testing that suggest a significant risk in humans exposed to the drug; and any clinically important increase
in the case of a serious suspected adverse reaction over that listed in the protocol or investigator brochure. 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 drug 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 and 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, and purity 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.
Submission of an NDA to the FDA
Assuming successful completion of required clinical testing and other requirements, the results of the preclinical studies and clinical trials,
together with detailed information relating to the product’s chemistry, manufacture, controls and proposed labeling, among other things, are submitted to
the FDA as part of an NDA requesting approval to market the drug product for one or more indications. Under federal law, the submission of most NDAs is
additionally subject to an application user fee, and the sponsor of an approved NDA is also subject to annual program fees.
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The FDA conducts a preliminary review of an NDA within 60 days of its receipt and informs the sponsor by the 74th day after the FDA’s
receipt of the submission to determine whether the application is sufficiently complete to permit substantive review. The FDA may request additional
information rather than accept an NDA for filing. In this event, the application must be resubmitted with the additional information. The resubmitted
application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive
review. The FDA has agreed to specified performance goals in the review process of NDAs. Most such applications are meant to be reviewed within ten
months from the filing date, and most applications for “priority review” products are meant to be reviewed within six months of the filing date. The review
process and the Prescription Drug User Fee Act goal date may be extended by the FDA for three additional months to consider new information or
clarification provided by the applicant to address an outstanding deficiency identified by the FDA following the original submission.
Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is or will be manufactured. These pre-
approval inspections may cover all facilities associated with an NDA submission, including drug component manufacturing (such as active pharmaceutical
ingredients), finished drug product manufacturing, and control testing laboratories. The FDA will not approve an application unless it determines that the
manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within
required specifications. Additionally, before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP.
In addition, as a condition of approval, the FDA may require an applicant to develop a REMS. A REMS use risk minimization strategies
beyond the professional labeling to ensure that the benefits of the product outweigh the potential risks. To determine whether a REMS is needed, the FDA
will consider the size of the population likely to use the product, seriousness of the disease, expected benefit of the product, expected duration of treatment,
seriousness of known or potential adverse events, and whether the product is a new molecular entity. A REMS can include medication guides, physician
communication plans for healthcare professionals, and elements to assure safe use, or ETASU. ETASU may 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 patient registries. The FDA
may require a REMS before approval or post-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.
The FDA is required to refer an application for a novel drug to an advisory committee or explain why such referral was not made. Typically, an
advisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates and provides a
recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an
advisory committee, but it considers such recommendations carefully when making decisions.
Fast Track, Breakthrough Therapy and Priority Review 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
and priority review 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 interactions with the FDA and the FDA may initiate review of sections of a Fast
Track product’s application before the application is complete, subject to agreement between the sponsor and the FDA on a schedule for the submission of
the various sections of the NDA and the sponsor’s payment of applicable user fees. However, the FDA’s PDUFA goal for reviewing a Fast Track
application does not begin until the last section of the application is submitted. In addition, the Fast Track designation may be withdrawn by the FDA if the
FDA believes that the designation is no longer supported by data emerging in the clinical trial process.
Second, a product may be designated as a Breakthrough Therapy if it is intended, either alone or in combination with one or more other
products, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the product may demonstrate substantial
improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical
development. The FDA may take certain actions with respect to Breakthrough Therapies, including holding meetings with the sponsor throughout the
development process; providing timely advice to the product sponsor regarding development and approval; involving more senior staff in the review
process; assigning a cross-disciplinary project lead for the review team; and taking other steps to design the clinical trials in an efficient manner.
Third, the FDA may designate a product for priority review if it is a product that treats a serious condition and, if approved, would provide a
significant improvement in safety or effectiveness. The FDA determines, on a case-by-case basis, whether the proposed product represents a significant
improvement when compared with other available therapies. Significant improvement may be illustrated by evidence of increased effectiveness in the
treatment of a condition, elimination or substantial reduction of a treatment-limiting product reaction, documented enhancement of patient compliance that
may lead to improvement in serious outcomes, and evidence of safety and effectiveness in a new subpopulation. A priority designation is intended to direct
overall attention and resources to the evaluation of such applications, and to shorten the FDA’s goal for taking action on a marketing application from ten
months to six months.
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Even if a product qualifies for one or more of these programs, the FDA may later decide that the product no longer meets the conditions for
qualification or decide that the time period for FDA review or approval will not be shortened. Furthermore, fast track designation, priority review, and
breakthrough therapy designation do not change the standards for approval, but may expedite the development or approval process. We may explore some
of these opportunities for our drug candidates as appropriate.
Accelerated Approval Pathway
The FDA may grant accelerated approval to a drug for a serious or life-threatening condition that provides meaningful therapeutic advantage to
patients over existing treatments based upon a determination that the drug 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 irreversible morbidity or
mortality or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments.
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 drug.
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 drug, 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 drugs 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.
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 drug’s clinical benefit. As a result, a drug 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 confirm a clinical benefit during post-marketing studies, would allow the FDA to withdraw the drug
from the market on an expedited basis. All promotional materials for drug 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 NDA and accompanying information, including the results of the inspection of the manufacturing
facilities, the FDA may issue an approval letter or a complete response letter. An approval letter authorizes commercial marketing of the product with
specific prescribing information for specific indications. A complete response letter generally outlines the deficiencies in the submission and may require
substantial additional testing or information in order for the FDA to reconsider the application. If and when those deficiencies have been addressed to the
FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in two or
six months depending on the type of information included. Even with submission of this additional information, the FDA ultimately may decide that the
application does not satisfy the regulatory criteria for approval.
If the FDA approves a product, it may limit the approved indications for use for the product, require that contraindications, warnings or
precautions be included in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess the drug’s
safety after approval, require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, including
distribution restrictions or other risk management mechanisms, including REMS, which can materially affect the potential market and profitability of the
product. The FDA may prevent or limit further marketing of a product based on the results of post-market studies or surveillance programs. After approval,
many types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to
further testing requirements and FDA review and approval.
Post-Approval Requirements
Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including,
among other things, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting
of adverse experiences with the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims, are
subject to prior FDA review and approval. There also are continuing, annual user fee requirements for any marketed products and the establishments at
which such products are manufactured, as well as new application fees for supplemental applications with clinical data.
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In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their
establishments with the FDA and state agencies and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance
with cGMP requirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented.
FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon the
sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money, and effort
in the area of production and quality control to maintain cGMP compliance.
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained
or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of
unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the
approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution
or other restrictions under a REMS program. Other potential consequences include, among other things:
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restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;
safety alerts, Dear Healthcare Provider letters, press releases or other communications containing warning or other safety information
about the product;
fines, warning letters or holds on post-approval clinical trials;
refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product license
approvals;
product seizure or detention, or refusal to permit the import or export of products; or
injunctions or the imposition of civil or criminal penalties.
The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promoted
only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and
regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to
significant liability.
In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, or PDMA, which
regulates the distribution of drugs and drug samples at the federal level, and sets minimum standards for the registration and regulation of drug distributors
by the states. Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure
accountability in distribution.
Regulation Outside the United States
European Union Drug Development
Similar to the United States, the various phases of preclinical and clinical research in the European Union are subject to significant regulatory
controls. Although the EU Clinical Trials Directive 2001/20/EC has sought to harmonize the EU clinical trials regulatory framework, setting out common
rules for the control and authorization of clinical trials in the EU, the EU Member States have transposed and applied the provisions of the Directive
differently. This has led to significant variations in the member state regimes. Under the current regime, before a clinical trial can be initiated it must be
approved in each of the EU countries where the trial is to be conducted by two distinct bodies: the National Competent Authority, or NCA, and one or more
Ethics Committees, or ECs. Under the current regime all suspected unexpected serious adverse reactions to the investigated drug that occur during the
clinical trial have to be reported to the NCA and ECs of the Member State where they occurred.
The EU clinical trials legislation currently is undergoing a transition process mainly aimed at harmonizing and streamlining clinical-trial
authorization, simplifying adverse-event reporting procedures, improving the supervision of clinical trials and increasing their transparency. In April 2014,
the EU passed the Clinical Trials Regulation (Regulation 536/2014), which will replace the current Clinical Trials Directive. To ensure that the rules for
clinical trials are identical throughout the European Union, the EU Clinical Trials Regulation was passed as a regulation that is directly applicable in all EU
Member States. All clinical trials performed in the European Union are required to be conducted in accordance with the Clinical Trials Directive until the
Clinical Trials Regulation becomes applicable. According to the current plans of the EMA, the Clinical Trials Regulation is expected to become applicable
during 2020. In the meantime, Clinical Trials Directive 2001/20/EC continues to govern all clinical trials performed in the EU.
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European Union Drug Review and Approval
In the European Economic Area, or EEA, which is comprised of the 27 Member States of the European Union (including Norway and
excluding Croatia), Iceland and Liechtenstein, medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. There are
two types of marketing authorizations.
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The Community MA is issued by the European Commission through the Centralized Procedure, based on the opinion of the Committee
for Medicinal Products for Human Use, or CHMP, of the European Medicines Agency, or EMA, and is valid throughout the entire
territory of the EEA. The Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal products,
orphan medicinal products, advanced-therapy medicines such as gene-therapy, somatic cell-therapy or tissue-engineered medicines and
medicinal products containing a new active substance indicated for the treatment of HIV, AIDS, cancer, neurodegenerative disorders,
diabetes, auto-immune and other immune dysfunctions and viral diseases. The Centralized Procedure is optional for products
containing a new active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or
technical innovation or which are in the interest of public health in the EU.
National MAs, which are issued by the competent authorities of the Member States of the EEA and only cover their respective territory,
are available for products not falling within the mandatory scope of the Centralized Procedure. Where a product has already been
authorized for marketing in a Member State of the EEA, this National MA can be recognized in another Member States through the
Mutual Recognition Procedure. If the product has not received a National MA in any Member State at the time of application, it can be
approved simultaneously in various Member States through the Decentralized Procedure. Under the Decentralized Procedure an
identical dossier is submitted to the competent authorities of each of the Member States in which the MA is sought, one of which is
selected by the applicant as the Reference Member State, or RMS. The competent authority of the RMS prepares a draft assessment
report, a draft summary of the product characteristics, or SPC, and a draft of the labeling and package leaflet, which are sent to the
other Member States (referred to as the Member States Concerned) for their approval. If the Member States Concerned raise no
objections, based on a potential serious risk to public health, to the assessment, SPC, labeling or packaging proposed by the RMS, the
product is subsequently granted a national MA in all the Member States (i.e., in the RMS and the Member States Concerned).
Under the above described procedures, before granting the MA, the EMA or the competent authorities of the Member States of the EEA make
an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.
Pharmaceutical Coverage, Pricing and Reimbursement
In the United States and markets in other countries, patients who are prescribed treatments for their conditions and providers performing the
prescribed services generally rely on third-party payors to reimburse all or part of the associated healthcare costs. Patients are unlikely to use our products
unless coverage is provided, and reimbursement is adequate to cover a significant portion of the cost of our products. Significant uncertainty exists as to the
coverage and reimbursement status of products approved by the FDA and other government authorities. Even if our drug candidates are approved, sales of
our products will depend, in part, on the extent to which third-party payors, including government health programs in the United States such as Medicare
and Medicaid, commercial health insurers and managed care organizations, provide coverage, and establish adequate reimbursement levels for, such
products. The process for determining whether a payor will provide coverage for a product is separate from the process for setting the price or
reimbursement rate that the payor will pay for the product if coverage is approved. Third-party payors are increasingly challenging the prices charged,
examining the medical necessity, and reviewing the cost-effectiveness of medical products and services and imposing controls to manage costs. Third-party
payors may limit coverage to specific products on an approved list, also known as a formulary, which might not include all of the approved products for a
particular indication.
In order to secure coverage and reimbursement for any product that might be approved for sale, a company may need to conduct expensive
pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the product, in addition to the costs required to obtain
FDA or other comparable marketing approvals. Nonetheless, drug candidates may not be considered medically necessary or cost effective. A decision by a
third-party payor not to cover our drug candidates could reduce physician utilization of our products once approved and have a material adverse effect on
our sales, results of operations and financial condition. Additionally, a payor’s decision to provide coverage for a product does not imply that an adequate
reimbursement rate will be approved. Further, one payor’s determination to provide coverage for a drug product does not assure that other payors will also
provide coverage and reimbursement for the product, and the level of coverage and reimbursement can differ significantly from payor to payor. Third-party
reimbursement and coverage may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in
product development.
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Within the United States, if we obtain appropriate approval in the future to market any of our drug product candidates, those products could
potentially be covered by various government health benefit programs as well as purchased by government agencies. The participation in such programs or
the sale of products to such agencies is subject to regulation. For example:
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Medicaid is a joint federal and state program that is administered by the states for low income and disabled beneficiaries. Under the
Medicaid Drug Rebate Program, participating manufacturers are required to pay a rebate for each unit of product reimbursed by the
state Medicaid programs. The amount of the rebate for each product is set by law and may be subject to an additional discount if certain
pricing increases more than inflation.
Medicare is a federal program that is administered by the federal government that covers individuals age 65 and over as well as those
with certain disabilities. Drugs may be covered under Medicare Part D. Medicare Part D provides coverage to enrolled Medicare
patients for self-administered drugs (i.e., drugs that do not need to be injected or otherwise administered by a physician). Medicare Part
D is administered by private prescription drug plans approved by the U.S. government and each drug plan establishes its own Medicare
Part D formulary for prescription drug coverage and pricing, which the drug plan may modify from time-to-time. The prescription drug
plans negotiate pricing with manufacturers and may condition formulary placement on the availability of manufacturer discounts. Since
2011, manufacturers with marketed brand name drugs have been required to provide a 50% discount the negotiated price for on brand
name prescription drugs utilized by Medicare Part D beneficiaries when those beneficiaries reach the coverage gap in their drug
benefits, and, beginning in 2019, that discount increased to 70%.
Drug products are subject to discounted pricing when purchased by federal agencies via the Federal Supply Schedule (FSS). FSS
participation is required for a drug product to be covered and reimbursed by certain federal agencies and for coverage under Medicaid,
Medicare Part B and the Public Health Service (PHS) pharmaceutical pricing program. FSS pricing is negotiated periodically with the
Department of Veterans Affairs. FSS pricing is intended not to exceed the price that a manufacturer charges its most-favored non-
federal customer for its product. In addition, prices for drugs purchased by the Veterans Administration, Department of Defense
(including drugs purchased by military personnel and dependents through the TRICARE retail pharmacy program), Coast Guard, and
PHS are subject to a cap on pricing (known as the "federal ceiling price") and may be subject to an additional discount if pricing
increases more than the rate of inflation.
To maintain coverage of drugs under the Medicaid Drug Rebate Program, manufacturers are required to extend discounts to certain
purchasers under the PHS pharmaceutical pricing program. Purchasers eligible for discounts include hospitals that serve a
disproportionate share of financially needy patients, community health clinics and other entities that receive health services grants from
the PHS.
The containment of healthcare costs also has become a priority of federal, state and foreign governments and the prices of drugs have been a
focus in this effort. Governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on
reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more
restrictive policies in jurisdictions with existing controls and measures, could further limit a company’s revenue generated from the sale of any approved
products. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained
for one or more products for which a company or its collaborators receive marketing approval, less favorable coverage policies and reimbursement rates
may be implemented in the future. Recently there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their
commercial products, which has resulted in several Congressional inquiries and proposed bills designed to, among other things, reform government
program reimbursement methodologies. Such scrutiny has resulted in several recent congressional inquiries and proposed and enacted federal and state
legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient
programs, and reform government program reimbursement methodologies for products. At the federal level, the Trump administration's budget proposals
for fiscal years 2019 and 2020 contain further drug price control measures that could be enacted during the budget process or in other future legislation.
Further, the Trump administration released a "Blueprint" to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to
increase drug manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list
price of their products, and reduce the out of pocket costs of drug products paid by consumers. The U.S. Department of Health and Human Services has
already started soliciting feedback on some of these measures and, at the same, is immediately implementing others under its existing authority. At the state
level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical 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. Any reduction in reimbursement from Medicare and other government
programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms
may prevent the generation of revenue, attainment of profitability, or commercialization of products. In addition, it is possible that there will be further
legislation or regulation that could harm the business, financial condition and results of operations.
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Outside the United States, ensuring adequate coverage and payment for our drug candidates will face challenges. Pricing of prescription
pharmaceuticals is subject to governmental control in many countries. Pricing negotiations with governmental authorities can extend well beyond the
receipt of marketing approval for a product and may require us to conduct a clinical trial that compares the cost effectiveness of our drug candidates or
products to other available therapies. The conduct of such a clinical trial could be expensive and result in delays in our commercialization efforts.
In the European Union, pricing and reimbursement schemes vary widely from country to country. Some countries provide that products may be
marketed only after a reimbursement price has been agreed. Some countries may require the completion of additional studies that compare the cost-
effectiveness of a particular drug candidate to currently available therapies (so called health technology assessment, or HTA) in order to obtain
reimbursement or pricing approval. For example, the European Union provides options for its member states to restrict the range of products for which
their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. European Union member
states may approve a specific price for a product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing
the product on the market. Other member states allow companies to fix their own prices for products but monitor and control prescription volumes and
issue guidance to physicians to limit prescriptions. Recently, many countries in the European Union have increased the amount of discounts required on
pharmaceuticals and these efforts could continue as countries attempt to manage healthcare expenditures, especially in light of the severe fiscal and debt
crises experienced by many countries in the European Union. The downward pressure on healthcare costs in general, particularly prescription drugs, has
become intense. As a result, increasingly high barriers are being erected to the entry of new products. Political, economic and regulatory developments may
further complicate pricing negotiations, and pricing negotiations may continue after reimbursement has been obtained. Reference pricing used by various
European Union member states, and parallel trade (arbitrage between low-priced and high-priced 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 of our products, if approved in those countries.
Healthcare Law and Regulation
Healthcare providers and third-party payors play a primary role in the recommendation and prescription of drug products that are granted
marketing approval. Arrangements with providers, consultants, third-party payors and customers are subject to broadly applicable fraud and abuse, anti-
kickback, false claims laws, reporting of payments to physicians, certain other healthcare providers and teaching hospitals and patient privacy laws and
regulations and other healthcare laws and regulations that may constrain our business and/or financial arrangements. Restrictions under applicable federal
and state healthcare laws and regulations, include the following:
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the U.S. federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully
soliciting, offering, paying, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the
referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made, in
whole or in part, under a federal healthcare program such as Medicare and Medicaid;
the federal civil and criminal false claims laws, including the civil False Claims Act, and civil monetary penalties laws, which prohibit
individuals or entities from, among other things, knowingly presenting, or causing to be presented, to the federal government, claims
for payment that are false, fictitious or fraudulent or knowingly making, using or causing to made or used a false record or statement to
avoid, decrease or conceal an obligation to pay money to the federal government.
HIPAA, which created additional federal criminal laws that prohibit, among other things, knowingly and willfully executing, or
attempting to execute, a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;
HIPAA, as amended by HITECH, 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 transparency requirements known as the federal Physician Payments Sunshine Act, under the Patient Protection and
Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA, 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 U.S. Department of Health and Human Services, information related to payments and other transfers of
value made by that entity to physicians, certain other healthcare providers, and teaching hospitals, as well as ownership and investment
interests held by physicians and their immediate family members; and
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to healthcare
items or services that are reimbursed by non-governmental third-party payors, including private insurers.
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Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the
relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments
to physicians and other healthcare providers or marketing expenditures and pricing information. State and foreign laws also govern the privacy and security
of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus
complicating compliance efforts.
Healthcare Reform
A primary trend in the United States healthcare industry and elsewhere is cost containment. There have been a number of federal and state
proposals during the last few years regarding the pricing of pharmaceutical and biopharmaceutical products, limiting coverage and reimbursement for drugs
and other medical products, government control and other changes to the healthcare system in the United States
In March 2010, the United States Congress enacted the ACA, which, among other things, includes changes to the coverage and payment for
drug products under government healthcare programs. Among the provisions of the ACA of importance to our potential drug candidates are:
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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 70% 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 Affordable Care Act 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 will remain in effect through 2027 unless additional Congressional action is taken. In
January 2013, then-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.
Since its enactment, there have been executive, legal and political challenges to certain aspects of the ACA. For example, President Trump
signed several executive orders and other directives designed to delay, circumvent, or loosen certain requirements mandated by the ACA. Moreover, the
Tax Cuts and Jobs Act of 2017, or the Tax Act, was enacted on December 22, 2017, and includes a provision repealing, effective January 1, 2019, the tax-
based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year
that is commonly referred to as the “individual mandate.” Moreover, the Bipartisan Budget Act of 2018, or the BBA, among other things, amends the ACA,
effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole.” On December 14, 2018, a
U.S. District Court Judge in the Northern District of Texas, ruled that the individual mandate is a critical and inseverable feature of the ACA, and therefore,
because it was repealed as part of the Tax Act, the remaining provisions of the ACA are invalid as well. Additionally, in December 2019, the U.S. Court of
Appeals for the 5th Circuit upheld the District Court ruling that the individual mandate was unconstitutional and remanded the case back to the District
Court to determine whether the remaining provisions of the ACA are invalid as well. The U.S. Supreme Court is currently reviewing this case, but it is
unknown when a decision will be reached. Although the U.S. Supreme Court has yet ruled on the constitutionality of the ACA, on January 28, 2021,
President Biden issued an
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executive order to initiate a special enrollment period from February 15, 2021 through May 15, 2021 for purposes of obtaining health insurance coverage
through the ACA marketplace. The executive order also instructs certain governmental agencies to review and reconsider their existing policies and rules
that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements,
and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA. It is unclear how the Supreme
Court ruling, other such litigation, and the healthcare reform measures of the Biden administration will impact the ACA and our business. Other healthcare
reform measures that may be adopted in the future could have a material adverse effect on our industry generally and on our ability to maintain or increase
sales of our existing products that we successfully commercialize or to successfully commercialize our drug candidates, if approved. In addition to the
ACA, there will continue to be proposals by legislators at both the federal and state levels, regulators and third-party payors to keep healthcare costs down
while expanding individual healthcare benefits. For example, there has been increasing legislative and enforcement interest in the United States with
respect to drug pricing practices. Specifically, there have been several recent presidential executive orders, Congressional inquiries, and proposed federal
legislation designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, review the
relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs.
Human Capital Management
Cortexyme’s approach to human capital resource management starts with our mission to pioneer upstream therapeutic approaches designed to
improve the lives of patients diagnosed with Alzheimer’s and other degenerative diseases. Our industry exists in a complex regulatory environment. The
unique demands of our industry, together with the challenges of running an enterprise focused on the discovery, development, manufacture and
commercialization of innovative medicines, require talent that is highly educated and/or has significant industry experience. Additionally, for certain key
functions, we require specific scientific expertise to oversee and conduct R&D activities and the complex manufacturing requirements for
biopharmaceutical products.
Our base pay program aims to compensate management team and staff members relative to the value of the contributions of their role, which
takes into account the skills, knowledge and abilities required to perform each position, as well as the experience brought to the job. We also provide annual
incentive programs to reward our management team and staff members in alignment with achievement of Company-wide goals that are established
annually and designed to drive aspects of our strategic priorities that support and advance our strategy across our Company. Our management team and
staff members are eligible for the grant of equity awards under our long-term incentive program that are designed to align the experience of these staff with
that of our shareholders. Our management team is further incentivized through grants of performance stock option awards. All management team and staff
members also participate in a regular performance measurement process that aligns pay to performance and through which they receive performance and
development feedback.
Our benefit programs are also generally broad-based, promote health and overall well-being and emphasize saving for retirement. All
management team and regular staff members are eligible to participate in the same core health and welfare and retirement savings plans. Other employee
benefits include medical plans, dental plans, vacation and sick-pay plans, employee assistance programs, flexible spending accounts, life and accident
insurance and short and long-term disability benefits.
Our Compensation Committee provides oversight of our compensation plans, policies and programs.
As of December 31, 2020, we had 37 full-time employees, 1 part-time employee and 1 contractor. Of our full-time employees, 20 of them
have advanced degrees, including but not limited to Ph.D.’s, 13 work in clinical operations, 3 work in Chemistry, Manufacturing and Controls, 10 work in
research and development, 11 work in, general and administration and 1 in quality assurance. Our employees are primarily located in South San Francisco,
California, however, we do have employees that work from a company leased facility in San Diego, California and others that work from their residences
located across the United States. None of our employees are represented by a labor union or are a party to a collective bargaining agreement and we believe
that we have good relations with our employees.
Corporate Information
We were incorporated in Delaware on June 20, 2012. Our principal executive offices are located at 269 East Grand Avenue, South San
Francisco, CA 94080. Our telephone number at that location is (415) 910-5717. Our corporate website address is www.cortexyme.com. Information
contained on, or that may be accessed through, our website is not incorporated by reference into this Annual Report on Form 10-K and should not be
considered a part of this Annual Report on Form 10-K.
Cortexyme is a registered trademark of Cortexyme, Inc. All other brand names or trademarks appearing in this Annual Report on Form 10-K
are the property of their respective holders. Solely for convenience, the trademarks and trade names in this Annual Report on Form 10-K are referred to
without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent
under applicable law, their rights thereto.
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Available Information
We make available, free of charge through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports
on Form 8-K, and amendments to those reports, filed or furnished pursuant to Sections 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as
amended, as soon as reasonably practicable after they have been electronically filed with, or furnished to, the SEC.
The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.
Item 1A. Risk Factors.
Our operations and financial results are subject to various risks and uncertainties, including those described below that could adversely affect
our business, financial condition, results of operations, cash flows and the trading price of our common stock. You should carefully consider the following
risks, together with all of the other information in this Annual Report on Form 10-K, including our financial statements and the related notes included
elsewhere in this Annual Report on Form 10-K.
Risks Relating Our Financial Position
We are a clinical stage biopharmaceutical company with a limited operating history.
We are a clinical stage biopharmaceutical company with a limited operating history focused on developing therapeutics for degenerative
diseases, including Alzheimer’s disease. We were incorporated in June 2012 and commenced material operations in June 2014. We have a very limited
operating history, which may make it difficult to evaluate the success of our business to date and assess our future viability. Drug development is a highly
uncertain undertaking and involves a substantial degree of risk. We have recently initiated clinical trials for our lead drug candidate, atuzaginstat, and have
not initiated clinical trials for any of our other drug candidates. To date, we have not initiated or completed a pivotal clinical trial, obtained marketing
approval for any drug candidate, manufactured a commercial scale drug candidate, arranged for a third party to do so on our behalf, or conducted sales and
marketing activities necessary for successful drug candidate commercialization. Our short operating history as a company makes any assessment of our
future success and viability subject to significant uncertainty. We will encounter risks and difficulties frequently experienced by early-stage
biopharmaceutical companies in rapidly evolving fields, and we have not yet demonstrated an ability to overcome such risks and difficulties successfully. If
we do not address these risks and difficulties successfully, our business will suffer.
We have no drug candidates approved for commercial sale, we have never generated any revenue from sales, and we may never be
profitable.
We have no drug candidates approved for sale, have never generated any revenue from sales, have never been profitable and do not expect to
be profitable in the foreseeable future. We have incurred net losses in each year since our inception. For the years ended December 31, 2020, 2019 and
2018, our net losses were $76.8 million, $37.0 million and $12.5 million, respectively. We had an accumulated deficit of $146.7 million as of December 31,
2020.
To date, we have devoted most of our financial resources to our corporate overhead and research and development of atuzaginstat, including
our preclinical development activities and clinical trials of atuzaginstat. We expect that it will be several years, if ever, before we have a drug candidate
ready for commercialization. We expect to continue to incur losses for the foreseeable future, and we expect these losses to increase as we continue our
development of, and seek regulatory approvals for our drug candidates, prepare for and begin the commercialization of any approved drug candidates, and
add infrastructure and personnel to support our drug development efforts and operations as a public company. We anticipate that any such losses could be
significant for the next several years. These net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’
equity and working capital. Further, these net losses have fluctuated significantly in the past and are expected to continue to significantly fluctuate from
quarter-to-quarter or year-to-year. To become and remain profitable, we must develop and eventually commercialize a drug with significant revenue.
We may never succeed in developing a commercial drug and, even if we succeed in commercializing one or more drug candidates, we may
never generate revenues that are significant or large enough to achieve profitability. In addition, we may encounter unforeseen expenses, difficulties,
complications, delays and other known and unknown challenges. Because of these numerous risks and uncertainties, we are unable to accurately predict the
timing or amount of increased expenses or when, or if, we will be able to generate revenues or achieve profitability. If we do achieve profitability, we may
not be able to sustain or increase profitability on a quarterly or annual basis and we will continue to incur substantial research and development and other
expenditures to develop and market additional drug candidates.
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We will require substantial additional funding to finance our operations, complete the development and commercialization of atuzaginstat
and evaluate future drug candidates. If we are unable to raise this funding when needed, we may be forced to delay, reduce or eliminate our drug
development programs or other operations.
Since our inception, we have used substantial amounts of cash to fund our operations, and we expect our expenses to increase substantially in
the foreseeable future in connection with our ongoing activities, particularly as we continue the research and development of, initiate clinical trials of, and
seek marketing approval for, atuzaginstat. Developing atuzaginstat and conducting clinical trials for the treatment of Alzheimer’s disease, early Parkinson’s
disease and any other indications that we may pursue in the future will require substantial amounts of capital. In addition, if we obtain marketing approval
for atuzaginstat or any future drug candidates, we expect to incur significant commercialization expenses related to sales, marketing, manufacturing and
distribution. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations.
Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. As of December 31, 2020, we
had $184.3 million in cash, cash equivalents and investments. We believe that our existing capital resources will be sufficient to fund our projected
operations through at least 2023. However, changing circumstances may cause us to increase our spending significantly faster than we currently anticipate,
and we may need to spend more money than currently expected because of circumstances beyond our control. We may need to raise additional funds
sooner than we anticipate if we choose to expand more rapidly than we presently anticipate.
The amount and timing of our future funding requirements will depend on many factors, some of which are outside of our control, including
but not limited to:
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the progress, costs, trial design, results of and timing of our Phase 2/3 GAIN trial and other clinical trials of atuzaginstat, including our
Phase 2 PEAK trial for Parkinson’s disease and for potential additional indications that we may pursue beyond Alzheimer’s and
Parkinson’s disease;
the willingness of the U.S. Food and Drug Administration, or FDA, and European Medicines Agency, or EMA, to accept our GAIN
trial and our PEAK trial, as well as data from our completed and planned clinical and preclinical studies and other work, as the basis for
review and approval of atuzaginstat for Alzheimer’s and Parkinson’s disease;
the outcome, costs and timing of seeking and obtaining FDA, EMA and any other regulatory approvals;
the number and characteristics of drug candidates that we pursue;
our ability to manufacture sufficient quantities of our drug candidates;
our need to expand our research and development activities;
the costs associated with securing and establishing commercialization and manufacturing capabilities;
the costs of acquiring, licensing or investing in businesses, drug candidates and technologies;
our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any
payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and
enforcement of any patents or other intellectual property rights;
our need and ability to retain management and hire scientific and clinical personnel;
the effect of competing drugs and drug candidates and other market developments;
our need to implement additional internal systems and infrastructure, including financial and reporting systems; and
the economic and other terms, timing of and success of any collaboration, licensing or other arrangements into which we may enter in
the future.
Additional funding may not be available to us on acceptable terms or at all. Any such funding may result in dilution to stockholders, imposition
of debt covenants and repayment obligations, or other restrictions that may affect our business. If we are unable to obtain funding on a timely basis, we
may be required to significantly curtail one or more of our research or development programs. We also could be required to seek funds through
arrangements with collaborative partners or otherwise that may require us to relinquish rights to some of our technologies or drug candidates or otherwise
agree to terms unfavorable to us. Additionally, while the potential global economic impact and the duration of the COVID-19 pandemic may be difficult to
assess or predict, a widespread pandemic could result in significant long-term disruption of global financial markets, which could in the future reduce our
ability to access capital and negatively affect our liquidity. In addition, the trading prices for our common stock and other biopharmaceutical companies, as
well as the broader equity and debt markets, have been highly volatile as a result of the COVID-19 pandemic and the resulting impact on economic activity.
Furthermore, a recession or decline in market value resulting from the spread of COVID-19 could materially affect our operations, overall yields from our
investment portfolio, including through impairment and loss of investment, and the value of our common stock.
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Risks Related to Our Business and the Development of Our Drug Candidates
We are substantially dependent on the success of atuzaginstat, which will require significant additional clinical testing before we can seek regulatory
approval and potentially launch commercial sales, and which may not be successful in clinical trials, receive regulatory approval or be successfully
commercialized, even if approved.
To date, we have invested substantially all of our efforts and financial resources in the research and development of atuzaginstat, which is
currently our only drug candidate. Before seeking marketing approval from regulatory authorities for the sale of atuzaginstat, we must conduct extensive
clinical trials to demonstrate the safety and efficacy of the drug in humans. We are not permitted to market or promote any of our drug candidates before we
receive regulatory approval from the FDA, or comparable foreign regulatory authorities, and we may never receive such regulatory approval. We cannot be
certain that atuzaginstat will be successful in clinical trials. Further, atuzaginstat may not receive regulatory approval even if it is successful in clinical
trials. If we do not receive regulatory approvals for atuzaginstat, we may not be able to continue our operations. Our prospects, including our ability to
finance our operations and generate revenue, will depend entirely on the successful development, regulatory approval and commercialization of
atuzaginstat. The clinical and commercial success of atuzaginstat will depend on a number of factors, including the following:
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the results from our Phase 2/3 GAIN trial, as well as other clinical trials of atuzaginstat, including our Phase 2 PEAK trial for
Parkinson’s disease;
the frequency and severity of adverse effects of atuzaginstat;
the ability of third-party manufacturers to manufacture supplies of atuzaginstat and to develop, validate and maintain a commercial-
scale manufacturing process that is compliant with current good manufacturing practices, or cGMP;
our ability to demonstrate atuzaginstat’s safety and efficacy to the satisfaction of the FDA and foreign regulatory authorities;
whether we are required by the FDA to conduct additional clinical trials prior to the approval to market atuzaginstat and whether the
FDA may disagree with the number, design, size, conduct or implementation of our clinical trials;
the receipt of necessary marketing approvals from the FDA and foreign regulatory authorities;
whether the FDA may require implementation of a Risk Evaluation and Mitigation Strategy, or REMS, as a condition of approval or
post-approval;
our ability to successfully commercialize atuzaginstat, if approved for marketing and sale by the FDA or foreign regulatory authorities,
whether alone or in collaboration with others;
our success in educating physicians and patients about the benefits, administration and use of atuzaginstat;
acceptance of atuzaginstat as safe and effective by patients and the medical community;
the availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing treatments;
achieving and maintaining compliance with all regulatory requirements applicable to atuzaginstat;
the effectiveness of our own or any future collaborators’ marketing, pricing, coverage and reimbursement, sales and distribution
strategies and operations;
our ability to maintain our existing patents and obtain newly issued patents that cover atuzaginstat and to enforce such patents and other
intellectual property rights in and to atuzaginstat;
our ability to avoid third-party intellectual property claims; and
a continued acceptable safety profile of atuzaginstat following approval.
Many of these factors are beyond our control. Accordingly, we cannot assure you that we will ever be able to generate revenue through the sale
of atuzaginstat. If we are not successful in commercializing atuzaginstat, or are significantly delayed in doing so, our business will be materially harmed.
Our approach to the potential treatment of the underlying cause of Alzheimer’s and other neurodegenerative diseases is based on a novel
therapeutic approach, which exposes us to unforeseen risks.
We have discovered and are developing a proprietary library of protease inhibitors from which we have selected our lead drug candidate,
atuzaginstat, which is under development to treat Alzheimer’s disease and other degenerative diseases. Our approach is based on the discovery of P.
gingivalis and its secreted virulence factor proteases, gingipains, and represents a new approach to disease modification in Alzheimer’s disease. There is no
current academic or general consensus on the causation of Alzheimer’s disease or method of action or current drugs that purport to treat Alzheimer’s
disease. Based on the results of our preclinical and
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clinical studies to date, we believe atuzaginstat is neuroprotective and with potential to prevent further neurodegeneration, reduce amyloid beta levels and
reduce inflammation, when administered orally. However, these ideas and this approach are novel, and we currently have only limited data based on
physiological mouse models of Alzheimer’s disease and our Phase 1 a/b clinical trials which enrolled 67 subjects, including nine patients with mild to
moderate Alzheimer’s disease. Our physiological animal model may not result in disease modifying treatment in humans. We are not aware of any other
brain-penetrating gingipain protease inhibitors being tested in humans. We may ultimately discover that atuzaginstat, or any of our other protease
inhibitors, do not possess certain properties required for therapeutic effectiveness. We have no long-term evidence regarding the efficacy, safety and
tolerability of atuzaginstat or other compounds in our proprietary library of protease inhibitors in humans. We may spend substantial funds attempting to
develop these drug candidates and never succeed in doing so.
Clinical drug development is a lengthy, expensive and uncertain process. The results of preclinical studies and early clinical trials are not
always predictive of future results. Any drug candidate that we advance into clinical trials may not achieve favorable results in later clinical trials, if
any, or receive marketing approval.
The research and development of drugs is extremely risky. Only a small percentage of drug candidates that enter the development process ever
receive marketing approval. Before obtaining marketing approval from regulatory authorities for the sale of any drug candidate, we must complete
preclinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of our drug candidates in humans. Clinical testing
is expensive and can take many years to complete, and its outcome is inherently uncertain.
The results of preclinical studies and completed clinical trials are not necessarily predictive of future results, and our current drug candidate
may not be further developed or have favorable results in later studies or trials. Clinical trial failure may result from a multitude of factors including, but
not limited to, flaws in study design, dose selection, placebo effect, patient enrollment criteria and failure to demonstrate favorable safety or efficacy traits.
As such, failure in clinical trials can occur at any stage of testing. A number of companies in the pharmaceutical industry have suffered setbacks in the
advancement of their drug candidates into later-stage clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding results in earlier
preclinical studies or clinical trials. The Phase 1a and Phase 1b clinical trials for our lead drug candidate, atuzaginstat, included only nine Alzheimer’s
patients and 58 healthy volunteers. Further, the results of our earlier stage clinical trials and our preclinical animal studies may not be predictive of the
results of outcomes in later-stage clinical studies. For example, data from six Alzheimer’s patients treated with atuzaginstat in our Phase 1b clinical trial
showed improvements across several exploratory cognitive tests. However, these improvements should be interpreted with caution because they were not
all statistically significant. When evaluated in a larger patient population, atuzaginstat may not show similar improvements toward cognitive effects or may
demonstrate different chemical and pharmacological properties in patients in unforeseen or harmful ways. Based upon negative or inconclusive results, we
may decide, or regulatory authorities may require us, to conduct additional clinical trials or preclinical studies. In addition, data obtained from preclinical
trials and clinical trials are susceptible to varying interpretations, and regulatory authorities may not interpret our data as favorably as we do, which may
further delay, limit or prevent development efforts, clinical trials or marketing approval. Furthermore, as more competing drug candidates within a
particular class of drugs proceed through clinical development to regulatory review and approval, the amount and type of clinical data that may be required
by regulatory authorities may increase or change.
If we are unable to complete preclinical studies or clinical trials of current or future drug candidates, due to safety concerns, or if the results of
these trials are not sufficient to convince regulatory authorities of their safety or efficacy, we will not be able to obtain marketing approval for
commercialization on a timely basis or at all. Even if we are able to obtain marketing approval for our current and any future drug candidates, those
approvals may be for indications or dose levels that deviate from our desired approach or may contain other limitations that would adversely affect our
ability to generate revenue from sales of those drug candidates. Moreover, if we are not able to differentiate our drug candidate against other approved drug
candidates within the same class of drugs, or if any of the other circumstances described above occur, our business would be harmed and our ability to
generate revenue from that class of drugs would be severely impaired.
Adverse side effects or properties or other safety risks associated with atuzaginstat or any future drug candidates could delay or preclude
approval, cause us to suspend or discontinue clinical trials, abandon further development, limit the commercial profile of an approved label, or result
in significant negative consequences following marketing approval, if any.
There may be side effects and adverse events associated with the use of atuzaginstat or any future drug candidates. atuzaginstat was well-
tolerated with no concerning safety signals in our Phase 1a and Phase 1b clinical trials. While some subjects experienced minor changes in
electrocardiograms, or ECGs, in particular transient increases in the QRS duration and PR interval, these changes were not clinically significant, which
means they did not result in the need to consider changes to the treatment of the patient. Similar measurements were seen at higher doses in animal studies.
There were no discernable trends in the QTcF interval in human or animal studies. Relative to placebo, there were no patterns in laboratory abnormalities or
changes in ECGs, vital signs or the results of physical examinations observed during these trials that would be deemed practically relevant to the treatment
of the patient with atuzaginstat. Results from our preclinical testing and early clinical trials do not ensure that later clinical trials will provide adequate data
to demonstrate the safety of atuzaginstat.
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Results of our Phase 2/3 GAIN trial, and future clinical trials, could reveal a high and unacceptable severity and prevalence of side effects or
unexpected characteristics as the clinical trials progress to longer exposures at varying dose levels and a larger number of patients. Side effects could
include treatment-related adverse events not seen in our Phase 1a and Phase 1b clinical trials of atuzaginstat including hepatic adverse events. Undesirable
side effects caused by, or unexpected or unacceptable characteristics associated with, atuzaginstat or any future drug candidates could result in the delay,
suspension or termination of clinical trials by us, the FDA or other regulatory authorities for a number of reasons. For example, on February 12, 2021, we
received a letter from the FDA stating that a partial clinical hold has been placed on atuzaginstat impacting the OLE phase of the GAIN Trial. The partial
clinical hold was initiated following the review of hepatic adverse events in the atuzaginstat trial by the FDA. Under the hold, we have stopped enrollment
and dosing in the OLE phase of the GAIN Trial.
As we test the safety of atuzaginstat in our Phase 2/3 GAIN trial or other trials, or as the use of atuzaginstat becomes more widespread if it
receives regulatory approval, we may identify additional adverse events that were not identified or not considered significant in our earlier trials. If such
side effects become later known in development or upon approval, if any, such findings may harm our business, financial condition, results of operations
and prospects significantly. If we or others later identify undesirable side effects, a number of potentially significant negative consequences could result,
including:
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regulatory authorities may withdraw, suspend or limit approval of atuzaginstat or any future drug candidates;
we may be required to recall a drug or change the way such drug is administered to patients;
regulatory authorities may require additional warnings or statements in the labeling, such as a boxed warning or a contraindication or
issue safety alerts, press releases or other communications containing warnings or other safety information about the drug candidate,
for example, field alerts to physicians and pharmacies;
regulatory authorities may require a medication guide outlining the risks of such side effects for distribution to patients, or that we
implement a risk evaluation and mitigation strategy, or REMS, to ensure that the benefits of the drug outweigh its risks; we may be
required to change the way a drug is distributed or administered, conduct additional clinical trials or change the labeling of a drug, or
be required to conduct additional post-marketing studies or surveillance;
we could be sued and held liable for harm caused to patients;
sales of the drug may decrease significantly or atuzaginstat or any future drug could become less competitive; and
our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of atuzaginstat or any future drug candidates, if
approved, and could significantly harm our business, financial condition, results of operations and prospects.
Success in preclinical studies or earlier clinical trials may not be indicative of results in future clinical trials.
Success in preclinical testing and early clinical trials does not ensure that later clinical trials will generate the same results or otherwise provide
adequate data to demonstrate the efficacy and safety of a drug candidate. Preclinical tests and Phase 1 and Phase 2 clinical trials are primarily designed to
test safety, to study pharmacokinetics and pharmacodynamics and to understand the side effects of drug candidates at various doses and schedules. Success
in preclinical or animal studies and early clinical trials does not ensure that later large-scale efficacy trials will be successful, nor does it predict final
results. Our drug candidates may fail to show the desired safety and efficacy in clinical development despite positive results in preclinical studies or having
successfully advanced through initial clinical trials.
Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after
achieving promising results in preclinical testing and earlier-stage clinical trials. Data obtained from preclinical and clinical activities are subject to varying
interpretations, which may delay, limit or prevent regulatory approval. In addition, we may experience regulatory delays or rejections as a result of many
factors, including changes in regulatory policy during the period of our drug candidate development. Any such delays could negatively impact our
business, financial condition, results of operations and prospects.
Clinical holds imposed by the FDA could prevent us from administering atuzaginstat at higher doses than currently utilized or planned.
Preclinical data for atuzaginstat showed toxicity at very high exposure levels in mice and, as a result, the FDA placed atuzaginstat on partial
clinical hold to enforce an exposure cap on atuzaginstat dosages in humans at approximately 2.4 times the top dose of 80 mg BID in our Phase 2/3 GAIN
trial. Although the FDA has permitted the continuation of clinical trials at the planned doses of atuzaginstat, if we determine that we need to increase the
dosage of atuzaginstat in humans, the partial hold, or any future clinical holds placed by the FDA may have a negative impact on our ability to carry out our
clinical studies, which could delay or prevent the commercialization of atuzaginstat and may harm our business and financial condition. In addition, the
FDA placed a partial clinical hold on atuzaginstat impacting the OLE phase of the GAIN Trial following the review of hepatic adverse events in the
atuzaginstat trial by the FDA. Under the hold, we have stopped enrollment and dosing in the OLE phase of the GAIN Trial.
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We may not be successful in our efforts to continue to create a pipeline of drug candidates or to develop commercially successful drugs. If
we fail to successfully identify and develop additional drug candidates, our commercial opportunity may be limited.
One of our strategies is to identify and pursue clinical development of additional drug candidates. We currently have four programs in the early
phase of development, all of which are in the research, discovery and preclinical stages of development. Identifying, developing, obtaining regulatory
approval and commercializing additional drug candidates will require substantial additional funding and is prone to the risks of failure inherent in drug
development. We cannot provide you any assurance that we will be able to successfully identify or acquire additional drug candidates, advance any of these
additional drug candidates through the development process, successfully commercialize any such additional drug candidates, if approved, or assemble
sufficient resources to identify, acquire, develop or, if approved, commercialize additional drug candidates. If we are unable to successfully identify,
acquire, develop and commercialize additional drug candidates, our commercial opportunity may be limited.
We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and
commercialization of our drug candidates.
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 drug candidates, including:
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regulatory authorities, institutional review boards or ethics committees, or IRBs or ECs, may not authorize us or our investigators to
commence a clinical trial or conduct a clinical trial at a prospective trial site or we may fail to reach a consensus with regulatory
authorities on trial design;
regulatory authorities in jurisdictions in which we seek to conduct clinical trials may differ from each other on our trial design, and it
may be difficult or impossible to satisfy all such authorities with one approach;
we may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with
prospective trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different contract
research organizations, or CROs, and trial sites;
clinical trials of our drug candidates may produce negative or inconclusive results, and we may decide, or regulatory authorities may
require us, to conduct additional clinical trials or abandon drug development programs;
the number of patients required for clinical trials of our drug candidates may be larger than we anticipate;
enrollment in our clinical trials may be slower than we anticipate or participants may drop out of these clinical trials at a higher rate
than we anticipate;
changes to clinical trial protocols;
our third-party contractors, including clinical investigators, contract manufacturers and vendors may fail to comply with applicable
regulatory requirements, lose their licenses or permits, or otherwise fail, or lose the ability to, meet their contractual obligations to us in
a timely manner, or at all;
we might have to suspend or terminate clinical trials of our drug candidates for various reasons, including a finding that the participants
are being exposed to unacceptable health risks;
regulatory authorities 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;
the cost of clinical trials of our drug candidates may be greater than we anticipate, and we may lack adequate funding to continue one
or more clinical trials;
the supply or quality of our drug candidates or other materials necessary to conduct clinical trials of our drug candidates may be
insufficient or inadequate;
our drug candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulatory
authorities or institutional review boards to suspend or terminate the trials; and
occurrence of serious adverse events in trials of the same class of agents conducted by other companies.
the occurrence of natural disasters, such as earthquakes, tsunamis, power shortages or outages, floods, or monsoons, public health
crises, such as pandemics and epidemics, political crisis, such as terrorism, war, political instability or other conflict, cyberattacks, or
other events outside of our control occurring at or around our clinical trials sites in the United States or Europe.
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For example, enrollment in our clinical trials may be delayed or impeded as a result of the COVID-19 pandemic due to prioritization of
healthcare resources toward the pandemic, and some patients may not be able to comply with clinical trial protocols if quarantines impede patient
movement or interrupt healthcare services. In addition, we may experience increased rates of patients withdrawing from our clinical trials following
enrollment as a result of contracting COVID-19 or other health conditions or because of quarantines or travel limitations (whether voluntary or required) If
the patients involved with our clinical trials contract COVID-19, we may have more adverse events and deaths in our clinical trials as a result. The
Company has taken and continues to take proactive measures to maintain the integrity of its ongoing clinical trial. For example, to potentially mitigate
some of the risks of the COVID-19 pandemic and based on interest and the ability to maintain milestone timelines, we enrolled approximately 70
additional subjects in the GAIN trial. However, these measures may not be successful, and the occurrence of any of these events could delay or impede our
ability to release clinical results, delay or impact our clinical trials, including the integrity and completeness of subject data and clinical study endpoints,
and could adversely impact our product candidate testing, development and timelines.
Clinical trials are expensive and time consuming, additional or unsuccessful clinical trials could cause our clinical development activities
to be delayed or otherwise adversely affected.
If we are required to conduct additional clinical trials or other testing of our drug candidates beyond those that we currently contemplate, if we
are unable to successfully complete clinical trials of our drug 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:
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be delayed in obtaining marketing approval for our drug candidates;
not obtain marketing approval at all;
obtain approval for indications, dosages or patient populations that are not as broad as intended or desired;
obtain approval with labeling that includes significant use or distribution restrictions or safety warnings, including boxed warnings;
be subject to additional post-marketing testing requirements; or
have the medicine removed from the market after obtaining marketing approval.
Drug development costs will also increase if we experience delays in testing or in obtaining marketing approvals. We do not know whether any
clinical trials will begin as planned, will need to be amended or will be completed on schedule, or at all. Significant clinical trial delays also could shorten
any periods during which we may have the exclusive right to commercialize our drug candidates, could allow our competitors to bring drug candidates to
market before we do, and could impair our ability to successfully commercialize our drug candidates, if approved, any of which may harm our business and
results of operations. In addition, many of the factors that cause, or lead to a delay in the commencement or completion of, clinical trials may also
ultimately lead to termination or suspension of a clinical trial. Any of these occurrences may harm our business, financial condition and prospects
significantly. Any termination of any clinical trial of our drug candidates will harm our commercial prospects and our ability to generate revenues.
Risks Relating to Regulatory Review and Approval of Our Drug Candidates and Other Legal Compliance Matters
We cannot be certain that atuzaginstat or any of our future drug candidates will receive regulatory approval, and without regulatory
approval we will not be able to market our drug candidates.
We currently have no drug candidates approved for sale and we cannot guarantee that we will ever have marketable drug candidates. We are
initially developing atuzaginstat for the treatment of patients with Alzheimer’s disease and are also consulting with investigators to consider other possible
indications. Our ability to generate revenue related to sales, if ever, will depend on the successful development and regulatory approval of atuzaginstat for
the treatment of Alzheimer’s disease and other indications.
The development of a drug candidate and issues relating to its approval and marketing are subject to extensive regulation by the FDA in the
United States, the EMA in Europe and regulatory authorities in other countries, with regulations differing from country to country. We are not permitted to
market our drug candidates in the United States or Europe until we receive approval of a new drug application, or NDA, from the FDA or a marketing
authorization application, or MAA, from the EMA, respectively. We have not submitted any marketing applications for any of our drug candidates.
NDAs and MAAs must include extensive preclinical and clinical data and supporting information to establish the drug candidate’s safety and
effectiveness for each desired indication. NDAs and MAAs must also include significant information regarding the chemistry, manufacturing and controls
for the drug. Obtaining approval of a NDA or a MAA is a lengthy, expensive and uncertain process, and we may not be successful in obtaining approval.
The FDA and the EMA review processes can take years to complete and approval is never guaranteed. If we submit a NDA to the FDA, the FDA must
decide whether to accept or reject the submission for filing. We cannot be certain that any submissions will be accepted for filing and review by the FDA.
Regulators of other jurisdictions,
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such as the EMA, have their own procedures for approval of drug candidates. Even if a drug is approved, the FDA or the EMA, as the case may be, may
limit the indications for which the drug may be marketed, require extensive warnings on the drug labeling or require expensive and time-consuming clinical
trials or reporting as conditions of approval. Regulatory authorities in countries outside of the United States and Europe also have requirements for
approval of drug candidates with which we must comply prior to marketing in those countries. Obtaining regulatory approval for marketing of a drug
candidate in one country does not ensure that we will be able to obtain regulatory approval in any other country. In addition, delays in approvals or
rejections of marketing applications in the United States, Europe or other countries may be based upon many factors, including regulatory requests for
additional analyses, reports, data, preclinical studies and clinical trials, regulatory questions regarding different interpretations of data and results, changes
in regulatory policy during the period of drug development and the emergence of new information regarding our drug candidates or other drug candidates.
Also, regulatory approval for any of our drug candidates may be withdrawn.
We initiated our Phase 2/3 GAIN trial in patients with Alzheimer’s disease in April 2019. Before we submit a NDA to the FDA or a MAA to
the EMA for atuzaginstat for the treatment of patients with Alzheimer’s disease, we must successfully complete at least our Phase 2/3 GAIN trial and
potentially additional late-stage clinical trials. The FDA generally requires two pivotal clinical trials to support approval. In addition, we must scale up
manufacturing and complete other standard preclinical and clinical studies. We cannot predict whether our future trials will be successful or whether
regulators will agree with our conclusions regarding the preclinical studies and clinical trials we have conducted to date and will conduct in the future.
We have concentrated our research and development efforts on the treatment of degenerative diseases, a field that has seen very limited
success in drug development. Further, our drug candidates are based on new approaches and novel technology, which makes it difficult to predict the
time and cost of drug candidate development and the regulatory approval process.
We have focused our research and development efforts on addressing degenerative diseases. Collectively, efforts by pharmaceutical companies
in the field of degenerative diseases have seen very limited successes in drug development. There are few effective therapeutic options available for
patients with Alzheimer’s disease and other degenerative diseases. Our future success is highly dependent on the successful development of our technology
and our drug candidates for treating degenerative diseases. Developing and, if approved, commercializing our drug candidates for treatment of degenerative
diseases subjects us to a number of challenges, including ensuring that we have selected the optimal dose of the therapeutic to block gingipains in the brain,
executing an appropriate trial to test for efficacy and obtaining regulatory approval from the FDA and other regulatory authorities.
Our approach to the treatment of degenerative diseases aims to understand the cause of disease pathogensis, select the right patient population,
discover and develop potent and selective small molecules that act directly in the brain or other organs on these targets, and leverage both preclinical and
human pharmacodynamic data for dose selection. This strategy may not prove to be successful. We cannot be sure that our approach will yield satisfactory
therapeutic drug candidates that are safe and effective, scalable, or profitable. Moreover, public perception of drug safety issues, including adoption of new
therapeutics or novel approaches to treatment, may adversely influence the willingness of subjects to participate in clinical trials, or if approved, of
physicians to prescribe novel treatments.
Clinical failure can occur at any stage of clinical development and we have never conducted a Phase 3 trial or submitted an NDA or MAA
before.
We have initiated our Phase 2/3 GAIN trial for Alzheimer’s disease. The conduct of our Phase 2/3 GAIN trials and the submission of a
successful NDA is a complicated process. As an organization, we have never conducted a registrational clinical trial and have limited experience in
preparing, submitting and prosecuting regulatory filings, and have not submitted a NDA. Failure to commence or complete, or delays in, our planned
clinical trials would prevent us from or delay us in seeking approval for, and if approved, commercializing our drug candidates, and failure to successfully
complete any of these activities in a timely manner for any of our drug candidates could have a material adverse impact on our business and financial
performance. The commencement, enrollment and completion of clinical trials can be delayed or suspended for a variety of reasons, including:
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inability to obtain sufficient funds required for a clinical trial;
inability to reach agreements on acceptable terms with prospective CROs and trial sites, the terms of which can be subject to extensive
negotiation and may vary significantly among different CROs and trial sites;
clinical holds, other regulatory objections to commencing or continuing a clinical trial or the inability to obtain regulatory approval to
commence a clinical trial in countries that require such approvals;
discussions with the FDA or non-U.S. regulators regarding the scope or design of our clinical trials;
inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial
programs, including some that may be for the same indications targeted by our drug candidates;
inability to obtain approval from IRBs to conduct a clinical trial at their respective sites;
severe or unexpected drug-related adverse effects experienced by patients;
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inability to timely manufacture sufficient quantities of the drug candidate required for a clinical trial;
difficulty recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including meeting the enrollment
criteria for our study and competition from other clinical trial programs for the same indications as our drug candidates;
inability to retain enrolled patients after a clinical trial is underway; and
enrollment may be delayed or interrupted or patients may drop out of clinical trials such as our Phase 2/3 Gain trial due to or the fear of
natural disasters, such as earthquakes, tsunamis, power shortages or outages, floods, or monsoons, public health crises, such as
pandemics and epidemics, political crisis, such as terrorism, war, political instability or other conflict, cyberattacks, or other events
outside of our control occurring at or around our clinical trials sites in the United States or Europe. For example, the coronavirus
outbreak may delay or impede enrollment in our clinical trials due to prioritization of hospital resources toward the outbreak, and some
patients may not be able to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services,
which would delay our ability to release clinical results and could impact our product candidate testing, development and timelines.
In addition, the design of a clinical trial can determine whether its results will support approval of a drug and flaws in the design of a clinical
trial may not become apparent until the clinical trial is well-advanced. Changes in regulatory requirements and guidance may also occur and we may need
to amend clinical trial protocols to reflect these changes with appropriate regulatory authorities. Amendments may require us to resubmit clinical trial
protocols to IRBs for re-examination, which may impact the costs, timing or successful completion of a clinical trial.
In addition, if we are required to conduct additional clinical trials or other preclinical studies of our drug candidates beyond those
contemplated, our ability to obtain regulatory approval of these drug candidates and generate revenue from their sales would be similarly harmed.
If clinical trials of our drug candidates fail to demonstrate safety and efficacy to the satisfaction of the FDA or similar regulatory
authorities outside the United States or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or
ultimately be unable to complete, the development and commercialization of our drug candidates.
Before obtaining regulatory approvals for the commercial sale of any of our drug candidates, we must demonstrate through lengthy, complex
and expensive preclinical studies and clinical trials that our drug candidates are both safe and effective for use in each target indication. Each drug
candidate must demonstrate an adequate risk versus benefit profile in its intended patient population and for its intended use.
Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during
the clinical trial process. The results of preclinical studies of our drug candidates may not be predictive of the results of early-stage or later-stage clinical
trials, and results of early clinical trials of our drug candidates may not be predictive of the results of later-stage clinical trials. The results of clinical trials
in one set of patients or disease indications may not be predictive of those obtained in another. In some instances, there can be significant variability in
safety or efficacy results between different clinical trials of the same drug candidate due to numerous factors, including changes in trial procedures set forth
in protocols, differences in the size and type of the patient populations, changes in and adherence to the dosing regimen and other clinical trial protocols
and the rate of dropout among clinical trial participants. Drug candidates in later stages of clinical trials may fail to show the desired safety and efficacy
profile despite having progressed through preclinical studies and initial clinical trials. A number of companies in the pharmaceutical industry have suffered
significant setbacks in advanced clinical trials due to lack of efficacy or unacceptable safety issues, notwithstanding promising results in earlier trials. This
is particularly true in degenerative diseases, where failure rates historically have been higher than in many other disease areas. Most drug candidates that
begin clinical trials are never approved by regulatory authorities for commercialization.
In addition, even if such clinical trials are successfully completed, we cannot guarantee that the FDA or foreign regulatory authorities will
interpret the results as we do, and more trials could be required before we submit our drug candidates for approval. Moreover, principal investigators for
our clinical trials may serve as scientific advisors or consultants to us from time to time and receive compensation in connection with such services. Under
certain circumstances, we may be required to report some of these relationships to the FDA or other regulatory authorities. The FDA or other regulatory
authorities may conclude that a financial relationship between us and a principal investigator has created a conflict of interest or otherwise affected the
integrity of the study. The FDA or other regulatory authorities may therefore question the integrity of the data generated at the applicable clinical trial site
and the utility of the clinical trial itself may be jeopardized. This could result in a delay in approval, or rejection, of our marketing applications by the FDA
or other regulatory authorities, as the case may be, and may ultimately lead to the denial of marketing approval of any of our drug candidates. To the extent
that the results of the trials are not satisfactory to the FDA or foreign regulatory authorities for support of a marketing application, we may be required to
expend significant resources, which may not be available to us, to conduct additional trials in support of potential approval of our drug candidates. Even if
regulatory approval is secured for any of our drug candidates, the terms of such approval may limit the scope and use of our drug candidate, which may
also limit its commercial potential.
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We expect to rely on third parties to conduct our clinical trials and some aspects of our research and preclinical testing, and those third
parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials, research, or testing.
We currently rely and expect to continue to rely on third parties, such as CROs, clinical data management organizations, medical institutions,
and clinical investigators, to conduct some aspects of our research and preclinical testing and our clinical trials. Any of these third parties may terminate
their engagements with us or be unable to fulfill their contractual obligations. If we need to enter into alternative arrangements, it would delay our drug
development activities.
Our reliance on these third parties for research and development activities reduces our control over these activities but does not relieve us of
our responsibilities. For example, we 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 current good clinical practice regulations, or GCP, for
conducting, recording, and reporting the results of clinical trials to assure that data and reported results are credible, reproducible 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 within certain 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 any drug
candidates we may develop and will not be able to, or may be delayed in our efforts to, successfully commercialize our medicines.
We also expect to rely on other third parties to store and distribute drug supplies for our clinical trials. Any performance failure on the part of
our distributors could delay clinical development or marketing approval of any drug candidates we may develop or commercialization of our medicines,
producing additional losses and depriving us of potential drug revenue.
We face significant competition in an environment of rapid technological and scientific change, and there is a possibility that our
competitors may achieve regulatory approval before us or develop therapies that are safer, more advanced or more effective than ours.
The development and commercialization of new drugs is highly competitive. Moreover, the degenerative disease field is characterized by
strong competition and a strong emphasis on intellectual property. We may face competition with respect to any drug candidates that we seek to develop or
commercialize in the future from major pharmaceutical companies, specialty pharmaceutical companies, and biotechnology companies worldwide.
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.
There are a number of large pharmaceutical and biotechnology companies that are currently pursuing the development of drug candidates for
the treatment of the degenerative disease indications for which we have research programs, including Alzheimer’s disease. Companies that we are aware
are developing therapeutics in the degenerative disease field include large companies with significant financial resources, such as AbbVie Inc., Biogen Inc.,
Eli Lilly and Company, Eisai Co., Ltd., Merck & Company, Inc., Novartis AG, and Roche Holding AG Group (including Genentech, its wholly owned
subsidiary), as well as companies pursuing a dysfunctional immune system approach to Alzheimer’s disease or other types of therapies.
Many of our current or potential competitors, either alone or with their strategic partners, have significantly greater financial resources and
expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals, and marketing
approved drug candidates 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 or early-stage companies may also prove to be significant competitors, particularly
through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified
scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies
complementary to, or necessary for, our programs. Our commercial opportunity could be reduced or eliminated if our competitors develop and
commercialize drug candidates that are safer, more effective, have fewer or less severe side effects, are more convenient, or are less expensive than any
drug candidates that we may develop. Furthermore, currently approved drug candidates could be discovered to have application for treatment of
degenerative disease indications, which could give such drug candidates significant regulatory and market timing advantages over any of our drug
candidates. Our competitors also may obtain FDA, EMA or other regulatory approval for their drug candidates more rapidly than we may obtain approval
for ours from the FDA for indications our drug candidates are targeting, which could result in our competitors establishing a strong market position before
we are able to enter the market.
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Additionally, drug candidates or technologies developed by our competitors may render our potential drug candidates uneconomical or
obsolete, and we may not be successful in marketing any drug candidates we may develop against competitors. If our competitors market drug candidates
that are more effective, safer or less expensive than our drug candidates, if approved, or that reach the market sooner than our drug candidates, if approved,
we may not achieve commercial success. In addition, the pharmaceutical industry is characterized by rapid technological change. If we fail to stay at the
forefront of technological change, we may be unable to compete effectively. Technological advances or drug candidates developed by our competitors may
render our technologies or drug candidates obsolete, less competitive or not economical.
If we or any of our third-party manufacturers encounter difficulties in production of our current or any future drug candidate, or fail to
meet rigorously enforced regulatory standards, our ability to provide supply of our drug candidates for clinical trials or for patients, if approved, could
be delayed or stopped, or we may be unable to maintain a commercially viable cost structure.
The processes involved in manufacturing our drug candidates are highly regulated and subject to multiple risks. As drug candidates are
developed through preclinical studies to late-stage clinical trials towards approval and commercialization, it is common that various aspects of the
development program, such as manufacturing methods, are altered along the way in an effort to optimize processes and results. Such changes carry the risk
that they will not achieve these intended objectives, and any of these changes could cause our drug candidates to perform differently and affect the results
of planned clinical trials or other future clinical trials.
In order to conduct clinical trials of our drug candidates, or supply commercial drug candidates, if approved, we will need to manufacture them
in small and large quantities. We currently rely on third parties to manufacture atuzaginstat for clinical trial purposes, and our manufacturing partners will
have to modify and scale-up the manufacturing process when we transition to commercialization of our drug candidates. Our manufacturing partners may
be unable to successfully modify or scale-up the manufacturing capacity for any of our drug candidates in a timely or cost-effective manner, or at all. In
addition, quality issues may arise during scale-up activities. If our manufacturing partners are unable to successfully scale-up the manufacture of our drug
candidates in sufficient quality and quantity, the development, testing and clinical trials of that drug candidate may be delayed or become infeasible, and
regulatory approval or commercial launch of any resulting drug may be delayed or not obtained, which could significantly harm our business. The same risks
would apply to our internal manufacturing facilities, should we in the future decide to build internal manufacturing capacity. In addition, building internal
manufacturing capacity would carry significant risks in terms of being able to plan, design and execute on a complex project to build manufacturing
facilities in a timely and cost-efficient manner.
In addition, the manufacturing process for any drug candidates that we may develop is subject to FDA, EMA and foreign regulatory
requirements, and continuous oversight, and we will need to contract with manufacturers who can meet all applicable FDA, EMA and foreign regulatory
authority requirements, including complying with current good manufacturing practices, or cGMPs, on an ongoing basis. If we or our third-party
manufacturers are unable to reliably produce drug candidates in accordance with the requirements of the FDA, EMA or other regulatory authorities, we
may not obtain or maintain the approvals we need to commercialize such drug candidates. Even if we obtain regulatory approval for any of our drug
candidates, there is no assurance that either we or our third party contract manufacturers will be able to manufacture the approved drug in accordance with
the requirements of the FDA, EMA or other regulatory authorities, to produce it in sufficient quantities to meet the requirements for the potential launch of
the drug, or to meet potential future demand. Any of these challenges could delay completion of clinical trials, require bridging clinical trials or the
repetition of one or more clinical trials, increase clinical trial costs, delay approval of our drug candidate, impair commercialization efforts, increase our
cost of goods, and have an adverse effect on our business, financial condition, results of operations and growth prospects.
If, in the future, we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market
any drug candidates we may develop, we may not be successful in commercializing those drug 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 drug
candidates. To achieve commercial success for any approved drug candidate for which we retain sales and marketing responsibilities, we must either
develop a sales and marketing organization or outsource these functions to third parties. In the future, we may choose to build a focused sales, marketing,
and commercial support infrastructure to sell, or participate in sales activities with collaborators for, some of our drug candidates if and when they are
approved.
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There are risks involved with both establishing our own commercial capabilities and entering into arrangements with third parties to perform
these services. For example, factors that may inhibit our efforts to commercialize any approved drug candidates on our own include:
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our inability to recruit and retain adequate numbers of effective sales, marketing, coverage or reimbursement, customer service,
medical affairs, and other support personnel;
the inability of sales personnel to obtain access to physicians or persuade adequate numbers of physicians to prescribe any future
approved drug candidates;
the inability of reimbursement professionals to negotiate arrangements for formulary access, reimbursement, and other acceptance by
payors;
the inability to price our drug candidates at a sufficient price point to ensure an adequate and attractive level of profitability;
restricted or closed distribution channels that make it difficult to distribute our drug candidates to segments of the patient population;
the lack of complementary drug candidates to be offered by sales personnel, which may put us at a competitive disadvantage relative to
companies with more extensive drug candidate lines; and
unforeseen costs and expenses associated with creating an independent commercialization organization.
If the commercial launch of a drug candidate for which we recruit a sales force and establish marketing and other commercialization
capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may
be costly, and our investment would be lost if we cannot retain or reposition our commercialization personnel.
If we enter into arrangements with third parties to perform sales, marketing, commercial support, and distribution services, our sales revenue or
the profitability of sales revenue may be lower than if we were to market and sell any drug candidates we may develop ourselves. In addition, we may not be
successful in entering into arrangements with third parties to commercialize our drug candidates or may be unable to do so on terms that are favorable to
us. We may 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 drug
candidates effectively. If we do not establish commercialization capabilities successfully, either on our own or in collaboration with third parties, we will
not be successful in commercializing our drug candidates if approved.
If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of
our drug candidates.
We face an inherent risk of product liability as a result of the clinical testing of our drug candidates and will face an even greater risk when and
if we commercialize any drug candidates. For example, we may be sued if our drug candidates cause or are perceived to cause injury or are found to be
otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in
manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Product liability
claims may be brought against us by participants enrolled in our clinical trials, patients, health care providers or others using, administering or selling our
drug candidates. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability
claims, we may incur substantial liabilities or be required to limit testing and commercialization of our drug candidates. Even successful defense would
require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
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decreased or interrupted demand for our drug candidates;
withdrawal of clinical trial participants and inability to continue clinical trials;
initiation of investigations by regulators;
costs to defend the related litigation;
a diversion of management’s time and our resources;
substantial monetary awards to trial participants or patients;
drug recalls, withdrawals or labeling, marketing or promotional restrictions;
termination of clinical trial sites or entire trial programs;
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injury to our reputation and significant negative media attention;
loss of revenue;
exhaustion of any available insurance and our capital resources;
the inability to commercialize any drug candidate; and
a decline in our share price.
Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could
prevent or inhibit the commercialization of drug candidates we develop, alone or with potential collaborators. Our insurance policies may have various
exclusions, and we may be subject to a product liability claim for which we have no coverage. We may have to pay any amounts awarded by a court or
negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain,
sufficient capital to pay such amounts. Even if our agreements with any future corporate collaborators entitle us to indemnification against losses, such
indemnification may not be available or adequate should any claim arise.
We may be exposed to a variety of international risks that could materially adversely affect our business.
Our business is subject to risks associated with conducting business internationally. Some of our suppliers and clinical trial centers are located
outside of the United States. In particular, we intend to conduct clinical trial operations in Australia. We may enter into agreements with third parties for the
development and commercialization of drug candidates in international markets. International business relationships will subject us to additional risks that
may materially adversely affect our ability to attain or sustain profitable operations, including:
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differing regulatory requirements for drug approvals internationally;
rejection or qualification of foreign clinical trial data by the competent authorities of other countries;complexities and difficulties in
obtaining, maintaining, protecting and enforcing our intellectual property;
potential third-party patent rights in countries outside of the United States;
the potential for so-called “parallel importing,” which is what occurs when a local seller, faced with relatively high local prices, opts to
import goods from another jurisdiction with relatively low prices, rather than buying them locally;
the potential for so-called “parallel exporting,” which is what occurs when a local seller buys goods meant for the locals and sells the
goods for a higher price in another country, potentially causing or aggravating supply problems;
unexpected changes in tariffs, trade barriers and regulatory requirements;
economic weakness, including inflation, or political instability, particularly in non-U.S. economies and markets, including several
countries in Europe;
compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
regulatory and compliance risks that relate to anti-corruption compliance and record-keeping that may fall within the purview of the
U.S. Foreign Corrupt Practices Act, its accounting provisions or its anti-bribery provisions or provisions of anti-corruption or anti-
bribery laws in other countries;
taxes in other countries;
financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial crises
on demand and payment for our products and exposure to foreign currency exchange rate fluctuations;
foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to
doing business in another country;
workforce uncertainty in countries where labor unrest is more common than in the United States;
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
business interruptions resulting from geo-political actions, including war and terrorism, public health crises, such as pandemics and
epidemics, or natural disasters, including earthquakes, volcanoes, typhoons, floods, hurricanes and fires.
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Any of these factors could harm our ongoing international clinical operations and supply chain, as well as any future international expansion
and operations and, consequently, our business, financial condition, prospects and results of operations.
Natural disasters, public health crises, political crises, and other catastrophic events or other events outside of our control may be
detrimental to our capabilities or the capabilities of third parties on which we depend.
Our headquarters are located in California near major geologic faults that have experienced earthquakes in the past. An earthquake or other
natural disaster or power shortages or outages could disrupt operations, impair critical systems or result in loss of clinical samples. Any of these disruptions
or other events outside of our control could have a material adverse impact on our business, harming our operating results. In addition, if any of our
suppliers or third-party service providers, such as our manufacturing partners or CROs, are affected by natural disasters, such as earthquakes, tsunamis,
power shortages or outages, floods or monsoons, public health crises, such as pandemics and epidemics, political crises, such as terrorism, war, political
instability or other conflict, cyberattacks, or other events outside of our control, our business and operating results could suffer. Disasters, public health
crises and political crises occurring at third-party facilities also could negatively impact our clinical development and regulatory approval timelines, our
reputation and the perception of our company. For example, as a result of the COVID-19 pandemic, we and our third-party service providers have limited
our operations or implemented limitations, including work-from-home policies. Our and our third-party service providers increased reliance on personnel
working from home may negatively impact productivity, or disrupt, delay, or otherwise adversely impact our business. The increase in working remotely
could increase cybersecurity risk, create data accessibility concerns, and make us and our third-party service providers more susceptible to communication
disruptions, any of which could adversely impact our or their business operations or delay necessary interactions with local and federal regulators,
manufacturing sites, clinical trial sites, and other third parties. In addition, as a result of shelter-in-place orders or other mandated travel restrictions, our on-
site staff conducting research and development activities may not be able to access our laboratories, and these core activities may be significantly limited or
curtailed, possibly for an extended period of time. Further, due to travel restrictions and “shelter in place” orders, we may experience limitations on the
ability to recruit and hire key personnel due to the inability to meet with candidates and reduced ability to engage with the medical and investor
communities due to the cancelation of conferences scheduled throughout the year. We also may experience operational challenges caused by sickness of
our employees or their families, the desire of employees to avoid contact with large groups of people, and an increased reliance on working from home or
mass transit disruptions. Furthermore, new quarantines for COVID-19 or other viruses could impact personnel at contract manufacturing facilities in China,
Europe or elsewhere to deliver key materials or the availability or cost of starting materials. Any disruption of our ability to manufacture atuzaginstat or the
ability of our contract manufacturing vendors in China, Europe or elsewhere to deliver key materials on a timely basis could have a material adverse effect
on the initiation of new trials, the duration of open label extension studies and overall product development. In addition, we may experience delays or
disruptions in non-clinical experiments and supplies for such experiments, including animals required for such experiments. These and other factors arising
from the COVID-19 pandemic could worsen in countries that are already afflicted with COVID-19, could continue to spread to additional countries, or
could return to countries where the pandemic has been partially contained, each of which could further adversely impact our ability to conduct clinical trials
and our business generally, and could have a material adverse impact on our operations and financial condition and results.
We will need to expand our operations and increase the size of our company, and we may experience difficulties in managing growth.
As we increase the number of ongoing drug development programs and advance our drug candidates through preclinical studies and clinical
trials, we will need to increase our drug development, scientific and administrative headcount to manage these programs. In addition, to meet our
obligations as a public company, we will need to increase our general and administrative capabilities. Our management, personnel and systems currently in
place may not be adequate to support this future growth. Our need to effectively manage our operations, growth and various projects requires that we:
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successfully attract and recruit new employees or consultants with the expertise and experience we will require;
manage our clinical programs effectively, which we anticipate being conducted at numerous clinical sites;
develop a marketing and sales infrastructure; and
continue to improve our operational, financial and management controls, reporting systems and procedures.
If we are unable to successfully manage this growth and increased complexity of operations, our business may be adversely affected.
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We may not be able to manage our business effectively if we are unable to attract and retain key personnel and consultants.
We may not be able to attract or retain qualified management, finance, scientific and clinical personnel and consultants due to the intense
competition for qualified personnel and consultants among biotechnology, pharmaceutical and other businesses. If we are not able to attract and retain
necessary personnel and consultants to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of
our development objectives, our ability to raise additional capital and our ability to implement our business strategy.
Our industry has experienced a high rate of turnover of management personnel in recent years. We are highly dependent on the development,
regulatory, commercialization and business development expertise of Casey C. Lynch, our co-founder, and President and Chief Executive Officer. If we
lose our Chief Executive Officer, our ability to implement our business strategy successfully could be seriously harmed. Any of our executive officers or
key employees or consultants may terminate their employment at any time.
Replacing executive officers, key employees and consultants may be difficult and may take an extended period because of the limited number
of individuals in our industry with the breadth of skills and experience required to develop, gain regulatory approval of and commercialize drug candidates
successfully. Competition to hire and retain employees and consultants from this limited pool is intense, and we may be unable to hire, train, retain or
motivate these additional key personnel and consultants. Our failure to retain key personnel or consultants could materially harm our business.
We have scientific and clinical advisors and consultants who assist us in formulating our research, development and clinical strategies. These
advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us.
Non-compete agreements are not permissible or are limited by law in certain jurisdictions and, even where they are permitted, these individuals typically
will not enter into non-compete agreements with us. If a conflict of interest arises between their work for us and their work for another entity, we may lose
their services. In addition, our advisors may have arrangements with other companies to assist those companies in developing drug candidates or
technologies that may compete with ours.
Failure to build our finance infrastructure and improve our accounting systems and controls could impair our ability to comply with the
financial reporting and internal controls requirements for publicly traded companies.
As a public company, we operate in an increasingly demanding regulatory environment, which requires us to comply with the Sarbanes-Oxley
Act of 2002, or the Sarbanes-Oxley Act, the regulations of Nasdaq Global Select Market, the rules and regulations of the Securities and Exchange
Commission, expanded disclosure requirements, accelerated reporting requirements and more complex accounting rules. Company responsibilities required
by the Sarbanes-Oxley Act include establishing corporate oversight and adequate internal control over financial reporting and disclosure controls and
procedures. Effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent financial fraud.
Commencing in 2020, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to
report on the effectiveness of our internal controls over financial reporting in our Form filing for 2020, as required by Section 404 of the Sarbanes-Oxley
Act. Prior to our initial public offering in May 2019, we had never been required to test our internal controls within a specified period and, as a result, we
may experience difficulty in meeting these reporting requirements in a timely manner.
We anticipate that the process of continuing to build our accounting and financial functions and infrastructure will require additional
professional fees, internal costs and management efforts. We expect that we will need to implement new internal systems to streamline the management of
our financial, accounting, human resources and other functions. However, such systems would likely require us to complete many processes and procedures
for the effective use of the systems or to run our business using the systems, which may result in additional costs. Any disruptions or difficulties in
implementing or using such systems could adversely affect our controls and harm our business. Moreover, such disruption or difficulties could result in
unanticipated costs and diversion of management attention. In addition, we may discover weaknesses in our systems of internal financial and accounting
controls and procedures that could result in a material misstatement of our financial statements. For example, we previously reported a material weakness
in internal control over financial reporting related to the fact that we had not deployed adequate qualified resources in our corporate accounting department
which resulted in material audit adjustments that were needed to modify the financial statements to comply with accounting principles generally accepted
in the United States. Certain transactions were not adequately analyzed for accounting ramifications and accounting records contained errors and
inaccuracies. During 2019, we completed the remediation measures related to the material weakness. Completion of remediation does not provide
assurance that our remediation or other controls will continue to operate properly.
Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to
error or fraud will not occur or that all control issues and instances of fraud will be detected.
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If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to
maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If we cannot provide reliable
financial reports or prevent fraud, our business and results of operations could be harmed, investors could lose confidence in our reported financial
information and we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities.
Our employees, independent contractors, consultants, commercial partners and vendors may engage in misconduct or other improper
activities, including noncompliance with regulatory standards and requirements and insider trading, which could significantly harm our business.
We are exposed to the risk of fraud or other misconduct by our employees, independent contractors, consultants, commercial partners and
vendors. Misconduct by these parties could include intentional failures to comply with the regulations of the FDA and non-U.S. regulators, provide
accurate information to the FDA and non-U.S. regulators, comply with health care fraud and abuse laws and regulations in the United States and abroad,
report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the
health care industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive
practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer
incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of
clinical trials, which could result in regulatory sanctions and serious harm to our reputation. 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 comply with these laws or regulations. If any such
actions are instituted against us, those actions could have a significant impact on our business, including the imposition of significant fines or other
sanctions.
Our insurance policies are expensive and only protect us from some business risks, which will leave us exposed to significant uninsured
liabilities.
We do not carry insurance for all categories of risk that our business may encounter. Some of the policies we currently maintain include general
liability, products liability and directors’ and officers’ insurance. We do not know, however, if we will be able to maintain insurance with adequate levels of
coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our financial position and results of
operations.
Failure to comply with health and data protection laws and regulations could lead to government enforcement actions, which could include
civil or criminal penalties, private litigation, and/or adverse publicity and could negatively affect our operating results and business.
We and any of our potential collaborators may be subject to federal, state, and foreign data protection laws and regulations (i.e., laws and
regulations that address privacy and data security). In the United States, numerous federal and state laws and regulations, including federal health
information privacy laws, state data breach notification laws, state health information privacy laws, and federal and state consumer protection laws, that
govern the collection, use, disclosure, and protection of health-related and other personal information could apply to our operations or the operations of
collaborators. In addition, we may obtain health information from third parties (including research institutions from which we obtain clinical trial data) that
are subject to privacy and security requirements under the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by
the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH. Depending on the facts and circumstances, we could be
subject to civil, criminal, and administrative penalties if we knowingly obtain, use, or disclose individually identifiable health information maintained by a
HIPAA-covered entity in a manner that is not authorized or permitted by HIPAA.
Several foreign jurisdictions, including the European Union, or the EU, its member states, the United Kingdom and Australia, among others,
have adopted legislation and regulations that increase or change the requirements governing the collection, use, disclosure and transfer of the personal
information of individuals in these jurisdictions. These laws and regulations are complex and change frequently, at times due to changes in political
climate, and existing laws and regulations are subject to different and conflicting interpretations, which adds to the complexity of processing personal data
from these jurisdictions. These laws have the potential to increase costs of compliance, risks of noncompliance and penalties for noncompliance.
The General Data Protection Regulation, or GDPR, replaced the EU Data Protection Directive on May 25, 2018. The GDPR introduced new
data protection requirements in the EU, as well as potential fines for noncompliant companies of up to the greater of €20 million or 4% of annual global
revenue. The regulation imposes numerous new requirements for the collection, use and disclosure of personal information, including more stringent
requirements relating to consent and the information that must be shared with data subjects about how their personal information is used, the obligation to
notify regulatory authorities and affected individuals of personal data breaches, extensive new internal privacy governance obligations, and obligations to
honor expanded rights of individuals in relation to their personal information (for example, the right to access, correct and delete their data). In addition, the
GDPR generally maintains the EU Data Protection Directive’s restrictions on cross-border data transfer. The GDPR will increase our responsibility and
liability in relation to personal data that we process, and we may be required to put in place additional potential mechanisms to ensure compliance with the
new EU data protection rules.
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Further, the United Kingdom’s vote in favor of exiting the EU (often referred to as “Brexit”) has created uncertainty with regard to data
protection regulation in the United Kingdom. In particular, it is unclear whether the United Kingdom will enact data protection legislation equivalent to the
GDPR and how data transfers to and from the United Kingdom will be regulated.
Compliance with U.S. and international data protection laws and regulations could require us to take on more onerous obligations in our
contracts, restrict our ability to collect, use and disclose data, or in some cases, impact our ability to operate in certain jurisdictions. Failure to comply with
these laws and regulations could result in government enforcement actions (which could include civil, criminal and administrative penalties), private
litigation, and/or adverse publicity and could negatively affect our operating results and business. Moreover, clinical trial subjects, employees and other
individuals about whom we or our potential collaborators obtain personal information, as well as the providers who share this information with us, may
limit our ability to collect, use and disclose the information. Claims that we have violated individuals’ privacy rights, failed to comply with data protection
laws, or breached our contractual obligations, even if we are not found liable, could be expensive and time-consuming to defend and could result in adverse
publicity that could harm our business.
Changes in healthcare law and implementing regulations, as well as changes in healthcare policy, may impact our business in ways that we
cannot currently predict, and may have a significant adverse effect on our business and results of operations.
In the United States and some foreign jurisdictions, there have been, and continue to be, several legislative and regulatory changes and
proposed changes regarding the healthcare system that could prevent or delay marketing approval of drug candidates, restrict or regulate post-approval
activities, and affect our ability to profitably sell any drug candidates for which we obtain marketing approval. Among policy makers and payors in the
United States and elsewhere, including in the European Union, or EU, there is significant interest in promoting changes in healthcare systems with the
stated goals of containing healthcare costs, improving quality and/or expanding access. In the United States, the pharmaceutical industry has been a
particular focus of these efforts and has been significantly affected by major legislative initiatives.
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the
Affordable Care Act, substantially changed the way healthcare is financed by both the government and private insurers, and significantly impacts the U.S.
pharmaceutical industry. The Affordable Care Act, among other things: (i) increased the minimum Medicaid rebates owed by manufacturers under the
Medicaid Drug Rebate Program and expanded rebate liability from fee-for-service Medicaid utilization to include the utilization of Medicaid managed care
organizations as well; (ii) established a branded prescription drug fee that pharmaceutical manufacturers of branded prescription drugs must pay to the
federal government; (iii) expanded the list of covered entities eligible to participate in the 340B drug pricing program by adding new entities to the
program; (iv) established a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer point-of-sale discounts off
negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs
to be covered under Medicare Part D; (v) extended manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in
Medicaid managed care organizations; (vi) expanded eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid
coverage to additional individuals and by adding new mandatory eligibility categories for individuals with income at or below 133% of the federal poverty
level, thereby potentially increasing manufacturers’ Medicaid rebate liability; (vii) established a new Patient-Centered Outcomes Research Institute to
oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research; and (viii) established a Center
for Medicare Innovation at the Centers for Medicare and Medicaid Services, or CMS, to test innovative payment and service delivery models to lower
Medicare and Medicaid spending, potentially including prescription drug spending.
Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, as well as recent
efforts by the Trump administration to repeal or replace certain aspects of the Affordable Care Act. Since January 2017, President Trump has signed two
Executive Orders and other directives designed to delay the implementation of certain provisions of the Affordable Care Act or otherwise circumvent some
of the requirements for health insurance mandated by the Affordable Care Act. Additionally, CMS promulgated regulations in 2018 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 Affordable Care Act for plans sold through such marketplaces. Concurrently, Congress has considered legislation that
would repeal, or repeal and replace, all or part of the Affordable Care Act. While Congress has not passed comprehensive repeal legislation, two bills
affecting the implementation of certain taxes under the Affordable Care Act have been signed into law. The Tax Cuts and Jobs Act of 2017, or the Tax Act,
includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain
individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” On December
14, 2018, a U.S. District Court Judge in the Northern District of Texas, ruled that the individual mandate is a critical and inseverable feature of the
Affordable Care Act, and therefore, because it was repealed as part of the Tax Act, the remaining provisions of the Affordable Care Act are invalid as well.
While the Trump Administration and the Centers for Medicare & Medicaid Services, or CMS, have both stated that the ruling will have no immediate
effect, it is unclear how this decision, subsequent appeals, if any, and other efforts to repeal and replace the Affordable Care Act will
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impact the Affordable Care Act and our business. Moreover, the Bipartisan Budget Act of 2018, or the BBA, among other things, amends the Affordable
Care Act, effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole.” Congress may
consider additional legislation to repeal, or repeal and replace, other elements of the Affordable Care Act. We continue to evaluate the Affordable Care Act
and its possible repeal and replacement, as it remains uncertain the extent to which any such changes may impact our business or financial condition.
Other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. These changes include aggregate
reductions to Medicare payments to providers of up to 2% per fiscal year pursuant to the Budget Control Act of 2011 and subsequent laws, which began in
2013 and, due to subsequent legislative amendments to the statute, including the BBA, will remain in effect through 2027 unless additional Congressional
action is taken. New laws may result in additional reductions in Medicare and other healthcare funding, which may adversely affect customer demand and
affordability for our drug candidates and, accordingly, the results of our financial operations. Additional changes that may affect our business include the
expansion of new programs such as Medicare payment for performance initiatives for physicians under the Medicare Access and CHIP Reauthorization Act
of 2015, or MACRA, which will first affect physician payment in 2019. At this time, it is unclear how the introduction of the Medicare quality payment
program will impact overall physician reimbursement.
Also, there has been heightened governmental scrutiny recently over the manner in which drug manufacturers set prices for their marketed
drug candidates, which has resulted in several Congressional inquiries and proposed and enacted federal and state legislation designed to, among other
things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government
program reimbursement methodologies for drugs. At the state level, legislatures are increasingly passing legislation and implementing regulations designed
to control pharmaceutical and biological drug pricing, including price or patient reimbursement constraints, discounts, restrictions on certain drug access
and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.
For example, since 2016, Vermont requires certain manufacturers identified by the state to justify their price increases. Similar prescription drug price
transparency laws have been enacted in Oregon and California, and more are pending in several other states.
We expect that these and other healthcare reform measures that may be adopted in the future may result in more rigorous coverage criteria and
lower reimbursement, and in additional downward pressure on the price that we receive for any approved drug candidate. Any reduction in reimbursement
from Medicare or other government-funded programs may result in a similar reduction in payments from private payors. The implementation of cost
containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our drug
candidates, once marketing approval is obtained.
Our ability to successfully commercialize any drugs that we develop depends in part on the extent to which coverage and adequate
reimbursement are 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, each individually 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. Government authorities
currently impose mandatory discounts for certain patient groups, such as Medicare, Medicaid and Veterans Affairs, or VA, hospitals, and may seek to
increase such discounts at any time. Future regulation may negatively impact the price of our product candidates, if approved. 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. We cannot be sure that coverage or reimbursement will be available for any drug candidate that we commercialize and, if coverage or
reimbursement is available, the level of reimbursement. Reimbursement may impact the demand for, or the price of, any drug candidate for which we obtain
marketing approval. In order to get coverage and reimbursement, physicians may need to show that patients have superior treatment outcomes with our
products compared to standard of care drugs, including lower-priced generic versions of standard of care drugs. If reimbursement is not available or is
available only to limited levels, we may not be able to successfully commercialize any drug candidate for which we obtain marketing approval. In the
United States, no uniform policy of coverage and reimbursement for products exists among third-party payors, and coverage decisions and reimbursement
levels for products can differ significantly from payor to payor. As a result, the coverage determination process is often a time consuming and costly
process that may require us to provide scientific and clinical support for the use of our products to each payor separately, with no assurance that coverage
and adequate reimbursement will be applied consistently or obtained.
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 medicine is approved by the FDA, EMA or other comparable foreign regulatory authorities. Moreover, eligibility for
reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture,
sale, and distribution. 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
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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, but make their determinations independently and may impose additional restrictions. Our inability
to promptly obtain coverage and profitable payment rates from both government-funded and private payors for any approved products we may develop
could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize drug candidates, and our overall financial
condition.
In the EU, coverage and reimbursement status of any drug candidates for which we obtain regulatory approval are provided for by the national
laws of EU Member States. The requirements may differ across the EU Member States. Also, at national level, actions have been taken to enact
transparency laws regarding payments between pharmaceutical companies and health care professionals.
If we engage in acquisitions, we will incur a variety of costs and we may never realize the anticipated benefits of such acquisitions.
Although we currently have no plans to do so, we may attempt to acquire businesses, technologies or drug candidates that we believe are a
strategic fit with our business. If we do undertake any acquisitions, the process of integrating an acquired business, technology or drug candidates into our
business may result in unforeseen operating difficulties and expenditures, including diversion of resources and management’s attention from our core
business. In addition, we may fail to retain key executives and employees of the companies we acquire, which may reduce the value of the acquisition or
give rise to additional integration costs. Future acquisitions could result in additional issuances of equity securities that would dilute the ownership of
existing stockholders. Future acquisitions could also result in the incurrence of debt, contingent liabilities or the amortization of expenses related to other
intangible assets, any of which could adversely affect our operating results. In addition, we may fail to realize the anticipated benefits of any acquisition.
We are currently conducting and in the future may conduct clinical trials for our drug candidates outside the United States, and the FDA,
EMA and applicable foreign regulatory authorities may not accept data from such trials.
We currently are conducting parts of the GAIN trial outside the United States and in the future choose to conduct one or more of our clinical
trials outside the United States, including in Europe. The acceptance of study data from clinical trials conducted outside the United States or another
jurisdiction by the FDA, EMA or applicable foreign regulatory authorities may be subject to certain conditions. In cases where data from foreign clinical
trials are intended to serve as the basis for marketing approval in the United States, the FDA will generally not approve the application on the basis of
foreign data alone unless (i) the data are applicable to the United States population and United States medical practice; and (ii) the trials were performed by
clinical investigators of recognized competence and pursuant to cGCP regulations. Additionally, the FDA’s clinical trial requirements, including sufficient
size of patient populations and statistical powering, must be met. Many foreign regulatory bodies have similar approval requirements. In addition, such
foreign trials would be subject to the applicable local laws of the foreign jurisdictions where the trials are conducted. There can be no assurance that the
FDA, EMA or any applicable foreign regulatory authority will accept data from trials conducted outside of the United States or the applicable jurisdiction.
If the FDA, EMA or any applicable foreign regulatory authority does not accept such data, it would result in the need for additional trials, which would be
costly and time-consuming and delay aspects of our business plan, and which may result in our drug candidates not receiving approval or clearance for
commercialization in the applicable jurisdiction.
Interim, top-line and preliminary data from our clinical trials that we announce or publish from time to time may change as more patient
data become available and are subject to audit and verification procedures that could result in material changes in the final data.
From time to time, we may publicly disclose preliminary or top-line data from our clinical studies, which are based on a preliminary analysis
of then-available data, and the results and related findings and conclusions are subject to change following a more comprehensive review of the data related
to the particular study or trial. We also make assumptions, estimations, calculations and conclusions as part of our analyses of data, and we may not have
received or had the opportunity to fully and carefully evaluate all data. As a result, the top-line results that we report may differ from future results of the
same studies, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Top-line data
also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously
published. As a result, top-line data should be viewed with caution until the final data are available. From time to time, we may also disclose interim data
from our clinical studies.
In addition, we may report interim analyses of only certain endpoints rather than all endpoints. Interim data from clinical trials that we may
complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data
become available. Adverse differences between preliminary or interim data and final data could significantly harm our business prospects. Further,
disclosure of interim data by us or by our competitors could result in volatility in the price of our common stock. Further, others, including regulatory
agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses or may interpret or weigh the importance of data
differently, which could impact the value of the particular program, the approvability or commercialization of the particular drug candidate or product and
our
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company in general. In addition, the information we choose to publicly disclose regarding a particular study or clinical trial is based on what is typically
extensive information, and you or others may not agree with what we determine is the material or otherwise appropriate information to include in our
disclosure, and any information we determine not to disclose may ultimately be deemed significant with respect to future decisions, conclusions, views,
activities or otherwise regarding a particular drug, drug candidate or our business. If the top-line data that we report differ from actual results, or if others,
including regulatory authorities, disagree with the conclusions reached, our ability to obtain approval for, and commercialize, our drug candidates may be
harmed, which could harm our business, operating results, prospects or financial condition.
Changes in funding for the FDA and other government agencies or other disruptions at these agencies could prevent new products and
services from being developed or commercialized in a timely manner, which could negatively impact our business.
The ability of the FDA to review and approve new drugs can be affected by a variety of factors, including government budget and funding
levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. Average review times at
the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development
activities is subject to the political process, which is inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may prolong the time necessary for new drugs to be reviewed and/or approved by necessary
government agencies, which would adversely affect our business. For example, over the last several years, including for 35 days beginning on December
22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees
and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process
our regulatory submissions, which could have a material adverse effect on our business. As a result of the COVID-19 pandemic, health regulatory agencies
globally have experienced and may continue to experience disruptions in their operations. The FDA, EMA and comparable foreign regulatory agencies
may have slower response times or be under-resourced to continue discussions with us regarding the scope or design of our clinical trials and, as a result,
review, inspection, and other timelines may be materially delayed. It is unknown how long these disruptions could continue, were they to occur. Any
elongation or de-prioritization of our clinical trials or delay in regulatory review resulting from such disruptions could affect the development and study of
atuzaginstat.
Even if we obtain regulatory approval for a drug candidate, it will remain subject to extensive ongoing regulatory review and requirements.
If any of our drug candidates are approved, they will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging,
storage, advertising, promotion, sampling, record-keeping, conduct of post-marketing studies, and submission of safety, efficacy, and other post-market
information, including both federal and state requirements in the United States and requirements of comparable foreign regulatory authorities.
Manufacturers and manufacturers’ facilities are required to comply with extensive requirements imposed by the FDA, EMA and comparable
foreign regulatory authorities, including ensuring that quality control and manufacturing procedures conform to cGMPs regulations. As such, we and our
contract manufacturers will be subject to continual review and inspections to assess compliance with cGMP and adherence to commitments made in any
NDA or MAA. Accordingly, we and others with whom we work must continue to expend time, money, and effort in all areas of regulatory compliance,
including manufacturing, production and quality control.
Any regulatory approvals that we receive for our drug candidates will be subject to limitations on the approved indicated uses for which the
drug candidate may be marketed and promoted or to the conditions of approval (including the potential for a requirement to implement a Risk Evaluation
and Mitigation Strategy), or contain requirements for potentially costly post-marketing testing. We will be required to report certain adverse reactions and
production problems, if any, to the FDA, EMA and comparable foreign regulatory authorities. Any new legislation addressing drug safety issues could
result in delays in drug development or commercialization, or increased costs to assure compliance. The FDA and other agencies, including the Department
of Justice, closely regulate and monitor the post-approval marketing and promotion of drug candidates to ensure that they are manufactured, marketed and
distributed only for the approved indications and in accordance with the provisions of the approved labeling. We will have to comply with requirements
concerning advertising and promotion for our drug candidates. Promotional communications with respect to prescription drugs are subject to a variety of
legal and regulatory restrictions and must be consistent with the information in the drug candidate’s approved label. As such, we may not promote our drug
candidates for indications or uses for which they do not have approval. The holder of an approved NDA or MAA must submit new or supplemental
applications and obtain approval for certain changes to the approved drug candidate labeling, or manufacturing process. We could also be asked to conduct
post-marketing clinical trials to verify the safety and efficacy of our drug candidates in general or in specific patient subsets. If original marketing approval
was obtained via the accelerated approval pathway, we could be required to conduct a successful post-marketing clinical trial to confirm clinical benefit for
our drug candidates. An unsuccessful post-marketing study or failure to complete such a study could result in the withdrawal of marketing approval.
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If a regulatory agency discovers previously unknown problems with a drug, such as adverse events of unanticipated severity or frequency, or
problems with the facility where the drug candidate is manufactured, or disagrees with the promotion, marketing or labeling of a drug candidate, such
regulatory agency may impose restrictions on that drug candidate or us, including requiring withdrawal of the drug candidate from the market. If we fail to
comply with applicable regulatory requirements, a regulatory agency or enforcement authority may, among other things:
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issue warning or untitled letters that would result in adverse publicity;
impose civil or criminal penalties;
suspend or withdraw regulatory approvals;
suspend any of our ongoing clinical trials;
mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;
require us to enter into a consent decree or permanent injunction, which can include imposition of various fines, reimbursements for
inspection costs, required due dates for specific actions and penalties for noncompliance;
withdraw regulatory approval;
refuse to approve pending applications or supplements to approved applications submitted by us;
impose restrictions on our operations, including closing our contract manufacturers’ facilities;
seize or detain drug candidates; or
require a drug candidate recall.
Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could
generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to
commercialize and generate revenue from our drug candidates. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of our
company and our operating results will be adversely affected.
The policies of the FDA and of other regulatory authorities may change and additional government regulations may be enacted that could
prevent, limit or delay regulatory approval of our drug candidates. We cannot predict the likelihood, nature or extent of government regulation that may
arise from future legislation or administrative action, either in the United States or abroad. For example, certain policies of the Trump administration may
impact our business and industry. Namely, 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 oversight activities such as
implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. It is difficult to predict how these
executive actions will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive
actions impose restrictions on the FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively
impacted. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to
maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability, which
would adversely affect our business, prospects, financial condition and results of operations.
Non-compliance by us or any future collaborator with regulatory requirements, including safety monitoring or pharmacovigilance, and with
requirements related to the development of products for the pediatric population can also result in significant financial penalties.
If we fail to comply with healthcare laws, we could face substantial penalties and our business, operations and financial condition could be
adversely affected.
Our operations are subject to various federal and state fraud and abuse laws. The laws that may impact our operations include:
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federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving,
offering or paying any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in
kind, to induce, or in return for, either the referral of an individual, or the purchase, lease, order or recommendation of any good,
facility, item or service for which payment may be made, in whole or in part, under a federal healthcare program, such as the Medicare
and Medicaid programs. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order
to have committed a violation. In addition, the government may assert that a claim including items or services resulting from a
violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act;
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federal civil and criminal false claims laws and civil monetary penalty laws, including the False Claims Act, which impose criminal
and civil penalties, including through civil “qui tam” or “whistleblower” actions, against individuals or entities from knowingly
presenting, or causing to be presented, claims for payment or approval from Medicare, Medicaid, or other third-party payors that are
false or fraudulent or knowingly making a false statement to improperly avoid, decrease or conceal an obligation to pay money to the
federal government. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of these
statutes or specific intent to violate them in order to have committed a violation;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that
prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by
means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or
control of, any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying,
concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the
delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their
respective implementing regulations, which impose requirements on certain covered healthcare providers, health plans, and healthcare
clearinghouses as well as their respective business associates that perform services for them that involve the use, or disclosure of,
individually identifiable health information, relating to the privacy, security and transmission of individually identifiable health
information without appropriate authorization;
the federal Physician Payment Sunshine Act, created under the Affordable Care Act, and its implementing regulations, which require
manufacturers of drugs, devices and medical supplies for which payment is available under Medicare, Medicaid or the Children’s
Health Insurance Program to report annually to the U.S. Department of Health and Human Services under the Open Payments Program,
information related to payments or other transfers of value made to physicians, certain other healthcare professionals and teaching
hospitals, as well as ownership and investment interests held by physicians and their immediate family members;
federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially
harm consumers; and
analogous state and foreign laws and regulations, such as state and foreign anti-kickback, false claims, consumer protection and unfair
competition laws which may apply to pharmaceutical business practices, including but not limited to, research, distribution, sales and
marketing arrangements as well as submitting claims involving healthcare items or services reimbursed by any third-party payer,
including commercial insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s
voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government that otherwise restricts
payments that may be made to healthcare providers and other potential referral sources; state laws that require drug manufacturers to
file reports with states regarding pricing and marketing information, such as the tracking and reporting of gifts, compensations and
other remuneration and items of value provided to healthcare professionals and entities; and state and foreign laws governing the
privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may
not have the same effect, thus complicating compliance efforts.
Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our
business activities, including compensating physicians with stock or stock options, could, despite our efforts to comply, be subject to challenge under one or
more of such laws. Efforts to ensure that our business arrangements will comply with applicable healthcare laws may involve substantial costs. It is
possible that governmental and enforcement authorities will conclude that our business practices may not comply with current or future statutes, regulations
or case law interpreting applicable fraud and abuse or other healthcare laws and regulations. If any such actions are instituted against us, those actions could
have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, disgorgement, monetary fines,
possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished
profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of
operations. In addition, the approval and commercialization of any of our drug candidates outside the United States will also likely subject us to foreign
equivalents of the healthcare laws mentioned above, among other foreign laws.
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If we or any contract manufacturers and suppliers we engage fail to comply with environmental, health, and safety laws and regulations,
we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.
We and any contract manufacturers and suppliers we engage are subject to numerous federal, state, and local environmental, health, and safety
laws, regulations, and permitting requirements, including those governing laboratory procedures; the generation, handling, use, storage, treatment, and
disposal of hazardous and regulated materials and wastes; the emission and discharge of hazardous materials into the ground, air, and water; and employee
health and safety. Our operations involve the use of hazardous and flammable materials, including chemicals and radioactive materials. Our operations also
produce hazardous waste. 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. Under certain environmental laws, we could be held responsible for costs relating
to any contamination at our current or past facilities and at third-party facilities. We also could incur significant costs associated with civil or criminal fines
and penalties.
Compliance with applicable environmental laws and regulations may be expensive, and current or future environmental laws and regulations
may impair our research, drug development and manufacturing efforts. In addition, we cannot entirely eliminate the risk of accidental injury or
contamination from these materials or wastes. Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur
due to injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential
liabilities. We do not carry specific hazardous waste insurance coverage, and our property, casualty, and general liability insurance policies specifically
exclude coverage for damages and fines arising from hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we
could be held liable for damages or be penalized with fines in an amount exceeding our resources, and our clinical trials or regulatory approvals could be
suspended, which could have a material adverse effect on our business, financial condition, results of operations, and prospects.
Our business activities may be subject to the Foreign Corrupt Practices Act, or FCPA, and similar anti-bribery and anti-corruption laws.
Our business activities may be subject to the FCPA and similar anti-bribery or anti-corruption laws, regulations or rules of other countries in
which we may operate, including the U.K. Bribery Act. The FCPA generally prohibits offering, promising, giving, or authorizing others to give anything of
value, either directly or indirectly, to a non-U.S. government official in order to influence official action, or otherwise obtain or retain business. The FCPA
also requires public companies to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and
maintain an adequate system of internal accounting controls. Our business is heavily regulated and therefore involves significant interaction with public
officials, including officials of non-U.S. governments. Additionally, in many other countries, the health care providers who prescribe pharmaceuticals are
employed by their government, and the purchasers of pharmaceuticals are government entities; therefore, our dealings with these prescribers and
purchasers are subject to regulation under the FCPA. Recently the Securities and Exchange Commission, or SEC, and Department of Justice have increased
their FCPA enforcement activities with respect to biotechnology and pharmaceutical companies. There is no certainty that all of our employees, agents,
contractors, or those of our affiliates, will comply with all applicable laws and regulations, particularly given the high level of complexity of these laws.
Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers, or our employees, the closing down of our
facilities, requirements to obtain export licenses, cessation of business activities in sanctioned countries, implementation of compliance programs, and
prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to offer our drug candidates in one or more
countries and could materially damage our reputation, our brand, our international expansion efforts, our ability to attract and retain employees, and our
business, prospects, operating results, and financial condition.
Any collaboration arrangements that we may enter into in the future may not be successful, which could adversely affect our ability to
develop and commercialize potential future drug candidates.
While we currently have no intention to enter into a collaboration agreement for atuzaginstat, in the future we may consider collaboration
arrangements with pharmaceutical or biotechnology companies for the development or commercialization of drug candidates depending on the merits of
retaining or divesting some or all commercialization rights. We will face, to the extent that we decide to enter into collaboration agreements, significant
competition in seeking appropriate collaborators. Moreover, collaboration arrangements are complex and time-consuming to negotiate, document,
implement and maintain. We may not be successful in our efforts to establish and implement collaborations or other alternative arrangements should we so
chose to enter into such arrangements. The terms of any collaborations or other arrangements that we may establish may not be favorable to us.
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Any future collaborations that we enter into may not be successful. The success of our collaboration arrangements will depend heavily on the
efforts and activities of our collaborators. Collaborations are subject to numerous risks, which may include that:
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collaborators have significant discretion in determining the efforts and resources that they will apply to collaborations;
collaborators may not pursue development and commercialization of our drug candidates or may elect not to continue or renew
development or commercialization programs based on clinical trial results, changes in their strategic focus due to the acquisition of
competitive drug candidates, availability of funding or other external factors, such as a business combination that diverts resources or
creates competing priorities;
collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial, abandon a drug
candidate, repeat or conduct new clinical trials or require a new formulation of a drug candidate for clinical testing;
collaborators could independently develop, or develop with third parties, drug candidates that compete directly or indirectly with our
drug candidates;
a collaborator with marketing, manufacturing and distribution rights to one or more drug candidates may not commit sufficient
resources to or otherwise not perform satisfactorily in carrying out these activities;
we could grant exclusive rights to our collaborators that would prevent us from collaborating with others;
collaborators may not properly maintain or defend our intellectual property rights or may use our intellectual property or proprietary
information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or
proprietary information or expose us to potential liability;
disputes may arise between us and a collaborator that causes the delay or termination of the research, development or
commercialization of our current or future drug candidates or that results in costly litigation or arbitration that diverts management
attention and resources;
collaborations may be terminated, and, if terminated, may result in a need for additional capital to pursue further development or
commercialization of the applicable current or future drug candidates;
collaborators may own or co-own intellectual property covering our drug candidates that results from our collaborating with them, and
in such cases, we would not have the exclusive right to develop or commercialize such intellectual property; and
a collaborator’s sales and marketing activities or other operations may not be in compliance with applicable laws resulting in civil or
criminal proceedings.
Risks Relating to Our Intellectual Property
If we are unable to obtain and maintain sufficient intellectual property protection for our drug candidates, or if the scope of the intellectual
property protection is not sufficiently broad, our competitors could develop and commercialize drug candidates similar or identical to ours, and our ability
to successfully commercialize our drug candidates may be adversely affected.
Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of our current and future
drug candidates and the methods used to manufacture them, as well as successfully defending these patents against third-party challenges. Our ability to
stop third parties from making, using, selling, offering to sell or importing our drug candidates is dependent upon the extent to which we have rights under
valid and enforceable patents or trade secrets that cover these activities.
The patent positions of biotechnology and pharmaceutical companies can be highly uncertain and involve complex legal and factual questions
for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in pharmaceutical patents has
emerged to date in the United States or in many jurisdictions outside of the United States. Changes in either the patent laws or interpretations of patent laws
in the United States and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may
be enforced in the patents that may be issued from the applications we currently or may in the future own or license from third parties. Further, if any
patents we obtain or license are deemed invalid and unenforceable, our ability to commercialize or license our technology could be adversely affected.
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Others may have filed, and in the future are likely to file, patent applications covering drug candidates that are similar, identical or competitive
to ours or important to our business. We cannot be certain that any patent application owned by a third party will not have priority over patent applications
filed or in-licensed by us, or that we or our licensors will not be involved in interference, opposition or invalidity proceedings before U.S. or non-U.S.
patent offices.
The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not
adequately protect our rights or permit us to gain or keep our competitive advantage. Only limited protection may be available and may not adequately
protect our rights or permit us to gain or keep any competitive advantage. If we do not adequately protect our intellectual property and proprietary
technology, competitors may be able to use our drug candidates and proprietary technologies and erode or negate any competitive advantage we may have,
which could have a material adverse effect on our financial condition and results of operations. For example:
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others may be able to make compounds that are similar to our drug candidates but that are not covered by the claims of our patents;
we might not have been the first to make the inventions covered by our pending patent applications;
we might not have been the first to file patent applications for these inventions;
others may independently develop similar or alternative technologies or duplicate any of our technologies;
any patents that we obtain may not provide us with any competitive advantages;
we may not develop additional proprietary technologies that are patentable; or
the patents of others may have an adverse effect on our business.
We have applied, and we intend to continue applying, for patents covering aspects of our drug candidates, proprietary technologies and their
uses that we deem appropriate. However, we may not be able to apply for patents on certain aspects of our current or future drug candidates, proprietary
technologies and their uses in a timely fashion, at a reasonable cost, in all jurisdictions, or at all, and any potential patent coverage we obtain may not be
sufficient to prevent substantial competition. As of December 31, 2020, we were the owner of record of six issued U.S. patents, 31 non-U.S. patents, and 54
pending U.S. and non-U.S. patent applications (collectively, “the Cortexyme patent portfolio”).
Four issued U.S. patents and 31 issued non-US patents in the Cortexyme patent portfolio relate to atuzaginstat, with claims directed to
atuzaginstat and related pharmaceutical compounds, pharmaceutical compositions containing these compounds, and use of these compounds in the
treatment of various indications. Pending U.S. and non-U.S. patent applications in the Cortexyme patent portfolio relate to atuzaginstat and related
pharmaceutical compounds, pharmaceutical compositions containing these compounds, methods of using these compounds in the treatment of various
indications, and methods of making these compounds.
In addition, two issued U.S. patents in the Cortexyme patent portfolio relate to pharmaceutical compounds that do not encompass atuzaginstat,
with claims directed to pharmaceutical compounds, pharmaceutical compositions containing these compounds, and use of these compounds in the
treatment of various indications. Pending U.S. and non-U.S. patent applications relate to additional compounds in these areas; as well as to diagnostic
methods and assay methods.
Without patent protection on the composition of matter of our drug candidates, our ability to assert our patents to stop others from using or
selling our drug candidates in a non-pharmaceutically acceptable formulation may be limited. Due to the patent laws of a country, or the decisions of a
patent examiner in a country, or our own filing strategies, we may not obtain patent coverage for all of our drug candidates or methods involving the use of
these candidates in a particular patent application. We plan to pursue divisional patent applications or continuation patent applications in the United States
and other countries, where applicable, to obtain claim coverage for inventions which were disclosed but not claimed in a particular parent patent
application.
The patent application process is subject to numerous risks and uncertainties, and there can be no assurance that we or any of our actual or
potential future collaborators will be successful in protecting our drug candidates, proprietary technologies and their uses by obtaining and/or defending
patents. These risks and uncertainties include the following:
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the U.S. Patent and Trademark Office, or USPTO, and various foreign governmental patent agencies require compliance with a number
of procedural, documentary, fee payment and other provisions during the patent process, the noncompliance with which can result in
abandonment or lapse of a patent or patent application, and partial or complete loss of patent rights in the relevant jurisdiction;
patent applications may not result in any patents being issued;
patents that may be issued or in-licensed may be challenged, invalidated, modified, revoked, circumvented, found to be unenforceable
or otherwise may not provide any competitive advantage;
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our competitors, many of whom have substantially greater resources than we do and many of whom have made significant investments
in competing technologies, may seek or may have already obtained patents that will limit, interfere with or eliminate our ability to
make, use and sell our potential drug candidates;
other parties may have designed around our claims or developed technologies that may be related or competitive to our platform, may
have filed or may file patent applications and may have received or may receive patents that overlap or conflict with our patent
applications, either by claiming the same compounds, compositions or methods or by claiming subject matter that could dominate our
patent position;
any successful opposition to any patents owned by or licensed to us could deprive us of rights necessary to prevent others from
practicing our technologies or to successfully commercialize any drug candidates that we may develop;
because patent applications in the United States and most other countries are confidential for a period of time after filing, we cannot be
certain that we were the first to file any patent application related to our drug candidates, proprietary technologies and their uses;
an interference proceeding can be provoked by a third party or instituted by the USPTO to determine who was the first to invent any of
the subject matter covered by the patent claims of applications we may in-license which have an effective filing date before March 16,
2013;
there may be significant pressure on the U.S. government and international governmental bodies to limit the scope of patent protection
both inside and outside the United States for disease treatments that prove successful, as a matter of public policy regarding worldwide
health concerns; and
countries other than the United States may have patent laws less favorable to patentees than those upheld by U.S. courts, allowing
foreign competitors a better opportunity to create, develop and market competing drug candidates.
The patent prosecution process is also expensive and time-consuming, and we may not be able to file and prosecute 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. Although we enter into non-disclosure and confidentiality agreements with parties who
have access to patentable aspects of our research and development output, such as our employees, outside scientific collaborators, CROs, contract
manufacturers, consultants, advisors and other third parties, any of these parties may breach such agreements and disclose such output before a patent
application is filed, thereby jeopardizing our ability to seek patent protection. We may also rely on trade secrets to protect our technology, especially where
we do not believe patent protection is appropriate or feasible. However, trade secrets are difficult to protect. Although we use reasonable efforts to protect
our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our
information to competitors. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time consuming,
and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our
competitors may independently develop equivalent knowledge, methods and know-how.
We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time consuming,
and unsuccessful. Further, our issued patents could be found invalid or unenforceable if challenged in court, and we may incur substantial costs as a
result of litigation or other proceedings relating to patent and other intellectual property rights.
Competitors may infringe our intellectual property rights. To prevent infringement or unauthorized use, we may be required to file
infringement claims, which can be expensive and time-consuming. If we choose to go to court to stop another party from using the inventions claimed in any
patents we obtain, that individual or company has the right to ask the court to rule that such patents are invalid or should not be enforced against that third
party. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity
challenge include an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for
an unenforceability assertion could include 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 also raise similar claims before the USPTO, even outside the context of
litigation. Similar mechanisms for challenging the validity and enforceability of a patent exist in non-U.S. patent offices and may result in the revocation,
cancellation, or amendment of any non-U.S. patents we hold in the future. The outcome following legal assertions of invalidity and unenforceability is
unpredictable, and prior art could render our patents invalid. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we
would lose at least part, and perhaps all, of the patent protection on one or more drug candidates. Such a loss of patent protection would have a material
adverse impact on our business.
These lawsuits are expensive and would consume time and resources and divert the attention of managerial and scientific personnel even if we
were successful in stopping the infringement of such patents. In addition, there is a risk that the court will decide that such patents are not valid and that we
do not have the right to stop the other party from using the claimed inventions. There is also the risk that, even if the validity of such patents is upheld, the
court will refuse to stop the other party on the ground that such other party’s activities do not infringe our rights to such patents. In addition, the U.S.
Supreme Court has recently modified some tests used by the USPTO in granting patents over the past 20 years, which may decrease the likelihood that we
will be able to obtain patents and increase the likelihood of challenge of any patents we obtain or license.
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Interference or derivation proceedings provoked by third parties or brought by us or declared by the USPTO may be necessary to determine the
priority of inventions with respect to our patents or patent applications. An unfavorable outcome could require us to cease using the related technology or to
attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially
reasonable terms or at all, or if a non-exclusive license is offered and our competitors gain access to the same technology. Our defense of litigation or
interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. In addition, the
uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our clinical trials,
continue our research programs, license necessary technology from third parties or enter into development or manufacturing partnerships that would help
us bring our drug candidates to market.
Even if resolved in our favor, litigation or other legal proceedings relating to our intellectual property rights may cause us to incur significant
expenses, and could distract our technical and management personnel from their normal responsibilities. 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. Uncertainties resulting from the initiation
and continuation of patent litigation or other proceedings could compromise our ability to compete in the marketplace.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that
some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the
results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could
have a material adverse effect on the price of our common stock.
Our ability to enforce our patent rights depends on our ability to detect infringement. It may be difficult to detect infringers who do not
advertise the components or methods that are used in connection with their drug candidates. Moreover, it may be difficult or impossible to obtain evidence
of infringement in a competitor’s or potential competitor’s drug candidate. We may not prevail in any lawsuits that we initiate, and the damages or other
remedies awarded if we were to prevail may not be commercially meaningful.
In addition, proceedings to enforce or defend our patents could put our patents at risk of being invalidated, held unenforceable or interpreted
narrowly. Such proceedings could also provoke third parties to assert claims against us, including that some or all of the claims in one or more of our
patents are invalid or otherwise unenforceable. If any of our patents covering our drug candidates are invalidated or found unenforceable, or if a court
found that valid, enforceable patents held by third parties covered one or more of our drug candidates, our competitive position could be harmed or we
could be required to incur significant expenses to enforce or defend our rights. If we initiate lawsuits to protect or enforce our patents, or litigate against
third party claims, such proceedings would be expensive and would divert the attention of our management and technical personnel.
We may infringe the intellectual property rights of others, which may prevent or delay our drug development efforts and stop us from
commercializing or increase the costs of commercializing our drug candidates.
Our success will depend in part on our ability to operate without infringing the intellectual property rights of third parties. We cannot guarantee
that our drug candidates, or manufacture or use of our drug candidates, will not infringe third-party patents.
Furthermore, a third party may claim that we or our manufacturing or commercialization collaborators are using inventions covered by the
third party’s patent rights and may go to court to stop us from engaging in our normal operations and activities, including making or selling our drug
candidates. These lawsuits are costly and could affect our results of operations and divert the attention of managerial and scientific personnel. There is a
risk that a court would decide that we or our commercialization collaborators are infringing the third party’s patents and would order us or our collaborators
to stop the activities covered by the patents. In that event, we or our commercialization collaborators may not have a viable way around the patent and may
need to halt commercialization of the relevant drug candidate. In addition, there is a risk that a court will order us or our collaborators to pay the other party
damages for having violated the other party’s patents. If we collaborate with third parties in the development of technology in the future, our collaborators
may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could
jeopardize or invalidate our intellectual property or proprietary information or expose us to litigation or potential liability. Further, our collaborators may
infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability. In the future, we may agree to indemnify
our collaborators against certain intellectual property infringement claims brought by third parties. The pharmaceutical and biotechnology industries have
produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of drug candidates or
methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform.
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Any claims of patent infringement asserted by third parties would be time consuming and could:
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result in costly litigation;
divert the time and attention of our technical personnel and management;
cause development delays;
prevent us from commercializing atuzaginstat or our other drug candidates until the asserted patent expires or is finally held invalid or
not infringed in a court of law;
require us to develop non-infringing technology, which may not be possible on a cost-effective basis;
require us to pay damages to the party whose intellectual property rights we may be found to be infringing, which may include treble
damages if we are found to have been willfully infringing such intellectual property;
require us to pay the attorney’s fees and costs of litigation to the party whose intellectual property rights we may be found to be
infringing; and/or
require us to enter into royalty or licensing agreements, which may not be available on commercially reasonable terms, or at all.
If we are sued for patent infringement, we would need to demonstrate that our drug candidates or methods either do not infringe the patent
claims of the relevant patent or that the patent claims are invalid, and we may not be able to do this. Proving invalidity is difficult.
For example, in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome the presumption of
validity enjoyed by issued patents. Even if we are successful in these proceedings, we may incur substantial costs and divert management’s time and
attention in pursuing these proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the patent rights of others,
we may be required to seek a license, which may not be available, defend an infringement action or challenge the validity of the patents in court. Patent
litigation is costly and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we do not
obtain a license, develop or obtain non-infringing technology, fail to defend an infringement action successfully or have infringed patents declared invalid,
we may incur substantial monetary damages, encounter significant delays in bringing our drug candidates to market and be precluded from manufacturing
or selling our drug candidates.
We do not routinely conduct independent reviews of pending patent applications of and patents issued to third parties. We cannot be certain
that others have not filed patent applications for technology covered by our pending applications, or that we were the first to invent the technology,
because:
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some patent applications in the United States may be maintained in secrecy until the patents are issued;
patent applications in the United States and elsewhere can be pending for many years before issuance, or unintentionally abandoned
patents or applications can be revived;
pending patent applications that have been published can, subject to certain limitations, be later amended in a manner that could cover
our technologies, our drug candidates or the use of our drug candidates;
identification of third-party patent rights that may be relevant to our technology is difficult because patent searching is imperfect due to
differences in terminology among patents, incomplete databases and the difficulty in assessing the meaning of patent claims;
patent applications in the United States are typically not published until 18 months after the priority date; and
publications in the scientific literature often lag behind actual discoveries.
Furthermore, the scope of a patent claim is determined by an interpretation of the law, the written disclosure in a patent and the patent’s
prosecution history and can involve other factors such as expert opinion. Our interpretation of the relevance or the scope of claims in a patent or a pending
application may be incorrect, which may negatively impact our ability to market our drug candidates. Further, we may incorrectly determine that our
technologies, or drug candidates are not covered by a third-party patent or may incorrectly predict whether a third party’s pending patent application will
issue with claims of relevant scope. Our determination of the expiration date of any patent in the United States or abroad that we consider relevant may be
incorrect, which may negatively impact our ability to develop and market our drug candidates.
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Our competitors may have filed, and may in the future file, patent applications covering technology similar to ours, and others may have or
obtain patents or proprietary rights that could limit our ability to make, use, sell, offer for sale or import our drug candidates and future approved products
or impair our competitive position. Numerous third-party U.S. and foreign issued patents and pending patent applications exist in the fields in which we are
developing drug candidates. There may be third-party patents or patent applications with claims to compositions, formulations, methods of manufacture or
methods for treatment related to the use or manufacture of our drug candidates. Any such patent application may have priority over our patent applications,
which could further require us to obtain rights to issued patents covering such technologies. If another party has filed a U.S. patent application on
inventions similar to ours, we may have to participate in an interference proceeding declared by the USPTO to determine priority of invention in the United
States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful if, unbeknownst to us, the other party
had independently arrived at the same or similar inventions prior to our own inventions, resulting in a loss of our U.S. patent position with respect to such
inventions. Other countries have similar laws that permit secrecy of patent applications, and may be entitled to priority over our applications in such
jurisdictions.
Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have
substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse
effect on our ability to raise the funds necessary to continue our operations.
Obtaining and maintaining our 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 fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid
to the USPTO and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents and/or applications.
We have systems in place to remind us to pay these fees, and we employ an outside firm to pay these fees due to the USPTO and non-U.S. patent agencies.
The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other
similar provisions during the patent application process. We employ reputable law firms and other professionals to help us comply, and in many cases, an
inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. If we license intellectual property we
may have to rely upon our licensors to comply with these requirements and effect payment of these fees with respect to any patents and patent applications
that we license. However, 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. In such an event, our competitors might be able to enter the market and this
circumstance would have a material adverse effect on our business.
We may be subject to claims that we have wrongfully hired an employee from a competitor or that we or our employees have wrongfully
used or disclosed alleged confidential information or trade secrets of their former employers.
We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers. If we are
not able to adequately prevent disclosure of trade secrets and other proprietary information, the value of our technology and drug candidate could be
significantly diminished.
As is common in the biotechnology and pharmaceutical industries, we employ individuals who were previously employed at other
biotechnology or pharmaceutical companies, including our competitors or potential competitors. We may be subject to claims that these employees, or we,
have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. We may also be subject to claims
that former employees, or other third parties have an ownership interest in our patents or other intellectual property. In addition, we may face claims by
third parties that our agreements with employees, contractors or consultants obligating them to assign intellectual property to us are ineffective or in
conflict with prior or competing contractual obligations of assignment, which could result in ownership disputes regarding intellectual property we have
developed or will develop and interfere with our ability to capture the commercial value of such intellectual property. Litigation may be necessary to defend
against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights,
which could adversely affect our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a
distraction to management.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed. Our reliance on
third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be
misappropriated or disclosed.
We rely on trade secrets to protect our proprietary technologies, especially where we do not believe patent protection is appropriate or
obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, outside scientific
collaborators, sponsored researchers and other advisors, and invention assignment agreements with employees, consultants and advisors, to protect our
trade secrets and other proprietary information. In addition to contractual measures, we try to protect the confidential nature of our proprietary information
using commonly accepted physical and
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technological security measures. Despite these efforts, we cannot provide any assurances that all such agreements have been duly executed, and these
agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized
disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information. For example, the FDA,
as part of its Transparency Initiative, is currently considering whether to make additional information publicly available on a routine basis, including
information that we may consider to be trade secrets or other proprietary information, and it is not clear at the present time how the FDA’s disclosure
policies may change in the future, if at all. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary
rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
In addition, such security measures may not provide adequate protection for our proprietary information, for example, in the case of
misappropriation of a trade secret by an employee, consultant, customer or third party with authorized access. Our security measures may not prevent an
employee, consultant or customer from misappropriating our trade secrets and providing them to a competitor, and any recourse we take against such
misconduct may not provide an adequate remedy to protect our interests fully. Monitoring unauthorized uses and disclosures is difficult, and we do not
know whether the steps we have taken to protect our proprietary technologies will be effective. Unauthorized parties may also attempt to copy or reverse
engineer certain aspects of our drug candidates that we consider proprietary. Enforcing a claim that a party illegally disclosed or misappropriated a trade
secret can be difficult, expensive and time-consuming, and the outcome is unpredictable. Even though we use commonly accepted security measures, the
criteria for protection of trade secrets can vary among different jurisdictions.
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 the United States are less willing or unwilling to protect trade secrets. Moreover, third parties
may still obtain this information or may come upon this or similar information independently, and we would have no right to prevent them from using that
technology or information to compete with us. Trade secrets could over time be disseminated within the industry through independent development, the
publication of journal articles and the movement of personnel skilled in the art from company to company or academic to industry scientific positions.
Though our agreements with third parties typically restrict the ability of our advisors, employees, licensors, suppliers, third-party contractors
and consultants to publish data potentially relating to our trade secrets, our agreements may contain certain limited publication rights. If any of our trade
secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such competitor from using that
technology or information to compete with us, which could harm our competitive position. Because from time to time we expect to rely on third parties in
the development, manufacture, and distribution of our drug candidates and provision of our services, we must, at times, share trade secrets with them.
Despite employing the contractual and other security precautions described above, the need to share trade secrets increases the risk that such trade secrets
become known by our competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. If
any of these events occurs or if we otherwise lose protection for our trade secrets, the value of this information may be greatly reduced and our competitive
position would be harmed.
In the future, we may need to obtain licenses of third-party technology that may not be available to us or are available only on
commercially unreasonable terms, and which may cause us to operate our business in a more costly or otherwise adverse manner that was not
anticipated.
From time to time we may be required to license technology from third parties to further develop or commercialize our drug candidates.
Should we be required to obtain licenses to any third-party technology, including any such patents required to manufacture, use or sell our drug candidates,
such licenses may not be available to us on commercially reasonable terms, or at all. The inability to obtain any third-party license required to develop or
commercialize any of our drug candidates could cause us to abandon any related efforts, which could seriously harm our business and operations.
Where we obtain licenses from or collaborate with third parties, in some circumstances, we may not have the right to control the preparation,
filing and prosecution of patent applications, or to maintain the patents, covering technology that we license from third parties, or such activities, if
controlled by us, may require the input of such third parties. We may also require the cooperation of our licensors and collaborators to enforce any licensed
patent rights, and such cooperation may not be provided. Therefore, these patents and applications may not be prosecuted and enforced in a manner
consistent with the best interests of our business, in compliance with applicable laws and regulations, which may affect the validity and enforceability of
such patents or any patents that may issue from such applications. Moreover, if we do obtain necessary licenses, we will likely have obligations under those
licenses, including making royalty and milestone payments, and any failure to satisfy those obligations could give our licensor the right to terminate the
license.
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Termination of a necessary license, or expiration of licensed patents or patent applications, could have a material adverse impact on our
business. Our business would suffer if any such licenses terminate, if the licensors fail to abide by the terms of the license, if the licensors fail to enforce
licensed patents against infringing third parties, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter
into necessary licenses on acceptable terms. Furthermore, if any exclusive licenses terminate, or if the underlying patents fail to provide the intended
exclusivity, competitors or other third parties may gain the freedom to seek regulatory approval of, and to market, drug candidates identical to ours.
Moreover, our licensors may own or control intellectual property that has not been licensed to us and, as a result, we may be subject to claims, regardless of
their merit, that we are infringing or otherwise violating the licensor’s rights. In addition, while we cannot currently determine the amount of the royalty
obligations, we would be required to pay on sales of future drug candidates, if any, the amounts may be significant. The amount of our future royalty
obligations will likely depend on the technology and intellectual property we use in drug candidates that we successfully develop and commercialize, if
any. Therefore, even if we successfully develop and commercialize drug candidates, we may be unable to achieve or maintain profitability.
Intellectual property rights do not necessarily address all potential threats to our competitive advantage.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and
may not adequately protect our business or permit us to maintain our competitive advantage. For example:
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others may be able to make drug candidates that are similar to ours but that are not covered by the claims of the patents that we own;
we or future collaborators might not have been the first to make the inventions covered by the issued patent or pending patent
application that we own or have exclusively licensed;
we or future collaborators might not have been the first to file patent applications covering certain of our inventions;
others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our
intellectual property rights;
it is possible that our pending patent applications will not lead to issued patents;
issued patents that we own or have exclusively licensed may be held invalid or unenforceable, as a result of legal challenges by our
competitors;
our competitors might conduct research and development activities in countries where we do not have patent rights and then use the
information learned from such activities to develop competitive drug candidates for sale in our major commercial markets;
we cannot ensure that any of our patents, or any of our pending patent applications, if issued, or those of our licensors, will include
claims having a scope sufficient to protect our drug candidates;
we cannot ensure that any patents issued to us or our licensors will provide a basis for an exclusive market for our commercially viable
drug candidates or will provide us with any competitive advantages;
we cannot ensure that our commercial activities or drug candidates will not infringe upon the patents of others;
we cannot ensure that we will be able to successfully commercialize our drug candidates on a substantial scale, if approved, before the
relevant patents that we own or license expire;
we may not develop additional proprietary technologies that are patentable; and
the patents of others may have an adverse effect on our business.
Should any of these events occur, they would significantly harm our business, results of operations and prospects.
Because of the expense and uncertainty of litigation, we may not be in a position to enforce our intellectual property rights against third
parties.
Because of the expense and uncertainty of litigation, we may conclude that even if a third party is infringing our issued patent, any patents that
may be issued as a result of our pending or future patent applications or other intellectual property rights, the risk-adjusted cost of bringing and enforcing
such a claim or action may be too high or not in the best interest of our company or our stockholders. In such cases, we may decide that the more prudent
course of action is to simply monitor the situation or initiate or seek some other non-litigious action or solution.
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We may not be able to protect our intellectual property rights throughout the world.
Patents are of national or regional effect, and filing, prosecuting and defending patents on all of our drug candidates throughout the world
would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the
United States. As such, 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 drug candidates made using our inventions in and into the United States or other jurisdictions. Further, the legal systems of certain countries,
particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to
pharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing drug candidates in violation of our
proprietary rights generally. In addition, certain developing countries, including China and India, have compulsory licensing laws under which a patent
owner may be compelled to grant licenses to third parties. In addition, some countries limit the enforceability of patents against third parties, including
government agencies or government contractors. In these countries, patents may provide limited or no benefit, and in those countries, we and our licensors
and licensees may have limited remedies if patents are infringed or if we or our licensors or licensees are compelled to grant a license to a third party,
which could diminish the value of those patents. This could limit our potential revenue opportunities. Further, competitors may use our technologies in
jurisdictions where we have not obtained patent protection to develop their own drug candidates and, further, may export otherwise infringing drug
candidates to territories where we have patent protection but where enforcement is not as strong as that in the United States. These drug candidates may
compete with our drug candidates, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.
Proceedings to enforce our patent 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 and 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 rights around the world may be inadequate to obtain a significant
commercial advantage from the intellectual property that we develop or license.
Changes in patent law in the United States and other jurisdictions could diminish the value of patents in general, thereby impairing our
ability to protect our drug candidates.
As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Our
patent rights may be affected by developments or uncertainty in U.S. or non-U.S. patent statutes, patent case laws in USPTO rules and regulations or in the
rules and regulations of non-U.S. patent offices.
Obtaining and enforcing patents in the pharmaceutical industry involves both technological and legal complexity and is therefore costly, time
consuming and inherently uncertain. Changes in either the patent laws or interpretation of the patent laws in the United States could increase the
uncertainties and costs. Recent patent reform legislation in the United States and other countries, including the Leahy-Smith America Invents Act (the
Leahy-Smith Act), signed into law on September 16, 2011, could increase those uncertainties and costs surrounding the prosecution of our patent
applications and the enforcement or defense of our issued patents.
The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent
applications are prosecuted, redefine prior art and provide more efficient and cost-effective avenues for competitors to challenge the validity of patents.
These include allowing third-party submission of prior art to the USPTO during patent prosecution and additional procedures to attack the validity of a
patent by USPTO administered post-grant proceedings, including post-grant review, inter partes review, and derivation proceedings. After March 2013,
under the Leahy-Smith Act, the United States transitioned to a first inventor to file system in which, assuming that the other statutory requirements 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. However, 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, Congress may pass patent reform legislation that is unfavorable to us.
The U.S. Supreme Court has ruled on several patent cases in recent years, narrowing the scope of patent protection available in certain
circumstances and weakening the rights of patent owners in certain situations. Depending on future actions by the U.S. Congress, the U.S. courts, the
USPTO and the relevant law-making bodies in other countries, the laws and regulations governing patents could change in unpredictable ways that would
weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.
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We may become subject to claims challenging the inventorship or ownership of our patents and other intellectual property.
We may be subject to claims that former employees or other third parties have an interest in our patents or other intellectual property as an
inventor or co-inventor. The failure to name the proper inventors on a patent application can result in the patents issuing thereon being unenforceable.
Inventorship disputes may arise from conflicting views regarding the contributions of different individuals named as inventors, the effects of foreign laws
where foreign nationals are involved in the development of the subject matter of the patent, conflicting obligations of third parties involved in developing
our drug candidates or as a result of questions regarding co-ownership of potential joint inventions. Litigation may be necessary to resolve these and other
claims challenging inventorship and/or ownership. Alternatively, or additionally, we may enter into agreements to clarify the scope of our rights in such
intellectual property. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights,
such as exclusive ownership of valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are
successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
Patent terms may be inadequate to protect our competitive position on our drug candidates for an adequate amount of time, and if we do
not obtain patent term extension for our drug candidates, our business may be materially harmed.
Patent rights are of limited duration. In the United States, the natural expiration of a patent is generally 20 years after its first effective non-
provisional filing date. In addition, although upon issuance a U.S. patent’s life can be increased based on certain delays caused by the USPTO, this increase
can be reduced or eliminated based on certain delays caused by the patent applicant during patent prosecution. Given the amount of time required for the
development, testing and regulatory review of new drug candidates, patents protecting such candidates might expire before or shortly after such drug
candidates are commercialized. Even if patents covering our drug candidates are obtained, once the patent life has expired for a drug candidate, we may be
open to competition from generic products. A patent term extension of up to five years based on regulatory delay may be available in the United States
under the Hatch-Waxman Act. However, only a single patent can be extended for each marketing approval, and any patent can be extended only once, for a
single drug candidate. Moreover, the scope of protection during the period of the patent term extension does not extend to the full scope of the claim, but
instead only to the scope of the drug candidate as approved. Further, a patent term extension cannot extend the remaining term of a patent beyond a total of
14 years from the date of drug candidate approval and only those claims covering such approved drug candidate, a method for using it or a method for
manufacturing it may be extended. Laws governing analogous patent term extensions in foreign jurisdictions vary widely, as do laws governing the ability
to obtain multiple patents from a single patent family. Additionally, we may not receive an extension if we fail to apply within applicable deadlines, fail to
apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent
protection afforded could be less than we request. If we are unable to obtain patent term extension or restoration, or the term of any such extension is less
than we request, the period during which we will have the right to exclusively market our drug candidate will be shortened and our competitors may obtain
approval of competing drug candidates following our patent expiration, and our revenue could be reduced.
If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of
interest and our business may be adversely affected.
Our current or future trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing
on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition among potential
partners or customers in our markets of interest. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to
build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by
owners of other trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. Over the long term, if we
are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may
be adversely affected. We may license our trademarks and trade names to third parties, such as distributors. Though these license agreements may provide
guidelines for how our trademarks and trade names may be used, a breach of these agreements or misuse of our trademarks and tradenames by our
licensees may jeopardize our rights in or diminish the goodwill associated with our trademarks and trade names. Our efforts to enforce or protect our
proprietary rights related to trademarks, trade names, trade secrets, domain names, copyrights or other intellectual property may be ineffective and could
result in substantial costs and diversion of resources and could adversely affect our financial condition or results of operations.
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Moreover, any name we have proposed to use with our drug candidate in the United States must be approved by the FDA, regardless of
whether we have registered it, or applied to register it, as a trademark. Similar requirements exist in Europe. The FDA typically conducts a review of
proposed drug candidate names, including an evaluation of potential for confusion with other drug candidate names. If the FDA (or an equivalent
administrative body in a foreign jurisdiction) objects to any of our proposed proprietary drug candidate names, we may be required to expend significant
additional resources in an effort to identify a suitable substitute name that would qualify under applicable trademark laws, not infringe the existing rights of
third parties and be acceptable to the FDA. Furthermore, in many countries, owning and maintaining a trademark registration may not provide an adequate
defense against a subsequent infringement claim asserted by the owner of a senior trademark. At times, competitors or other third parties may adopt trade
names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could
be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our
registered or unregistered trademarks or trade names. If we assert trademark infringement claims, a court may determine that the marks we have asserted
are invalid or unenforceable, or that the party against whom we have asserted trademark infringement has superior rights to the marks in question. In this
case, we could ultimately be forced to cease use of such trademarks.
If atuzaginstat, our lead drug candidate, obtains regulatory approval, additional competitors could enter the market with generic versions,
which may result in a material decline in sales of affected drugs.
Under the Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, a pharmaceutical manufacturer may
file an abbreviated new drug application, or ANDA, seeking approval of a generic copy of an approved, small molecule innovator drug. Under the Hatch-
Waxman Act, a manufacturer may also submit a new drug application, or NDA, under section 505(b)(2) that references the FDA’s prior approval of the
small molecule innovator drug. A 505(b)(2) NDA drug may be for a new or improved version of the original innovator drug. The Hatch-Waxman Act also
provides for certain periods of regulatory exclusivity, which preclude FDA approval (or in some circumstances, FDA filing and reviewing) of an ANDA or
505(b)(2) NDA. In addition to the benefits of regulatory exclusivity, an innovator NDA holder may have patents claiming the active ingredient, drug
formulation or an approved use of the drug, which would be listed with the drug in the FDA publication, “Approved Drug Products with Therapeutic
Equivalence Evaluations,” known as the “Orange Book.” If there are patents listed in the Orange Book, a generic or 505(b)(2) applicant that seeks to
market its drug before expiration of the patents must include in the ANDA a “Paragraph IV certification,” challenging the validity or enforceability of, or
claiming non-infringement of, the listed patent or patents. Notice of the certification must be given to the innovator, too, and if within 45 days of receiving
notice the innovator sues to protect its patents, approval of the ANDA is stayed for 30 months, or as lengthened or shortened by the court.
Accordingly, if any of our small molecule drug candidates receive FDA approval, competitors could file ANDAs for generic versions of our
drugs or 505(b)(2) NDAs that reference our drugs, respectively. If there are patents listed for atuzaginstat in the Orange Book, those ANDAs and 505(b)(2)
NDAs would be required to include a certification as to each listed patent indicating whether the ANDA applicant does or does not intend to challenge the
patent. We cannot predict how any generic competitor would address patents we may list in the Orange Book, if any, whether we would sue on any such
patents, or the outcome of any such suit.
We may not be successful in securing or maintaining proprietary patent protection for drug candidates and technologies we develop or license.
Moreover, if any of our owned or in-licensed patents that are listed in the Orange Book are successfully challenged by way of a Paragraph IV certification
and subsequent litigation, the affected drug could immediately face generic competition and its sales would likely decline rapidly and materially. Should
sales decline, we may have to write off a portion or all of the intangible assets associated with the affected drug and our results of operations and cash flows
could be materially and adversely affected.
Risks Relating to Owning Our Common Stock
The market price of our common stock is likely to be volatile and could fluctuate or decline, resulting in a substantial loss of your
investment.
The market price of our common stock has been and may continue to be volatile and could be subject to wide fluctuations in response to many
risk factors listed in this section, and others beyond our control, including:
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results of clinical trials and, in particular, our Phase 2/3 GAIN trial;
results of clinical trials of other drug candidates being evaluated for Alzheimer’s disease or other neurodegenerative diseases;
regulatory actions with respect to our drug candidates or our competitors’ drug candidates;
actual or anticipated fluctuations in our financial condition and operating results, including fluctuations in our quarterly and annual
results;
announcements of technological innovations by us or our competitors;
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overall conditions in our industry and the markets in which we operate;
addition or loss of significant customers, or other developments with respect to significant customers;
changes in laws or regulations applicable to our drug candidates;
actual or anticipated changes in our growth rate relative to our competitors;
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
additions or departures of key personnel;
competition from existing drug candidates or new drug candidates that may emerge;
issuance of new or updated research or reports by securities analysts;
fluctuations in the valuation of companies perceived by investors to be comparable to us;
disputes or other developments related to proprietary rights, including patents, litigation matters, and our ability to obtain intellectual
property protection for our technologies;
announcement or expectation of additional financing efforts;
sales of our common stock by us or our stockholders;
share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
market conditions for pharmaceutical stocks in general;
the expiration of contractual lock-up agreements with our executive officers, directors and stockholders; and
general economic and market conditions, including developments relating to the COVID-19 pandemic and the associated economic
downturn.
Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of
equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies.
These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or
international currency fluctuations, may negatively impact the market price of our common stock. In the past, stockholders have instituted securities class
action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs and
divert our management’s attention from other business concerns, which could seriously harm our business.
Future sales of our common stock in the public market could cause our share price to fall.
Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur, could depress
the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities.
Certain holders of our common stock have rights, subject to conditions, to require us to file registration statements covering their shares or to
include their shares in Securities Act registration statements that we may file for ourselves or other stockholders. Once we register these shares, they can be
freely sold in the public market. Moreover, we have also registered under the Securities Act shares of common stock that we may issue under our equity
compensation plans.
In addition, in the future, we may issue additional shares of common stock or other equity or debt securities convertible into common stock in
connection with a financing, acquisition, litigation settlement, employee arrangements or otherwise. Any such issuance could result in substantial dilution
to our existing stockholders and could cause our stock price to decline.
We have never paid dividends on our common stock and we do not intend to pay dividends for the foreseeable future. Consequently, any
gains from an investment in our common stock will likely depend on whether the price of our common stock increases.
We have never declared or paid any dividends on our common stock and do not intend to pay any dividends in the foreseeable future. We
anticipate that we will retain all of our future earnings for use in the operation of our business and for general corporate purposes. Any determination to pay
dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price
appreciation, which may never occur, as the only way to realize any future gains on their investments.
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General Risk Factors
General Risk Factors
Insiders have substantial control over us and will be able to influence corporate matters.
Our directors and executive officers and our affiliates beneficially own, in the aggregate, approximately 26.9% of our outstanding capital stock.
As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership
could limit stockholders’ ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over
us.
Our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market
price of our stock.
Our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that could delay or prevent a
change in control of our company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions.
These provisions include:
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providing for a classified board of directors with staggered, three-year terms;
authorizing our board of directors to issue preferred stock with voting or other rights or preferences that could discourage a takeover
attempt or delay changes in control;
prohibiting cumulative voting in the election of directors;
providing that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a
quorum;
prohibiting the adoption, amendment or repeal of our amended and restated bylaws or the repeal of the provisions of our amended and
restated certificate of incorporation regarding the election and removal of directors without the required approval of at least 66.67% of
the shares entitled to vote at an election of directors;
prohibiting stockholder action by written consent;
limiting the persons who may call special meetings of stockholders; and
requiring advance notification of stockholder nominations and proposals.
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, which is responsible for appointing the members of our management. In addition,
the provisions of Section 203 of the Delaware General Corporate Law, or the DGCL, govern us. These provisions may prohibit large stockholders, in
particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time without the consent
of our board of directors.
These and other provisions in our amended and restated certificate of incorporation and our amended and restated bylaws and under Delaware
law could discourage potential takeover attempts, reduce the price investors might be willing to pay in the future for shares of our common stock and result
in the market price of our common stock being lower than it would be without these provisions.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the sole and
exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ abilities to obtain a favorable
judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation provide that, unless we consent to the selection of an alternative forum, to the fullest
extent permitted by law, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for:
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any derivative action or proceeding brought on our behalf;
any action asserting a claim of breach of a fiduciary duty owed by, or other wrongdoing by, any of our directors, officers, employees or
agents or our stockholders;
any action asserting a claim against us arising under the DGCL, our amended and restated certificate of incorporation, or our amended
and restated bylaws; and
any action asserting a claim against us that is governed by the internal-affairs doctrine;
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provided that, the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act or any
other claim for which the federal courts have exclusive jurisdiction; and provided further that, if and only if the Court of Chancery of the State of Delaware
dismisses any such action for lack of subject matter jurisdiction, such action may be brought in another state or federal court sitting in the State of
Delaware. Our amended and restated certificate of incorporation also provide that the federal district courts of the United States of America will be the
exclusive forum for the resolution of any complaint asserting a cause of action against us or any of our directors, officers, employees or agents and arising
under the Securities Act.
We believe these provisions may benefit us by providing increased consistency in the application of Delaware law and federal securities laws
by chancellors and judges, as applicable, particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited
schedule relative to other forums and protection against the burdens of multi-forum litigation. However, these provisions may limit a stockholder’s ability
to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees. While the Delaware Supreme
Court recently determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring such a claim arising under
the Securities Act against us, our directors, officers, or other employees in a venue other than in the federal district courts of the United States of America.
In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated
certificate of incorporation, and this may require significant additional costs associated with resolving such action in other jurisdictions.
Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us
and may reduce the amount of money available to us.
Our amended and restated certificate of incorporation and amended and restated bylaws provide that we will indemnify our directors and
officers, in each case to the fullest extent permitted by Delaware law.
In addition, as permitted by Section 145 of the DGCL, our amended and restated bylaws and our indemnification agreements that we have
entered into with our directors and officers provide that:
•
•
•
•
•
•
we will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to
the fullest extent permitted by Delaware law. Delaware law provides that a corporation may indemnify such person if such person acted
in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the registrant and, with
respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful;
we may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable
law;
we are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that
such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to
indemnification;
we will not be obligated pursuant to our amended and restated bylaws to indemnify a person with respect to proceedings initiated by
that person against us or our other indemnitees, except with respect to proceedings authorized by our board of directors or brought to
enforce a right to indemnification;
the rights conferred in our amended and restated bylaws are not exclusive, and we are authorized to enter into indemnification
agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons; and
we may not retroactively amend our amended and restated bylaw provisions to reduce our indemnification obligations to directors,
officers, employees and agents.
Our internal computer systems, or those used by our third-party research institution collaborators, CROs or other contractors or
consultants, may fail or suffer security breaches.
Despite the implementation of security measures, our internal computer systems and those of our future CROs and other contractors and
consultants may be vulnerable to damage from computer viruses and unauthorized access. Although to our knowledge we have not experienced any such
material system failure 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. For example, the loss of clinical trial data from completed, ongoing or future clinical
trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we rely on our
third-party research institution collaborators for research and development of our drug candidates and other third parties for the manufacture of our drug
candidates and to conduct clinical trials, and similar events relating to their computer systems could also have a material adverse effect on our business. To
the extent that any disruption or security breach were to result in a loss of, or damage to, our data or systems, or inappropriate disclosure of confidential or
proprietary information, we could incur liability and the further development and commercialization of our drug candidates could be delayed.
57
Our ability to utilize our federal net operating loss and tax credit carryforwards may be limited.
Our net operating loss, or NOL, carryforwards could expire unused and be unavailable to offset future income tax liabilities because of their
limited duration or because of restrictions under U.S. tax law. NOLs generated in tax years ending on or prior to December 31, 2017 are only permitted to
be carried forward for 20 taxable years under applicable U.S. federal tax law. Moreover, under the Tax Act as modified by the CARES Act, federal NOLs
generated in tax years beginning after December 31, 2017 may be carried forward indefinitely, but the deductibility of such federal NOLs may be limited to
80% of current year taxable income for tax years beginning after January 1, 2021.
Under Sections 382 and 383 of the Internal Revenue Code, of 1986, as amended (“Code”), limitations on a corporation’s ability to use its
NOLs and tax credit carryforwards apply if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50 percentage
point change (by value) in its equity ownership by certain stockholders over a three-year period. If we have experienced an ownership change at any time
since our incorporation, we may already be subject to limitations on our ability to utilize our existing NOL carryforwards and other tax attributes to offset
taxable income or tax liability. In addition, future changes in our stock ownership, which may be outside of our control, may trigger an ownership change.
Similar provisions of state tax law may also apply to limit our use of accumulated state tax attributes. As a result, even if we earn net taxable income in the
future, our ability to use our pre-change NOL carryforwards and other tax attributes to offset such taxable income or tax liability may be subject to
limitations, which could potentially result in increased future income tax liability to us.
Item 1B. Unresolved Staff Comments.
None
Item 2. Properties.
Our corporate headquarters are currently located in South San Francisco, California, where we sublease 4,911 square feet of office, research
and development, and laboratory space pursuant to a lease agreement that expires in July 2021. We also lease 3,168 square feet of office space in San
Diego, California for our clinical trial operations staff that will expire in August 2023. We believe that these facilities will be adequate for our near-term
needs. If required, we believe that suitable additional or alternative space would be available in the future on commercially reasonable terms.
Item 3. Legal Proceedings.
From time to time, we may become involved in legal proceedings arising in the ordinary course of business. We are not currently a party to any
litigation or legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on our business. Regardless of outcome,
litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, negative publicity and
reputational harm and other factors.
Item 4. Mine Safety Disclosures.
Not applicable.
58
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is listed on the Nasdaq Global Select Market under the trading symbol “CRTX”.
PART II
Our common stock has been traded on The Nasdaq Global Select Market since May 9, 2019 under the ticker symbol “CRTX”. As of February
15, 2021, there were 17 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders and
includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.
Stock Price Performance Graph
The following stock performance graph compares our total stock return with the total return for (i) the Nasdaq Composite Index and the (ii) the
Nasdaq Biotechnology Index for the period from May 9, 2019 through December 31, 2020. The figures represented below assume an investment of $100 in
our common stock at the closing price of $32.89 on the date of our IPO, May 9, 2019 and in the Nasdaq Composite Index and the Nasdaq Biotechnology
Index on May 9, 2019 and the reinvestment of dividends into shares of common stock. The comparisons in the table are required by the SEC and are not
intended to forecast or be indicative of possible future performance of our common stock. This graph shall not be deemed “soliciting material” or be
deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities
under that section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the
Securities Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
Company/Index
Cortexyme, Inc
Nasdaq Composite Index
Nasdaq Biotechnology Index
Dividend Policy
Ticker
CRTX
^IXIC
^NBI
5/9/2019
12/31/2019
100.00
100.00
100.00
170.69
113.43
114.28
12/31/2020
84.46
162.92
143.64
We have never declared or paid any cash dividends on our common stock or any other securities. We anticipate that we will retain all available
funds and any future earnings, if any, for use in the operation of our business and do not anticipate paying cash dividends in the foreseeable future. In
addition, future debt instruments may materially restrict our ability to pay dividends on our common stock. Payment of future cash dividends, if any, will be
at the discretion of the board of directors after taking into account various factors, including our financial condition, operating results, current and
anticipated cash needs, the requirements of current or then-existing debt instruments and other factors the board of directors deems relevant.
59
Sales of Unregistered Securities
None
Use of Proceeds
On May 8, 2019, our registration statement on Form S-1 (File No. 333-230853) was declared effective by the SEC for our IPO. At the closing of
our IPO on May 13, 2019 we sold 5,073,800 shares of common stock which included the exercise in full by the underwriters of their option to purchase
additional shares, at a public offering price of $17.00 per share and received gross proceeds of $86.3 million, which resulted in net proceeds to us of
approximately $77.8 million, after deducting underwriting discounts and commissions and offering related transaction costs.
There has been no material change in the planned use of proceeds from our IPO from that described in the final prospectus filed by us with the
SEC on May 9, 2019.
Issuer Purchases of Equity Securities
None
Item 6 Selected Financial Data
Not applicable.
60
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our financial
statements and related notes thereto included elsewhere in this Annual Report of Form 10-K. This discussion contains forward-looking statements that
involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions, that are based on the beliefs of our management.
Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the “Risk Factors” section of this Annual Report on Form 10-K
This discussion and analysis generally covers our financial condition and results of operations for the year ended December 31, 2020,
including year-over-year comparisons versus the year ended December 31, 2019. Our Annual Report on Form 10-K for the year ended December 31, 2019
includes a discussion and analysis of our financial condition and results of operations for the year ended December 31, 2018 in Item 7 of Part II,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Overview
We are a clinical stage biopharmaceutical company pioneering a novel disease-modifying therapeutic approach to treat what we believe to be a
key underlying cause of Alzheimer’s and other degenerative diseases. Our approach is based on the seminal discovery of the presence of Porphyromonas
gingivalis, or P. gingivalis, and its secreted toxic virulence factor proteases, called gingipains, in the brains of greater than 90% of more than 100
Alzheimer’s patients observed across multiple studies to date. Additionally, we have observed that P. gingivalis infection causes Alzheimer’s pathology in
animal models, and these effects have been successfully treated with a gingipain inhibitor in preclinical studies. Our proprietary lead drug candidate,
atuzaginstat (COR388), is an orally administered, brain-penetrating small molecule gingipain inhibitor. Atuzaginstat was well-tolerated with no concerning
safety signals in our Phase 1a and Phase 1b clinical trials conducted to date, which enrolled a total of 67 subjects, including nine patients with mild to
moderate Alzheimer’s disease. We initiated a global Phase 2/3 clinical trial of atuzaginstat, called the GAIN trial, in mild to moderate Alzheimer’s patients
in April 2019 in the United States and in September 2019 in Europe and expect top-line results by the end of 2021.
Partial Clinical Hold
On February 12, 2021 the Company received a letter from the FDA stating that a partial clinical hold has been placed on atuzaginstat
(COR388) impacting the open-label extension (OLE) phase of the company’s ongoing Phase 2/3 study, the GAIN Trial. Under the hold, no new
participants will be enrolled in the OLE and currently enrolled OLE participants will be discontinued. Participants in the fully enrolled (N=643) double-
blind, placebo-controlled randomized phase of the GAIN Trial will continue to receive study drug at their assigned dose. The partial clinical hold was
initiated following the review of hepatic adverse events in the atuzaginstat trial by the FDA. These events have been reversible and without any known
long-term adverse effects for the participants. Cortexyme will continue to collaborate with the FDA on the overall development program for atuzaginstat.
For additional information on the various risks posed by the partial clinical hold, please read Item 1A. Risk Factors included in this report.
Business Update Regarding COVID-19
The current COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our
employees, patients, communities and business operations, as well as the U.S. economy and financial markets. The full extent to which the COVID-19
pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly
uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its
impact and the economic impact on local, regional, national and international markets.
To date, our employees, vendors and clinical trial sites have been able to advance our GAIN clinical trial, complete enrollment and continue
the Open Label Extension for eligible patients completing the GAIN trial. At this time the impact of the COVID-19 pandemic has not resulted in changes
to our previously stated analysis timelines for the GAIN trial. We are continuing to assess the potential impact of the COVID-19 pandemic on our business
and operations, including our expenses, preclinical operations and clinical trials. Our office-based employees have been working primarily from home since
mid-March 2020, while ensuring essential staffing levels in our operations remain in place, including maintaining key personnel in our lab facility. We have
developed plans to enable all employees to voluntarily return to work in our offices and lab facility which include safety protocols, such as face coverings,
social distancing, frequent cleaning, and COVID-19 testing. We continue to assess the risks which take into account
61
applicable public health authority and local government guidelines and are designed to ensure community and employee safety. However, the effects of the
COVID-19 pandemic continue to rapidly evolve and even if our employees more broadly return to work in our offices and lab facility, we may have to
resume a more restrictive remote work model, whether as a result of spikes or surges in COVID-19 infection or hospitalization rates or public authority
mandates. We are not currently experiencing any significant supply chain disruptions and have drug supply for the full GAIN Trial on hand. We have
diversified our vendor relationships geographically for both starting materials and manufacturing. However, in the future, the ongoing COVID-19
pandemic, may result in the inability of some of our suppliers to deliver drug supplies on a timely basis. We have taken and continues to take proactive
measures to maintain the integrity of its ongoing clinical trial. To potentially mitigate some of the risks of COVID-19 and based on interest and the ability
to maintain milestone timelines, we enrolled approximately an additional 70 subjects in the GAIN trial. Despite these efforts, the COVID-19 pandemic
could impact timelines, subject follow up visits and study completion. We will continue to monitor the COVID-19 situation and its impact on the ability to
continue the development of, and seek regulatory approvals for, our product candidates.
For additional information on the various risks posed by the COVID-19 pandemic, please read Item 1A. Risk Factors included in this report.
Financial Overview
Since commencing material operations in 2014, we have devoted substantially all of our efforts and financial resources to building our research
and development capabilities, establishing our corporate infrastructure and most recently, executing our Phase 1a, Phase 1b and Phase 2/3 clinical trials of
atuzaginstat.
To date, we have not generated any revenue and we have never been profitable. We have incurred net losses since the commencement of our
operations. As of December 31, 2020, we had an accumulated deficit of $146.7 million. We incurred a net loss of $76.8 million in the year ended
December 31, 2020. We do not expect to generate product revenue unless and until we obtain marketing approval for and commercialize a drug candidate,
and we cannot assure you that we will ever generate significant revenue or profits.
To date, we have financed our operations primarily through the issuance and sale of convertible promissory notes and redeemable convertible
preferred stock and common stock. From inception through December 31, 2020, we received net proceeds of approximately $294.9 million from the
issuance of redeemable convertible preferred stock, convertible promissory notes and common stock. This includes net proceeds of approximately $117.6
million from the issuance and sale of common stock in a private placement to certain accredited investors received in February 2020.
As of December 31, 2020 and 2019, we had cash, cash equivalents and short-term investments of $133.8 million and $99.9 million,
respectively. The balances exclude long-term investments of $50.5 million and $16.8 million as of those same periods.
Our cash equivalents, short-term and long-term investments are held in money market funds, certificate of deposits, repurchase agreements,
investments in corporate debt securities, municipal debt obligations and government agency obligations.
We believe that our existing cash, cash equivalents and short-term investments will be sufficient to fund our planned operations through 2023,
including through the completion and the announcement of the top-line results of our Phase 2/3 GAIN trial. 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.
We expect to incur substantial expenditures in the foreseeable future as we expand our pipeline and advance our drug candidates through
clinical development, the regulatory approval process and, if approved, commercial launch activities. Specifically, in the near term we expect to incur
substantial expenses relating to our ongoing and planned clinical trials, the development and validation of our manufacturing processes, and other
development activities.
We will need substantial additional funding to support our continuing operations and pursue our development strategy. Until such time as we
can generate significant revenue from sales of an approved drug, if ever, we expect to finance our operations through the sale of equity, debt financings or
other capital sources. Adequate funding may not be available to us on acceptable 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 our drug candidates or delay
our efforts to expand our product pipeline.
62
Components of Operating Results
Operating Expenses
Research and Development Expenses
Our research and development expenses consist of expenses incurred in connection with the research and development of our research
programs. These expenses include payroll and personnel expenses, including stock-based compensation, for our research and product development
employees, laboratory supplies, product licenses, consulting costs, contract research, preclinical and clinical expenses, allocated rent, facilities costs and
depreciation. We expense both internal and external research and development costs as they are incurred. Non-refundable advance payments and deposits
for services that will be used or rendered for future research and development activities are recorded as prepaid expenses and recognized as an expense as
the related services are performed.
To date, substantially all of our research and development expenses have supported the advancement of atuzaginstat and our other drug
candidates are in early-stage preclinical development. As a result, we do not allocate our costs to individual drug candidates. We expect that at least for the
foreseeable future, a substantial majority of our research and development expense will support the clinical and regulatory development of atuzaginstat.
We expect our research and development expenses to increase substantially during the next few years as we seek to complete existing and
initiate additional clinical trials, pursue regulatory approval of atuzaginstat and advance other drug candidates into preclinical and clinical development.
Over the next few years, we expect our preclinical, clinical and contract manufacturing expenses to increase significantly relative to what we have incurred
to date. Predicting the timing or the final cost to complete our clinical program or validation of our manufacturing and supply processes is difficult and
delays may occur because of many factors.
General and Administrative Expenses
General and administrative expenses consist principally of personnel-related costs, including payroll and stock-based compensation, for
personnel in executive, finance, human resources, business and corporate development, and other administrative functions, professional fees for legal,
consulting, insurance and accounting services, allocated rent and other facilities costs, depreciation, and other general operating expenses not otherwise
classified as research and development expenses.
We anticipate that our general and administrative expenses will increase as the size of our business operations grows to support additional
research and development activities.
Interest Income
Interest and other income, net consists primarily of interest earned on our short-term and long-term investments portfolio,
Change in fair value of derivative liability
The change in the fair value of the derivative liability is the change in valuation of the bifurcated redemption premium related to the
convertible promissory notes which fully settled upon completion of Series B financing.
Critical Accounting Policies, Significant Judgments and Use of Estimates
Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of
these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, as well as the reported revenue and expenses incurred during the reporting periods.
Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to
understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
63
While our significant accounting policies are described in the notes to our financial statements, we believe that the following critical
accounting policies are most important to understanding and evaluating our reported financial results.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and development expenses consist primarily of clinical trial and contract
manufacturing expenses related to development of atuzaginstat. Also included are personnel costs for our research and product development employees,
non-personnel costs such as professional fees payable to third parties for preclinical studies and research services, laboratory supplies and equipment
maintenance, product licenses, and other consulting costs.
We estimate preclinical and clinical study and research expenses based on the services performed, pursuant to arrangements with contract
research organizations, or CROs that conduct and manage preclinical and clinical studies and research services on our behalf. We estimate these expenses
based on regular reviews with internal management personnel and external service providers as to the progress or stage of completion of services and the
contracted fees to be paid for such services. Based upon the combined inputs of internal and external resources, if the actual timing of the performance of
services or the level of effort varies from the original estimates, we will adjust the accrual accordingly. Payments associated with licensing agreements to
acquire exclusive licenses to develop, use, manufacture and commercialize products that have not reached technological feasibility and do not have
alternate commercial use are expensed as incurred. Payments made to third parties under these arrangements in advance of the performance of the related
services by the third parties are recorded as prepaid expenses until the services are rendered.
Stock-Based Compensation Expense
We measure and record compensation expense using the applicable accounting guidance for share-based payments related to stock options and
performance-based awards granted to our directors and employees. The fair value of stock options is determined by using the Black-Scholes option-pricing
model. The fair value of performance stock option awards is estimated at the date of grant, using the Monte Carlo Simulation model. The Black-Scholes
and Monte Carlo Simulation valuation models incorporate assumptions as to stock price volatility, the expected life of options or awards, a risk-free interest
rate and dividend yield. In valuing our stock options and market-based stock awards, significant judgment is required in determining the expected volatility
of our common stock and the expected life that individuals will hold their stock options prior to exercising. Expected volatility for stock options is based on
the historical volatility of our own stock and the stock of companies within our defined peer group. Further, our expected volatility may change in the
future, which could substantially change the grant-date fair value of future awards and, ultimately, the expense we record.
We expense stock-based compensation for stock options and performance awards over the requisite service period. For awards with only a
service condition, we expense stock-based compensation using the straight-line method over the requisite service period for the entire award. For awards
with a market condition, we expense over the vesting period regardless of the value that the award recipients ultimately receive.
We estimate the fair value of stock-based compensation utilizing the Black-Scholes and Monte Carlo Simulation option-pricing models, which
are impacted by the following variables:
Expected Term—We have opted to use the “simplified method” for estimating the expected term of options, whereby the expected term equals
the arithmetic average of the vesting term and the original contractual term of the option (generally 10 years).
Expected Volatility—Due to our limited operating history and a lack of company specific historical and implied volatility data, we have based
our estimate of expected volatility on the historical volatility of our own stock and the stock of companies within our defined peer group. The historical
volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term
of the stock-based awards.
Risk-Free Interest Rate—The risk-free rate assumption is based on the U.S. Treasury instruments with maturities similar to the expected term
of our stock options.
Expected Dividend—We have not issued any dividends in our history and do not expect to issue dividends over the life of the options and
therefore have estimated the dividend yield to be zero.
64
Common Stock Valuations
The estimated fair value of the common stock underlying our stock options was determined at each grant date by our board of directors, with
input from management. All options to purchase shares of our common stock are intended to be exercisable at a price per share not less than the per-
share fair value of our common stock underlying those options on the date of grant.
Prior to our IPO in May 2019, on each grant date, our board of directors made a reasonable determination of the fair value of our common
stock based on the information known to us on the date of grant, upon a review of any recent events and their potential impact on the estimated fair value
per share of the common stock, and timely valuations from an independent third-party valuation in accordance with guidance provided by the American
Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation (the Practice Aid).
The methodology to determine the fair value of our common stock included estimating the fair value of the enterprise using a market approach, which
estimates the fair value of the company by including an estimation of the value of the business based on guideline public companies under a number of
different scenarios. In determining the fair value of our common stock on each grant date, our board of directors considered numerous objective and
subjective factors, including the results of independent third party valuations, external market conditions affecting the pharmaceutical and biotechnology
industry and trends within the industry; our stage of development; the rights, preferences and privileges of our redeemable convertible preferred stock
relative to those of our common stock; the prices at which we sold shares of our redeemable convertible preferred stock; our financial condition and
operating results, including our levels of available capital resources; the progress of our research and development efforts, our stage of development and
business strategy; equity market conditions affecting comparable public companies; general U.S. market conditions and the lack of marketability of our
common stock.
Following our IPO in May 2019, our board of directors determined the fair value of our common stock based on the closing price of our
common stock on the date of grant.
Income Taxes
We account for income taxes under the asset and liability method. Current income tax expense or benefit represents the amount of income
taxes expected to be payable or refundable for the current year. Deferred income tax assets and liabilities are determined based on differences between the
financial statement reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards and are measured using the enacted tax
rates and laws that will be in effect when such items are expected to reverse. Deferred income tax assets are reduced, as necessary, by a valuation allowance
when management determines it is more likely than not that some or all of the tax benefits will not be realized.
We account for uncertain tax positions in accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes. We assess all material
positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by
relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the
largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved
uncertain tax positions must be reassessed, and we will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the
amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments
concerning the recognition and measurement of a tax benefit might change as new information becomes available.
As of December 31, 2020, our total net deferred tax assets were $35.0 million. A valuation allowance is established against the net deferred tax
assets to reduce their carrying value to an amount that is more likely than not to be realized. The deferred tax assets and liabilities are classified as
noncurrent along with the related valuation allowance. Due to a lack of earnings history, the net deferred tax assets have been fully offset by a valuation
allowance. The deferred tax assets were primarily comprised of federal and state tax net operating losses, or NOLs. Utilization of NOLs may be limited by
the “ownership change” rules, as defined in Section 382 of the Code. Similar rules may apply under state tax laws. Our ability to use our remaining NOLs
may be further limited if we experience an ownership change in connection with this offering, future offerings or as a result of future changes in our stock
ownership.
65
Results of Operations
Comparison of the Years Ended December 31, 2020 and 2019
The following table summarizes our results of operations for the periods indicated (dollars in thousands):
Operating expenses:
Research and development
General and administrative
Loss from operations
Interest income
Net loss
Research and Development Expenses
The following table summarizes our research and development expenses:
Year Ended December 31,
2020
2019
Change
$
%
$
$
61,307 $
17,586
(78,893)
2,044
(76,849) $
30,214 $
8,954
(39,168)
2,188
(36,980) $
31,093
8,632
(39,725)
(144)
(39,869)
102.9 %
96.4 %
101.4 %
(6.6) %
107.8 %
Direct research and development expenses:
Atuzaginstat (COR388)
Other direct research costs
Indirect research and development expenses:
Personnel related (including stock-based compensation)
Facilities and other research and development expenses
Total research and development expenses
Year ended December 31,
Change
2020
2019
$
%
$
42,166 $
4,304
23,422 $
1,785
18,744
2,519
13,412
1,425
61,307 $
4,005
1,002
30,214 $
9,407
423
31,093
$
80.0 %
141.1 %
234.9 %
42.2 %
102.9 %
For the year ended December 31, 2020 research and development expenses increased $31.1 million or 102.9%, from 2019. This was primarily
due to an increase of $18.7 million in expenses for our lead product candidate, atuzaginstat, which is in our Phase 2/3 GAIN clinical trial. This increase is
attributed to expenses of $10.1 million in clinical trial expense, $7.0 million in drug manufacturing costs as we scaled production of atuzaginstat and other
clinical costs of approximately $1.6 million in support of advancing atuzaginstat’s development through the study. Personnel-related expenses, including
stock-based compensation, increased by $9.4 million due to an increase in headcount as we scaled the GAIN clinical trial and our clinical manufacturing
operating relationships and capabilities during 2020. In addition, we had an increase of $2.5 million in research and development expenses related to other
preclinical programs currently in development and $0.4 million increase in our facilities costs. We expect our GAIN trial related expenses to decrease in
2021 as the trial concludes with top-line results being reported by the end of 2021. This decrease will be offset to some extent as we start our Phase 2
PEAK trial and advance other pipeline indications through pre-clinical and the clinical trial process.
General and Administrative Expenses
For the year ended December 31, 2020, general and administrative expenses increased $8.6 million, or 96.4 %, from 2019 primarily due to an
increase of $7.7 million in personnel costs, including stock-based compensation of $6.1 million, as a result of an increase in our employee headcount and
an increase of $1.3 million in insurance, legal, accounting, investor relations and other compliance cost associated with becoming a public company offset
by a decrease in travel and entertainment expense of $0.4 million due to travel restrictions related to COVID-19.
Interest Income
For the year ended December 31, 2020, interest income decreased $0.1 million or 6.6% due to a decrease in interest rate yields on the portfolio
during the year.
66
Liquidity and Capital Resources
We have incurred cumulative net losses and negative cash flows from operations since our inception and anticipate we will continue to incur
net losses for the foreseeable future. As of December 31, 2020, we had an accumulated deficit of $146.7 million. As of December 31, 2020, we had cash,
cash equivalents and investments of $184.3 million.
Based on our existing business plan, we believe that our existing cash, cash equivalents and investments will be sufficient to fund our
anticipated level of operations through at least 2023.
We will continue to require additional capital to develop our drug candidates and fund operations for the foreseeable future. We may seek to
raise capital through private or public equity or debt financings, collaborative or other arrangements with other companies, or through other sources of
financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital as and when needed could have
a negative impact on our financial condition and our ability to pursue our business strategies. We anticipate that we will need to raise substantial additional
capital, the requirements of which will depend on many factors, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
the progress, costs, trial design, results of and timing of our Phase 2/3 GAIN trial and other clinical trials of atuzaginstat, including our
Phase 2 PEAK trial for Parkinson’s disease and for potential additional indications that we may pursue beyond Alzheimer’s and
Parkinson’s disease;
the willingness of the FDA or EMA to accept our Phase 2/3 GAIN trial, as well as data from our completed and planned clinical and
preclinical studies and other work, as the basis for review and approval of atuzaginstat for Alzheimer’s disease;
the outcome, costs and timing of seeking and obtaining FDA, EMA and any other regulatory approvals;
the number and characteristics of drug candidates that we pursue;
our ability to manufacture sufficient quantities of our drug candidates;
our need to expand our research and development activities;
the costs associated with securing and establishing commercialization and manufacturing capabilities;
the costs of acquiring, licensing or investing in businesses, drug candidates and technologies;
our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any
payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and
enforcement of any patents or other intellectual property rights;
our need and ability to retain management and hire scientific and clinical personnel;
the effect of competing drugs and drug candidates and other market developments;
our need to implement additional internal systems and infrastructure, including financial and reporting systems; and
the economic and other terms, timing of and success of any collaboration, licensing or other arrangements into which we may enter in
the future.
If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Any future debt financing into which we
enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay
dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any debt
financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. If we are unable to raise additional funds
when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We may also be required to
sell or license to others rights to our drug candidates in certain territories or indications that we would prefer to develop and commercialize ourselves.
67
Summary Statement of Cash Flows
The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below (in
thousands):
Net cash (used in) provided by:
Operating activities
Investing activities
Financing activities
Net increase in cash and cash equivalents
Cash Used in Operating Activities
Year Ended December 31,
2020
2019
$
$
(50,818)
(52,431)
118,876
15,627
$
$
(33,277)
(17,747)
77,366
26,342
Net cash used in operating activities was $50.8 million for the year ended December 31, 2020, $33.3 million for the year ended December 31,
2019.
Cash used in operating activities in the year ended December 31, 2020 was primarily due to our net loss for the period of $76.8 million, which
included non-cash expenses of $15.8 million and changes to operating assets and liabilities of $10.2 million.
Cash used in operating activities in the year ended December 31, 2019 was primarily due to our net loss for the period of $37.0 million, which
included non-cash expenses of $2.6 million and changes to operating assets and liabilities of $1.9 million offset by non-cash interest income of $0.8
million.
Cash Used in Investing Activities
Cash used in investing activities was $52.4 million in the year ended December 31, 2020, primarily related to the purchase of investments of
$187.1 million and maturities of debt investments of $134.8 million.
Cash used in investing activities was $17.7 million in the year ended December 31, 2019, primarily related to the purchase of investments of
$135.4 million and maturities of debt investments of $117.7 million.
Cash Provided by Financing Activities
Cash provided by financing activities was $118.9 million in the year ended December 31, 2020, which consisted of net proceeds of
$117.6 million from our private placement and $1.3 million from the exercise of stock options.
Cash provided by financing activities was $77.4 million in the year ended December 31, 2019, which consisted of net proceeds of
$77.8 million from our IPO, $0.1 million from the exercise of stock options, less payment on our finance leases of $0.6 million.
Contractual Obligations and Commitments
We have contractual obligations from our operating and finance leases. The following table summarizes our significant binding contractual
obligations at December 31, 2020 (in thousands):
Operating and Finance Leases
Less than one year
245
$
$
1 to 3 years
3 to 5 years
More than 5
years
Total
211
$
—
$
—
$
456
Payments due by period
The terms of certain third party contract organizations for clinical trials, non-clinical studies and testing, manufacturing, and other services and
products for operating purposes require us to pay potential future payments based on milestone achievement by the vendor. The amount and timing of the
payments under these contracts varies based upon the timing of the services performed. We have not included in this disclosure any such contingent
payment obligations as the amount, timing and likelihood of such payments are not known.
68
Off-Balance Sheet Arrangements
Since our inception, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and
Exchange Commission.
Indemnification
As permitted under Delaware law and in accordance with our bylaws, we indemnify our officers and directors for certain events or occurrences
while the officer or director is or was serving in such capacity. We are also party to indemnification agreements with our officers and directors. We believe
the fair value of the indemnification rights and agreements is minimal. Accordingly, we have not recorded any liabilities for these indemnification rights
and agreements as of December 31, 2020 and December 31, 2019.
Recent Accounting Pronouncements Adopted
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure
Requirements for Fair Value Measurement. The new guidance changes disclosure requirements related to fair value measurements as part of the disclosure
framework project. The disclosure framework project aims to improve the effectiveness of disclosures in the notes to the financial statements by focusing
on requirements that clearly communicate the most important information to users of the financial statements. The Company adopted this effective January
1, 2020. The adoption of this pronouncement did not have a material impact on its financial statements or disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40)”:
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which
clarifies the accounting for implementation costs in cloud computing arrangements. The Company adopted the standard prospectively on January 1, 2020.
The adoption of this pronouncement did not have a material impact on its financial statements.
Recent Accounting Pronouncements Not Yet Adopted
The following are new accounting pronouncements that the Company is evaluating for future impacts on its financial statements:
Financial Instruments—Credit Losses: In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments which amends the principles around the recognition of credit losses by mandating entities
incorporate an estimate of current expected credit losses when determining the value of certain assets. The guidance also amends reporting around
allowances for credit losses on available-for-sale marketable securities. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit
Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates, which established that a one-time determination of the
effective date for ASU 2016-13 would be based on the Company’s SEC reporting status as of November 15, 2019. The Company was a Smaller Reporting
Company as defined by the SEC, and therefore, ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods
within those fiscal years. The Company is evaluating the impact of the guidance on its financial statements.
All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial
position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates, and to a
lesser extent, foreign currency exchange rates. We do not hold or issue financial instruments for trading purposes.
69
Item 8. Financial Statements and Supplementary Data.
Cortexyme, Inc.
Index to Financial Statements
Audited Financial Statements
Report of Independent Registered Public Accounting Firm
Balance Sheets
Statements of Operations and Comprehensive Loss
Statement of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Statements of Cash Flows
Notes to Financial Statements
70
Page
71
74
75
76
77
78
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Cortexyme, Inc.
South San Francisco, California
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Cortexyme, Inc. (the “Company”) as of December 31, 2020 and 2019, the related statements of
operations and comprehensive loss, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years in
the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States
of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's
internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 1, 2021 expressed an unqualified
opinion thereon.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of the Accounting
Standards Codification Topic 842, “Leases.”
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or
required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on
the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinion on the critical audit
matter or on the accounts or disclosures to which it relates.
Accounting for prepaid and accrued clinical trial expenses
As disclosed in Note 2 to the financial statements, the Company expenses research and development costs as incurred, which include costs relating to
clinical trial activities. Expenses related to clinical trial studies are based on estimates of the services received and efforts expended pursuant to contracts
with each of the Contract Research Organizations (“CROs”) and investigative sites. Tracking the progress of the clinical trials, including payments made by
the Company and by the CROs, allows the Company to record the appropriate expense, prepayments, and accruals under the terms of the agreements. As
described in Note 5 to the financial statements, the Company recorded prepaid research and development expenses and accrued research and development
expenses of $2,110,000 and $10,603,000 as of December 31, 2020, respectively, which includes prepayment and accrual for clinical trial expenses.
71
We identified the auditing of the Company’s prepaid and accrued clinical trial expenses as a critical audit matter. When estimating prepaid and accrued
clinical trial expenses, the Company considers several factors including clinical trial budgets, contract amendments, the high volume of data received from
the investigative sites and CROs to determine progress toward completion, and payments made. Additionally, due to the long duration of clinical trials and
the timing of invoicing received from CROs and investigative sites, the actual amounts incurred are not typically known at the time the financial statements
are issued. Auditing these elements involved especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to
address these matters.
The primary procedures we performed to address this critical audit matter included:
•
•
•
•
•
Testing management’s process for estimating prepayment or accrual of clinical trial expenses and evaluating the appropriateness of the method
used by management to develop its assumptions.
Testing the clinical trial expenses by confirming progress with CROs.
Testing the completeness and accuracy of the underlying data received from the investigative sites used in determining the clinical trial expenses,
including corroborating against executed agreements, invoices with the investigative sites and information communicated by the CROs.
Recalculating the estimated prepaid or accrued clinical trial expenses based on the Company’s assumptions.
Testing a sample of transactions by comparing the costs against the related invoices and agreements in addition to testing a sample of payments
subsequent to the year end to evaluate the completeness of clinical trial accruals.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2018.
San Jose, California
March 1, 2021
72
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Cortexyme, Inc.
South San Francisco, California
Opinion on Internal Control over Financial Reporting
We have audited Cortexyme Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2020, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO
criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the balance
sheets of the Company as of December 31, 2020 and 2019, the related statements of operations and comprehensive loss, redeemable convertible preferred
stock and stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and our
report dated March 1, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying “Item 9A, Management’s Report on Internal Control over Financial Reporting”. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
San Jose, California
March 1, 2021
73
CORTEXYME, INC.
BALANCE SHEETS
(in thousands except share and per share data)
December 31, 2020
December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents
Short term investments
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets, net
Long term investments
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Total current liabilities
Long-term operating lease liability
Total liabilities
Commitments and contingencies (See Note 7)
Stockholders’ equity:
Preferred stock, $0.001 par value, 10,000,000 authorized, no shares issued and
outstanding as of December 31, 2020 and 2019, respectively
Common stock, $0.001 par value, 100,000,000 shares authorized,
29,543,222 and 26,869,413 issued and outstanding as of December 31, 2020 and
2019, respectively
Additional paid in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
$
66,841 $
66,979
4,042
137,862
427
674
50,464
39
189,466 $
3,555 $
13,441
16,996
208
17,204
51,214
48,650
6,192
106,056
709
625
16,763
217
124,370
3,075
5,817
8,892
—
8,892
—
—
29
318,574
313
(146,654)
172,262
189,466 $
27
185,196
60
(69,805)
115,478
124,370
See accompanying notes to the financial statements
74
CORTEXYME, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands except for share and per share amounts)
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Interest income
Interest expense
Change in fair value of derivative liability
Net loss
Other comprehensive income / (loss):
Unrealized gain / (loss) on available for sales securities
Total comprehensive loss
Net loss per share - basic and diluted
2020
2019
2018
Year Ended December 31,
$
$
61,307
17,586
78,893
(78,893)
2,044
—
—
(76,849)
253
(76,596)
(2.63)
$
$
30,214 $
8,954
39,168
(39,168)
2,188
—
—
(36,980)
109
(36,871) $
(1.94)
10,085
2,034
12,119
(12,119)
806
(957)
(206)
(12,476)
(49)
(12,525)
(3.71)
Weighted average shares of common stock outstanding - basic and diluted
29,176,232
19,031,940
3,362,192
See accompanying notes to the financial statements
75
CORTEXYME, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands except share amounts)
Series A Redeemable
Convertible Preferred
Stock
Series B Redeemable
Convertible Preferred
Stock
Balance January 1, 2018
9,008,919 $ 17,178
Shares
Amount
Shares
Amount
—
— $
Common Stock
Additional
Paid in
Shares
Amount
Capital
Other
Comprehensive
Income / (Loss)
Accumulated
Deficit
Shareholders'
Equity /
(Deficit)
3,361,016 $
3 $
66 $
— $
(20,349) $
(20,280)
Issuance of Series B
redeemable
convertible preferred stock,
net of
issuance costs of $157
Issuance of Series B
redeemable
convertible preferred stock in
connection with the
conversion of
convertible promissory notes
and
accrued interest
Issuance of Series B
redeemable
convertible preferred stock in
connection
with the facility lease
agreement
Vesting of Series B redeemable
convertible
preferred stock in lieu of rent
Exercise of stock options
Stock based compensation
Other comprehensive loss
Net loss
Conversion of redeemable
convertible
preferred stock to common
stock
Vesting of Series B redeemable
convertible
preferred stock in lieu of rent
Initial public offering of
common stock, net
of issuance costs of $8,427
Exercise of stock options
Stock based compensation
Exercise of stock warrant
Other comprehensive income
Net loss
Balance December 31, 2018
Balance December 31, 2019
Issuance of common stock in
connection
with private placement, net of
issuance
costs of $7,372
Exercise of stock options
Stock based compensation
Other comprehensive income
Net loss
Balance December 31, 2020
—
— 7,890,466 75,688
—
—
—
—
—
—
—
— 1,147,205 11,027
—
—
—
—
—
—
—
—
114,437
—
—
—
—
—
—
—
153
—
—
—
—
—
—
—
—
—
9,008,919 $ 17,178 9,152,108 $ 86,868
—
—
—
—
—
—
—
—
—
—
—
51,350
—
—
—
3,412,366 $
—
—
—
—
—
3 $
—
24
155
—
—
245 $
—
—
—
(49)
—
(49) $
—
—
—
—
(12,476)
(32,825) $
—
24
155
(49)
(12,476)
(32,626)
(9,008,919) (17,178) (9,152,108) (87,816) 18,161,027
18
104,976
—
—
104,994
—
—
—
948
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
— $
—
—
—
—
—
—
—
5,073,800
194,279
—
27,941
—
—
26,869,413 $
5
1
—
—
—
—
27 $
77,822
96
2,056
1
—
—
185,196 $
—
—
—
—
109
—
60 $
—
—
—
—
—
(36,980)
(69,805) $
77,827
97
2,056
1
109
(36,980)
115,478
—
—
—
—
—
—
2,500,000
173,809
—
—
—
29,543,222 $
2
—
—
—
—
29 $
117,626
1,282
14,470
—
—
318,574 $
—
—
—
253
—
313 $
—
—
—
—
(76,849)
(146,654) $
117,628
1,282
14,470
253
(76,849)
172,262
See accompanying notes to the financial statements
76
CORTEXYME, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
2020
Year Ended December 31,
2019
2018
$
(76,849) $
(36,980) $
(12,476)
Cash flows from operating activities
Net Loss
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash interest expense related to convertible promissory notes
Non-cash rent expense
Stock based compensation
Depreciation and amortization
Accretion of discount on convertible promissory notes payable
Amortization of premium / (discount) on available for sale investments
Change in fair value of derivative liability
Changes in operating assets and liabilities:
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued expenses and other current liabilities
Net cash used in operating activities
Cash flow from investing activities:
Purchase of investments
Proceeds from maturities of investments
Purchase of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Payments of finance leases
Proceeds from issuance of convertible promissory note payable
Proceeds from issuance of commons stock upon exercise of stock options
Proceeds from Series B redeemable convertible preferred stock, net of issuance costs
Proceeds from stock warrant exercise
Deferred initial public offering costs
Proceeds from initial public offering, net of stock offering costs
Proceeds from private placement offering, net of issuance costs
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of non-cash information:
Right-of-use assets obtained in exchange for new operating lease liabilities
Conversion of Series A redeemable convertible preferred stock to common
stock on initial public offering
Conversion of Series B redeemable convertible preferred stock to common
stock on initial public offering
Acceleration of vesting of Series B redeemable convertible preferred stock
on initial public offering
Issuance of Series B redeemable convertible preferred stock in connection
with conversion of convertible promissory notes and accrued interest
Issuance of Series B redeemable convertible stock for facility lease
$
$
$
$
$
$
$
—
367
14,470
332
—
635
—
2,184
178
480
7,385
(50,818)
(187,141)
134,762
(52)
(52,431)
(34)
—
1,282
—
—
—
—
117,628
118,876
15,627
51,214
66,841 $
—
367
2,056
188
—
(812)
—
(5,324)
(207)
2,580
4,855
(33,277)
(135,415)
117,723
(55)
(17,747)
(559)
—
97
—
1
—
77,827
—
77,366
26,342
24,872
51,214 $
620 $
878 $
— $
17,178 $
— $
87,816 $
— $
— $
— $
856 $
— $
— $
263
153
155
51
694
(351)
206
(690)
50
(23)
273
(11,695)
(55,242)
8,700
(212)
(46,754)
—
250
24
75,688
—
(34)
—
—
75,928
17,479
7,393
24,872
—
—
—
—
11,027
1,100
See accompanying notes to the financial statements
77
CORTEXYME, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization
Description of Business
Cortexyme, Inc. (the “Company”) was incorporated in the State of Delaware in June 2012 and is headquartered in South San Francisco,
California. The Company is a clinical stage biopharmaceutical company focused on developing therapeutics based on data supporting a new theory of the
cause of Alzheimer’s disease and other degenerative disorders. Cortexyme is targeting a specific, infectious pathogen tied to neurodegeneration and chronic
inflammation in humans and animal models.
Initial Public Offering
On May 8, 2019, the Company’s registration statement on Form S-1 (File No. 333-230853) for its initial public offering of common stock
(“IPO”) was declared effective by the Securities and Exchange Commission (“SEC”). On May 13, 2019, the Company closed its IPO with the sale of
5,073,800 shares of common stock, which included 661,800 shares of common stock issued upon the exercise in full of the underwriters’ option to
purchase additional shares, at a public offering price of $17.00 per share, resulting in net proceeds of $77.8 million, after deducting underwriting discounts
and commissions and estimated offering expenses paid by the Company.
In addition, in connection with the closing of the IPO, all of the Company’s outstanding shares of redeemable convertible preferred stock were
automatically converted into 18,161,027 shares of common stock, and there are no shares of redeemable convertible preferred stock outstanding as of
December 31, 2020.
Private Investment in Public Equity (“PIPE”)
In February 2020, the Company completed a private investment in public equity transaction (“PIPE Financing”). The Company entered into
Stock Purchase Agreements (the “Purchase Agreements”) with certain accredited investors, including an entity affiliated with a member of the Company’s
Board of Directors, pursuant to which the Company sold and issued shares of common stock for aggregate gross proceeds of $125.0 million. Costs related
to the offering were $7.4 million. Pursuant to the Purchase Agreements, the Company sold 2,500,000 common shares at $50.00 per common share. In
connection with the PIPE Financing, the Company filed a registration statement on Form S-1 (File No. 333-237594), with the SEC registering for resale the
shares of common stock issued in the PIPE Financing. The registration statement was declared effective by the SEC on April 13, 2020.
Liquidity and Capital Resources
The Company has incurred losses and negative cash flows from operations since inception and expects to continue to generate operating losses
for the foreseeable future. As of December 31, 2020, the Company had an accumulated deficit of $146.7 million. Since inception through December 31,
2020, the Company has funded operations primarily with the net proceeds from the issuance of convertible promissory notes, from the issuance of
redeemable convertible preferred stock, from the net proceeds from the IPO and from the net proceeds from the PIPE Financing. As of December 31, 2020,
the Company had cash, cash equivalents, and short-term investments of $133.8 million, which it believes will be sufficient to fund its planned operations
for a period of at least 12 months from the date of the issuance of the accompanying financial statements. The Company also has long-term investments of
$50.5 million.
Management expects to incur additional losses in the future to fund its operations and conduct product research and development and may need
to raise additional capital to fully implement its business plan. The Company may raise additional capital through the issuance of equity securities, debt
financings or other sources in order to further implement its business plan. However, if such financing is not available when needed and at adequate levels,
the Company will need to reevaluate its operating plan and may be required to delay the development of its product candidate.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements and the notes thereto have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”) pursuant to the instructions of the SEC on Form 10-K through the rules and interpretive releases of the SEC
under federal securities law.
78
Use of Estimates
The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, and expenses, as well as related disclosure of contingent assets and liabilities. The most significant
estimates used in the Company’s financial statements relate to the determination of the fair value of common stock prior to the initial public offering,
accruals for research and development costs, useful lives of long-lived assets, stock-based compensation and related assumptions, the incremental
borrowing rate for leases and income tax uncertainties, including a valuation allowance for deferred tax assets; and contingencies. The Company bases its
estimates on historical experience and on various other market specific and other relevant assumptions that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results could differ materially from the Company’s estimates.
Risk and Uncertainties
The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Company’s future
operating results and cause actual results to vary materially from expectations include, but are not limited to, uncertainty of results of clinical trials and
reaching milestones, uncertainty of regulatory approval of the Company’s potential drug candidates, uncertainty of market acceptance of the Company’s
drug candidates, competition from substitute products and larger companies, securing and protecting proprietary technology, strategic relationships and
dependence on key individuals and sole source suppliers. The Company’s drug candidate will require approvals from the U.S. Food and Drug
Administration (FDA) and comparable foreign regulatory agencies prior to commercial sales in their respective jurisdictions. There can be no assurance
that any drug candidate will receive the necessary approvals. If the Company was denied approval, approval was delayed or the Company was unable to
maintain approval for any drug candidate, it could have a materially adverse impact on the Company.
In connection with the COVID-19 pandemic, governments have implemented significant measures, including closures, quarantines, travel
restrictions and other social distancing directives, intended to control the spread of the virus. Companies have also taken precautions, such as requiring
employees to work remotely, imposing travel restrictions, and temporarily closing businesses. To the extent that these restrictions remain in place,
additional prevention and mitigation measures are implemented in the future or there is uncertainty about the effectiveness of these or any other measures
to contain or treat COVID-19, there is likely to be a continuing, adverse impact on global economic conditions and consumer confidence and spending,
which could materially and adversely affect the Company’s research and development, as well as operational activities. At this time, the Company
continues to manage and mitigate potential disruptions to its research and future manufacturing and supply chain considerations. The Company has not
experienced significant hinderances to its operations or material negative financial impacts as compared to prior periods. At this time, the extent to which
the COVID-19 pandemic impacts the Company’s business will depend on future developments which are highly uncertain and cannot be predicted.
Segments
The Company operates and manages its business as one reportable and operating segment, which is the business of developing and
commercializing therapeutics. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an
aggregate basis for purposes of allocating and evaluating financial performance. All long-lived assets are maintained in the United States of America.
Cash, Cash Equivalents and Investments
The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash
equivalents include marketable securities. Management determines the appropriate classification of its investments in debt securities at the time of purchase
and at the end of each reporting period. Investments with original maturities beyond three months at the date of purchase and which mature at, or less than
twelve months from the balance sheet date are classified as short-term investments. Investments with a maturity beyond twelve months from the balance
sheet date are classified as long-term investments. Collectively, cash equivalents, short-term investments and long-term investments are
considered available-for-sale and are recorded at fair value. Unrealized gains and losses are recorded as a component of other comprehensive loss in the
statement of operations and included as a separate component of redeemable convertible preferred stock and stockholders’ equity (deficit). Realized gains
and losses are included in interest income in the statements of operations and comprehensive loss.
Premiums (discounts) are amortized (accreted) over the life of the related investment as an adjustment to yield using the straight-line interest
method. Dividend and interest income are recognized when earned. These amounts are recorded in “interest income” in the statements of operations and
comprehensive loss.
79
Property and Equipment, Net
Property and equipment are stated at cost and reduced by accumulated depreciation. Depreciation expense is recognized using the straight-
line method over the estimated useful lives of the respective assets. Depreciation and amortization begin at the time the asset is placed in service.
Maintenance and repairs are charged to expense as incurred, and improvements are capitalized. When assets are retired or otherwise disposed of, the cost
and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in operations in the period realized.
The useful lives of property and equipment are as follows:
Computer equipment
Lab equipment
Finance lease right of use assets
Leasehold improvement
Office furniture
3 years
5 years
Shorter of estimated useful life or lease term
Shorter of estimated useful life or lease term
3 years
Concentration of Credit Risk
Cash equivalents, short-term and long-term investments are financial instruments that potentially subject the Company to concentrations of
credit risk. The Company invests in money market funds, repurchase agreements, treasury bills and notes, government bonds, commercial paper and
corporate notes. The Company limits its credit risk associated with cash equivalents, short-term and long-term investments by placing them with banks and
institutions it believes are highly credit worthy and in highly rated investments.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment charge would be recorded when estimated
undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Impairment, if any,
is assessed using discounted cash flows or other appropriate measures of fair value. The Company did not recognize any impairment charges for the years
ended December 31, 2020, 2019 and 2018.
Leases
The Company adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) as of January 1, 2019 using the modified
retrospective method. The results for years ended December 31, 2019 and 2020 are presented under ASC 842. The results for the year ended December 31,
2018 were not adjusted and continue to be reported in accordance with historical accounting under prior lease guidance, ASC 840, Leases (Topic 840). The
Company also elected the package of practical expedients under the transition guidance that will retain the historical lease classification and initial direct
costs for any leases that existed prior to adoption of the new guidance and the practical expedient to not separate lease and non-lease components.
The Company determines if an arrangement includes a lease at inception. Right-of-use lease assets and lease liabilities are recognized based on
the present value of the future minimum lease payments over the lease term at the commencement date. The right-of-use lease asset includes any lease
payments made and excludes lease incentives. Incremental borrowing rate is used in determining the present value of future payments. The Company
applies a portfolio approach to the property leases to apply an incremental borrowing rate to leases with similar lease terms. The lease terms may include
options to extend or terminate the lease. The Company recognizes the options to extend the lease as part of the right-of-use lease assets and lease liabilities
only if it is reasonably certain that the option would be exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the
non-cancelable lease term.
As a result of the adoption of the new guidance, effective January 1, 2019, the Company recorded a right-of-use lease asset of $0.9 million, a
short-term lease liability of $0.3 million, and a long-term lease liability of $0.6 million and no cumulative effect adjustment was made to the retained
earnings as of the adoption date. See “Note 6. Leases” for further disclosure.
80
Research and Development Expenses
Research and development costs are expensed as incurred. Research and development expenses consist primarily of personnel costs for the
Company’s research and product development employees. Also included are non-personnel costs such as professional fees payable to third parties for
preclinical and clinical studies and research services, laboratory supplies and equipment maintenance, product licenses, and other consulting costs. The
Company estimates preclinical and clinical study and research expenses based on the services performed, pursuant to contracts with contract research
organizations (“CROs”) that conduct and manage preclinical and clinical studies and research services on its behalf. Expenses related to clinical studies are
based on estimates of the services received and efforts expended pursuant to contracts with many research institutions, clinical research organizations and
other service providers that conduct and manage clinical studies on our behalf. The financial terms of these agreements are subject to negotiation and vary
from contract to contract and may result in uneven payment flows. Generally, these agreements set forth the scope of work to be performed at a fixed fee or
unit price. Payments under the contracts are mainly driven by time and materials incurred by these service providers. Payments made to third parties under
these arrangements in advance of the performance of the related services by the third parties are recorded as prepaid expenses until the services are
rendered. Expenses related to clinical studies are generally recorded based on the timing of when services that have been performed on the Company’s
behalf by the service providers, clinical trial budgets and in accordance with the contracts and related amendments. The determination of timing involves
reviewing open contracts and purchase orders, communicating with applicable personnel to identify the timing of when services that have been performed
on the Company’s behalf and estimating the level of service performed and the associated cost incurred for the service when the Company has not yet been
invoiced or otherwise notified of actual cost. The Company periodically confirms the accuracy of estimates with the service providers and makes
adjustments if necessary. Examples of estimated clinical expenses include:
•
•
•
•
fees paid to Contract Research Organizations, or CROs, in connection with clinical studies;
fees paid to investigative sites in connection with clinical studies;
fees paid to contract manufacturers in connection with the production of clinical study materials; and
fees paid to vendors in connection with preclinical development activities.
If the actual timing of the performance of services or the level of effort varies from the original estimates, the Company will adjust the prepaid
or accrual accordingly. Payments associated with licensing agreements to acquire exclusive licenses to develop, use, manufacture and commercialize
products that have not reached technological feasibility and do not have alternate commercial use are expensed as incurred.
Patent Costs
The Company has no historical data to support a probable future economic benefit for the arising patent applications, filing and prosecution
costs. Therefore, patent costs are expensed as incurred.
Stock-Based Compensation
The Company accounts for stock-based compensation arrangements with employees in accordance with Accounting Standards Codification
(“ASC”) 718, Compensation—Stock Compensation. Stock-based awards granted include stock options with service-based vesting. ASC 718 requires the
recognition of compensation expense, using a fair value-based method, for costs related to all stock-based payments. The Company’s determination of the
fair value of stock options with service-based vesting on the date of grant utilizes the Black-Scholes option-pricing model and is impacted by its common
stock price as well as other variables including: but not limited to, expected term that options will remain outstanding, expected common stock price
volatility over the term of the option awards, risk-free interest rates and expected dividends. The fair value of a stock-based award is recognized over the
period during which an optionee is required to provide services in exchange for the option award, known as the requisite service period (usually the vesting
period) on a straight-line basis. Stock-based compensation expense is recognized based on the fair value determined on the date of grant and is reduced for
forfeitures as they occur. The Company uses a Monte Carlo Simulation method to estimate the grant date fair value of stock option awards with market-
based performance conditions.
Redeemable Convertible Preferred Stock
The Company recorded all shares of convertible preferred stock at their respective fair values less issuance costs on the dates of issuance. The
convertible preferred stock was recorded outside of stockholders’ equity (deficit) because, in the event of certain deemed liquidation events considered not
solely within the Company’s control, such as a merger, acquisition and sale of all or substantially all of all the Company’s assets, the convertible preferred
stock will become redeemable at the option of the holders. Additionally, holders with 60% of majority had the right to demand redemption on or after
May 23, 2025. In the event of a change of control of the Company, proceeds received from the sale of such shares would have been distributed in
accordance with the liquidation preferences set forth in the Company’s Amended and Restated Certificate of Incorporation unless the holders of
81
convertible preferred stock had converted their shares of convertible preferred stock into shares of common stock. The Company determined not to adjust
the carrying values of the convertible preferred stock to the liquidation preferences of such shares because of the uncertainty of whether or when such an
event would occur. In connection with the closing of the IPO, all of the Company’s outstanding shares of redeemable convertible preferred stock were
automatically converted into 18,161,027 shares of common stock, and there are no shares of redeemable convertible preferred stock outstanding as of
December 31, 2020 and 2019.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Current income tax expense or benefit represents the amount of
income taxes expected to be payable or refundable for the current year. Deferred income tax assets and liabilities are determined based on differences
between the financial statement reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards and are measured using the
enacted tax rates and laws that will be in effect when such items are expected to reverse. Deferred income tax assets are reduced, as necessary, by a
valuation allowance when management determines it is more likely than not that some or all of the tax benefits will not be realized.
The Company accounts for uncertain tax positions in accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes. The
Company assesses all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to
assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s
sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As of each
balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the
sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits
requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes
available.
The Company includes any penalties and interest expense related to income taxes as a component of other expense and interest expense, net, as
necessary.
Comprehensive Income (Loss)
The Company is required to report all components of comprehensive income (loss), including net loss, in the financial statements in the period
in which they are recognized. Comprehensive income (loss) is defined as a change in equity of a business enterprise during a period, resulting from
transactions and other events and circumstances from non-owner sources. The Company had unrealized gain from its available-for-sale securities during
the years ended December 31, 2020 and 2019 and an unrealized loss from its available-for sale securities during the year ended December 31, 2018, which
are considered other comprehensive income (loss).
Net Loss per Share
Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period,
without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of
common shares and common share equivalents of potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share
calculation, redeemable convertible preferred stock, warrants and common stock options are considered to be potentially dilutive securities. Because the
Company reported a net loss for the years ended December 31, 2020, 2019 and 2018, and the inclusion of the potentially dilutive securities would be
antidilutive, diluted net loss per share is the same as basic net loss per share for both periods.
Recent Accounting Pronouncements Adopted
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure
Requirements for Fair Value Measurement. The new guidance changes disclosure requirements related to fair value measurements as part of the disclosure
framework project. The disclosure framework project aims to improve the effectiveness of disclosures in the notes to the financial statements by focusing
on requirements that clearly communicate the most important information to users of the financial statements. The Company adopted this effective January
1, 2020. The adoption of this pronouncement did not have a material impact on its financial statements or disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40)”: Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which clarifies the
accounting for implementation costs in cloud computing arrangements. The Company adopted the standard prospectively on January 1, 2020. The adoption
of this pronouncement did not have a material impact on its financial statements.
82
Recent Accounting Pronouncements Not Yet Adopted
The following are new accounting pronouncements that the Company is evaluating for future impacts on its financial statements:
Financial Instruments—Credit Losses: In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments which amends the principles around the recognition of credit losses by mandating entities
incorporate an estimate of current expected credit losses when determining the value of certain assets. The guidance also amends reporting around
allowances for credit losses on available-for-sale marketable securities. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit
Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates, which established that a one-time determination of the
effective date for ASU 2016-13 would be based on the Company’s SEC reporting status as of November 15, 2019. The Company was a Smaller Reporting
Company as defined by the SEC, and therefore, ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods
within those fiscal years. The Company is evaluating the impact of the guidance on its financial statements.
All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.
Note 3. Fair Value Measurements
The fair value of our financial instruments reflects the amounts that we estimate we would receive in connection with the sale of an asset or
pay in connection with the transfer of a liability in an orderly transaction between market participants at the measurement date (exit price). We disclose and
recognize the fair value of our assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The
guidance establishes three levels of the fair value hierarchy as follows:
Level 1 - Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the
measurement date;
Level 2 - Inputs other than quoted prices that are observable for the assets or liability either directly or indirectly, including inputs in markets
that are not considered to be active;
Level 3 - Inputs that are unobservable. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of
input that is significant to the fair value measurement.
The carrying amounts of the Company’s financial instruments, which include cash, accounts payable and accrued liabilities and other current
liabilities approximate their fair values due to their short maturities.
Our assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments
and consider factors specific to the asset or liability. During the years presented, the Company has not changed the manner in which it values assets and
liabilities that are measured at fair value using Level 3 inputs. The Company recognizes transfers between levels of the fair value hierarchy as of the end of
the reporting period. There were no transfers within the hierarchy during the years ended December 31, 2020 and 2019.
Financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used in such measurements by
major security type as of December 31, 2020 and 2019 are presented in the following tables (in thousands):
Money market funds
Certificates of Deposit
Repurchase Agreements
Corporate notes
Government and agency notes
Municipal notes
Total
Fair Value Measurements at December 31, 2020
Total
Level 1
Level 2
Level 3
$
$
15,661 $
30,765
15,000
75,426
8,296
3,446
148,594 $
83
15,661 $
—
—
—
—
—
15,661 $
— $
30,765
15,000
75,426
8,296
3,446
132,933 $
—
—
—
—
—
—
Money market funds
Certificates of Deposit
Repurchase Agreements
Corporate notes
Government notes
Commercial Paper
Total
Fair Value Measurements at December 31, 2019
Total
Level 1
Level 2
Level 3
$
$
30,054 $
20,046
15,000
38,783
7,574
1,096
112,553 $
30,054 $
—
—
—
—
—
30,054 $
— $
20,046
15,000
38,783
7,574
1,096
82,499 $
—
—
—
—
—
—
—
Note 4: Cash, Cash Equivalents and Investments
The following tables categorize the fair values of cash, cash equivalents, short-term investments and long-term investments measured at fair
value on a recurring basis on our balance sheets (in thousands):
Cash and cash equivalents:
Cash
Money market funds
Repurchase agreements
Certificates of deposit
Corporate notes
Total cash and cash equivalents
Short-term investments:
Commercial paper
Certificates of deposit
Municipal notes
Corporate notes
Government and agency notes
Total short-term investments
Long-term investments
Corporate notes
Certificates of deposit
Municipal notes
Government and agency notes
Total long-term investments
December 31,
2020
2019
$
$
$
$
$
$
35,690
15,661
15,000
490
—
66,841
$
$
— $
23,387
2,365
34,991
6,236
66,979 $
40,435 $
6,888
1,081
2,060
50,464 $
4,074
30,054
15,000
985
1,101
51,214
1,096
15,428
—
24,552
7,574
48,650
13,130
3,633
—
—
16,763
The investments are classified as available-for-sale securities. As of December 31, 2020, the weighted average remaining contractual maturities
of available-for-sale securities was approximately 10 months. At December 31, 2020 and 2019, the balance in the Company’s accumulated other
comprehensive income (loss) was comprised solely of activity related to the Company’s available-for-sale securities. There were no realized gains or losses
recognized on the sale or maturity of available-for-sale securities for the years ended December 31, 2020, 2019 or 2018 and as a result, the Company did
not reclassify any amounts out of accumulated other comprehensive income for the year. The Company has a limited number of available-for-sale securities
in insignificant unrealized loss positions as of December 31, 2020 and 2019, which the Company does not intend to sell and has concluded it will not be
required to sell before recovery of the amortized cost for the investment at maturity.
84
The following table summarizes the available-for-sale securities (in thousands):
Money market funds
Certificates of Deposit
Repurchase Agreements
Corporate notes
Government and agency notes
Municipal notes
$
Total cash equivalents and investments
$
Classified as:
Cash equivalents (maturities within 90 days)
Short-term investments (maturities within one year)
Long-term investments (maturities beyond 1 year)
Total cash equivalents and investments
Money market funds
Certificates of Deposit
Repurchase Agreements
Corporate notes
Government notes
Commercial Paper
$
Total cash equivalents and investments
$
Classified as:
Cash equivalents (maturities within 90 days)
Short-term investments (maturities within one year)
Long-term investments (maturities beyond 1 year)
Total cash equivalents and investments
Fair Value Measurements at December 31, 2020
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
15,661 $
30,603
15,000
75,298
8,274
3,445
148,281 $
— $
162
—
183
22
1
368 $
— $
—
—
(55)
—
—
(55) $
$
$
15,661
30,765
15,000
75,426
8,296
3,446
148,594
31,151
66,979
50,464
148,594
Fair Value Measurements at December 31, 2019
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
30,054 $
19,992
15,000
38,788
7,563
1,096
112,493 $
— $
54
—
—
11
—
65 $
— $
—
—
(5)
—
(5) $
$
$
30,054
20,046
15,000
38,783
7,574
1,096
112,553
47,140
48,650
16,763
112,553
Note 5: Balance Sheet Components
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
Prepaid expenses
Prepaid insurance
Prepaid research and development expenses
Other current assets
Total prepaid expenses and other current assets
85
December 31,
2020
2019
$
$
274 $
964
2,110
694
4,042 $
129
858
4,517
688
6,192
Property and equipment, net
Property and equipment, net consisted of the following (in thousands):
Computer equipment
Lab equipment
Finance lease right of use assets
Leasehold improvement
Office furniture
Less: accumulated amortization and depreciation
Property and equipment, net
December 31,
2020
2019
$
$
33
405
557
21
26
(615)
427
$
$
28
405
559
—
—
(283)
709
Depreciation expense for property and equipment was $332,000, $188,000 and $51,000 for the years ended December 31, 2020, 2019, and
2018, respectively.
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
Personnel expenses
Professional fees
Research and development expenses
Other
Total accrued expenses and other current liabilities
Note 6. Leases
Real Estate Operating Leases
December 31,
2020
2019
$
$
2,415 $
141
10,603
282
13,441 $
1,261
96
4,410
50
5,817
In June 2018, the Company entered into a three-year lease agreement with no renewal options with an investor in the Series B redeemable
convertible preferred stock. The lease began on July 16, 2018 and provides 3,185 square feet of office and laboratory space in South San Francisco,
California. The Company issued 114,437 shares of its Series B redeemable convertible preferred stock with a fair value of $1.1 million in exchange for the
leased facility. No other payments are due under the lease. The common area maintenance and other operating costs are included in the base rent. 100% of
the issued shares were initially subject to a repurchase option. Pursuant to the terms of the lease, each month beginning on the one-month anniversary of the
commencement date of the lease, 1/36th of the total shares are released from the repurchase option until all shares are released over the lease period of three
years. The scheduled release of shares ceased immediately upon the IPO which was a terminating event.
The Company completed its IPO on May 13, 2019 and as a result, pursuant to the terms of the lease agreement, all previously unvested shares
were fully vested and as part of the IPO process, all outstanding shares of the Company’s redeemable convertible preferred stock including the Series B
redeemable convertible preferred stock issued in connection with the lease agreement were converted into shares of the Company’s common stock on a 1-
for-1 basis and the operating lease liability was extinguished.
In May 2019, the Company entered into an amendment to the lease agreement to rent additional space in the same facility under the same
terms as its existing facility lease except the terms of payment. Under the terms of the amendment, the Company paid a one-time fee of approximately
$63,000 for the additional space and the lease agreement will terminate in July 2021. No other payments are due under the lease agreement and no renewal
option is available. As the entire lease is prepaid, there is no associated lease liability.
In May 2020, the Company entered into a second amendment to the lease agreement to rent additional space in the same facility under the
same terms as its existing facility lease except the terms of payment. Under the terms of the amendment, the Company will pay rent monthly for the
additional space and the lease agreement will terminate in July 2021. The Company recorded an operating lease asset and liability of $172,000.
86
The Company believes suitable space will be available before the July 2021 lease termination of its South San Francisco facility.
In May 2020, the Company entered into a lease agreement to rent space in San Diego, California for our clinical operations team. The lease
agreement is for three years which commenced August 1, 2020. Total payments under the lease will be $337,000. The Company paid a security deposit of
$29,000 and is included in Other Assets on our December 31, 2020 balance sheet. At the commencement of the lease, the Company recorded an operating
lease asset of $326,000, which consists of an operating lease liability of $317,000 and cash rent prepayment of $9,000. The Company recognizes lease
expense on a straight-line basis over the term of its operating lease. As of December 31, 2020, future rent expense of $596,000 will be recognized over the
remaining terms of 7 to 31 months on a straight-line basis over the respective lease period.
Clinical Equipment Operating Lease
The Company uses certain vendor supplied equipment in connection with its on-going clinical trial. The Company has analyzed the vendor
agreement and determined that it contains an embedded operating lease. The Company recognizes monthly the leases costs in our research and
development expenses. The right of use asset and lease liability are recognized at the lease commencement date based on the present value of lease
payments over the lease term. The Company’s lease does not provide an implicit rate. The Company used an adjusted historical incremental borrowing rate,
based on the information available at the approximate lease commencement date, to determine the present value of lease payments. The remaining lease
expense of $79,000 will be recognized over the remaining lease term of approximately 20 months.
Clinical Equipment Financing Lease
The Company uses certain vendor supplied equipment in connection with its on-going clinical trial. The Company has analyzed the vendor
agreements and determined that they contain embedded finance leases. The Company recognizes the depreciation expense in research and development
expenses in the statements of operations and comprehensive loss and recognizes expense on a straight-line basis starting when the equipment is placed into
service until the end of the contract term ranging from 20 to 34 months. Depreciation expense of the financing lease right of use asset for the years ended
December 31, 2020, 2019 and 2018 were $230,000, $107,000, and $0, respectively.
Supplemental balance sheet information related to leases as follows (in thousands except lease terms and discount rates):
Operating lease right of use asset, net
Short-term operating lease liability
Long-term operating lease liability
Finance lease right of use asset
Finance lease accumulated amortization
Total finance lease right of use asset, net
Weighted average remaining lease term
Operating leases
Finance leases
Weighted average discount rate
Operating leases
Finance leases
Year ended December 31,
2021
2022
2023
Total lease payments
Less: imputed interest
Total remaining lease liability
December 31, 2020
674
238
208
446
$
$
$
$
$
557
(337)
220
$
December 31, 2019
625
—
—
—
559
(107)
452
1.6 years
0.9 years
1.6 years
2.1 years
2.10%
—%
—%
—%
Operating Lease
245
141
70
456
(10)
446
87
Lease costs for the years ended December 31, 2020 and 2019 were approximately:
Lease costs:
Finance lease amortization of right of use assets
Operating lease costs
Short-term lease costs
Total lease costs
Years ended December 31,
2019
2020
$
$
230 $
578
92
900 $
107
374
11
492
For the year ended December 31, 2018, rent expense under operating leases computed under the previous accounting method, ASC 840,
Leases, was approximately $387,000.
Note 7. Commitments and Contingencies
Legal Matters
The Company’s industry is characterized by frequent claims and litigation, including claims regarding intellectual property. As a result, the
Company may be subject to various legal proceedings from time to time. The results of any future litigation cannot be predicted with certainty, and
regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management
resources and other factors. Management is not aware of any pending or threatened litigation.
Indemnification
As permitted under Delaware law and in accordance with the Company’s bylaws, the Company is required to indemnify its officers and
directors for certain events or occurrences while the officer or director is or was serving in such capacity. The Company is also party to indemnification
agreements with its directors. The Company believes the fair value of the indemnification rights and agreements is minimal. Accordingly, the Company has
not recorded any liabilities for these indemnification rights and agreements as of December 31, 2020 and 2019.
Contingencies
From time to time, we may have certain contingent liabilities that arise in the ordinary course of our business activities. We accrue a liability
for such matters when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated.
Note 8. Common Stock and Common Stock Warrant
Common Stock
The Company had reserved shares of common stock for future issuance as follows:
Options issued and outstanding under the 2019 Stock Plan
Shares available for issuance under 2019 Stock Plan
Shares available for issuance under the Employee Stock Purchase Plan
Total
December 31,
2020
2019
5,465,327
269,353
536,989
6,271,669
2,393,934
2,439,779
268,295
5,102,008
The Company is authorized to issue 100,000,000 shares of common stock with a par value of $0.001 per share. Each share of common stock is
entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when and if declared by
the board of directors, subject to the prior rights of holders of any preferred stock that may be outstanding at the time. The Company has never declared any
dividends on common stock. As of December 31, 2020, and 2019, the Company had 29,543,222 and 26,869,413 shares of common stock issued and
outstanding, respectively.
88
Common Stock Warrant
In June 2014, in connection with a research grant and license agreement, the Company issued a warrant to purchase 27,941 shares of common
stock at $0.03 per share. The grant date estimated fair value of such warrants was insignificant. The warrant was immediately exercisable and expires in
June 2024. The warrant was fully exercised in May 2019.
Note 9. Equity Incentive Plans
On December 4, 2014, the Company’s stockholders approved the 2014 Stock Plan (“2014 Plan”), and most recently amended the 2014 Plan on
April 25, 2019. The 2014 Plan was amended, restated and re-named the 2019 Equity Incentive Plan (the “2019 Plan”), which became effective as of May
7, 2019, the day prior to the effectiveness of the registration statement filed in connection with the IPO. The remaining shares available for issuance under
the 2014 Plan were added to the shares reserved for issuance under the 2019 Plan.
The 2019 Plan provides for the grant of stock options (including incentive stock options and non-qualified stock options), stock appreciation
rights, restricted stock, RSUs, performance units, and performance shares to the Company’s employees, directors, and consultants. The maximum
aggregate number of shares that may be issued under the 2019 Plan is 5,131,549 shares of the Company’s common stock. In addition, the number of shares
available for issuance under the 2019 Plan will be annually increased on the first day of each of its fiscal years beginning with fiscal 2020, by an amount
equal to the least of (i) 2,146,354 shares of common stock; (ii) 4% of the outstanding shares of its common stock as of the last day of its immediately
preceding fiscal year; and (iii) such other amount as the Company’s Board of Directors may determine.
The 2019 Plan may be amended, suspended or terminated by the Company’s Board of Directors at any time, provided such action does not
impair the existing rights of any participant, subject to stockholder approval of any amendment to the 2019 Plan as required by applicable law or listing
requirements. Unless sooner terminated by the Company’s Board of Directors, the 2019 Plan will automatically terminate on April 23, 2029.
As of December 31, 2020, the Company had 269,353 shares available for future issuance under the 2019 Plan.
Stock Options
Activity for service-based stock options under the 2019 Plan is as follows:
Balance at December 31, 2017
Options granted
Options exercised
Options cancelled / forfeited
Balance at December 31, 2018
Options granted
Options exercised
Options cancelled / forfeited
Balance at December 31, 2019
Options granted
Options exercised
Options cancelled / forfeited
Balance at December 31, 2020
Options vested and expected to vest to December 31, 2020
Options exercisable at December 31, 2020
Number of
Options and
Unvested
Shares
Weighted
Average
Exercise Price
Weighted
average
remaining
contractual
life (years)
Aggregate
intrinsic
value
(In thousands)
769,409 $
1,316,342
(51,350)
(148,897)
1,885,504 $
932,639
(194,279)
(229,930)
2,393,934 $
2,798,645
(173,809)
(228,443)
4,790,327 $
4,790,327
1,471,526 $
0.39
2.08
0.46
0.41
1.57
15.87
0.51
21.09
5.35
42.95
7.38
42.56
25.47
25.47
10.32
8.89 $
—
—
—
9.07 $
—
—
—
8.62 $
—
—
—
8.69 $
8.69
7.64 $
1,108
—
—
—
1,253
—
—
—
121,593
—
—
—
49,723
49,723
30,633
Aggregate intrinsic value represents the difference between the Company’s estimated fair value of its common stock as of their respective
balance sheet dates and the exercise price of outstanding options. The total intrinsic value of options exercised was $6,697,000, $887,000 and $91,000 for
the years ended December 31, 2020, 2019 and 2018, respectively. The weighted-average grant date fair value of options granted during the years ended
December 31, 2020, 2019 and 2018 was $31.21, $11.11 and $1.26 per share, respectively. The total estimated grant date fair value of options vested during
the years ended December 31, 2020, 2019, and 2018 was $10.5 million, $1.2 million, and $0.1 million, respectively.
89
In 2020, 2019 and 2018, the Company recognized $14,267,000, $2,056,000, and $155,000 respectively, of stock-based compensation expense
related to options granted to employees and non-employees. The compensation expense is allocated on a departmental basis, based on the classification of
the option holder. No income tax benefits have been recognized in the statement of operations for stock-based compensation arrangements. As of
December 31, 2020, total unamortized employee stock-based compensation was $72.7 million, which is expected to be recognized over the remaining
estimated vesting period of 1.72 years.
Performance Stock Options (“PSOs”)
In December 2020, the Company granted 675,000 performance stock options (“PSOs”) under the Stock Incentive Plan to its executive and
senior officers. Vesting for the options is performance based and is based on continued employment at the vesting date, with the options vesting in two
installments if the Company’s average closing price in any 45 consecutive trading day period exceeds a certain amount per share prior to March 15, 2023
and March 15, 2024, respectively. PSOs represent a contingent right to purchase Common Stock upon achievement of specified market conditions.
The Company recognized stock-based compensation expense of $203,000 in 2020 relating to these PSOs. The weighted-average grant date fair
value of the PSOs granted during 2020 was $14.90 per share. As of December 31, 2020, total unamortized stock-based compensation related to PSOs was
$9,854,000, which is expected to be recognized over the remaining estimated vesting period of 2.75 years. Total intrinsic value for PSOs outstanding was
$0 for the year ended December 31, 2020.
The following table summarizes activity under the Company’s PSOs from the 2019 Plan and related information:
Balance at December 31, 2019
Options granted
Options exercised
Options cancelled
Balance at December 31, 2020
Outstanding
Vested
Stock-Based Compensation Expense
Shares Subject to
Outstanding PSOs
—
675,000
—
—
675,000
675,000 $
—
Weighted
Average
Exercise Price
Weighted average remaining
contractual life (years)
—
29.60
—
—
29.60
29.60
—
—
—
—
—
9.94
9.94
—
The following table summarizes employee and non-employee stock-based compensation expense for the years ended December 31, 2020, 2019
and 2018 and the allocation within the statements of operations and comprehensive loss (in thousands):
General and administrative expense
Research and development expense
Total stock-based compensation
2020
2019
2018
$
$
7,441 $
7,029
14,470 $
1,378 $
678
2,056 $
78
77
155
The Company estimates the fair value of its service-based stock option awards utilizing the Black-Scholes option pricing model, which is
dependent upon several variables, such as expected term, volatility, risk-free interest rate, and expected dividends. Each of these inputs is subjective and
generally requires significant judgment to determine. Stock-based compensation is measured at the grant date based on the fair value of the award and is
recognized as expense, over the requisite service period, which is generally the vesting period of the respective award. The Company recognizes
compensation on a straight-line basis over the requisite vesting period for each award. Forfeitures are recognized as they occur. The following weighted
average assumptions were used to calculate the fair value of stock-based compensation for the years ended December 31, 2020, 2019 and 2018:
Expected volatility
Expected dividend yield
Expected term (in years)
Risk-free interest rate
2020
2019
2018
86.69%
—%
6.23
0.80%
80.19%
—%
6.25
1.90%
69.6%
—%
6.25
2.91%
90
Expected Term — The Company has opted to use the “simplified method” for estimating the expected term of options, whereby the expected
term equals the arithmetic average of the vesting term and the original contractual term of the option (generally 10 years).
Expected Volatility—Due to the Company’s limited operating history and a lack of company specific historical and implied volatility data, the
Company has based its estimate of expected volatility on the historical volatility of its own stock and the stock of companies within its defined peer group.
The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated
expected term of the stock-based awards.
Risk-Free Interest Rate — The risk-free rate assumption is based on the U.S. Treasury instruments with maturities similar to the expected term
of the Company’s stock options.
Expected Dividend — The Company has not issued any dividends in its history and does not expect to issue dividends over the life of the
options and therefore has estimated the dividend yield to be zero.
Fair value of Common Stock — The fair value of the shares of common stock underlying the stock-based awards has historically been
determined by the board of directors, with input from management. Prior to the Company’s IPO, there has been no public market for the Company’s
common stock, the board of directors determined the fair value of the common stock on the grant-date of the stock-based award by considering a number of
objective and subjective factors, including enterprise valuations of the Company’s common stock performed by an unrelated third-party specialist,
valuations of comparable companies, sales of the Company’s redeemable convertible preferred stock to unrelated third parties, operating and financial
performance, the lack of liquidity of the Company’s capital stock, and general and industry-specific economic outlook. Subsequent to the IPO date, the
board of directors uses the closing price of stock on the date of grant to determine the fair value. The board of directors intends all options granted to be
exercisable at a price per share not less than the estimated per share fair value of common stock underlying those options on the date of grant.
The Company estimated the grant date fair value of its market-based performance stock option awards granted during the year ended
December 31, 2020 using a Monte Carlo Simulation method by applying the following assumptions:
Expected share price volatility
Contractual term, in years
Risk-free interest rate
95.0%
10
0.90%
Employee Stock Purchase Plan
On April 24, 2019, the Company’s Board of Directors adopted its 2019 Employee Stock Purchase Plan (“2019 ESPP”), which was
subsequently approved by the Company’s stockholders and became effective on May 7, 2019, the day immediately prior to the effectiveness of the
registration statement filed in connection with the IPO. The 2019 ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of
Section 423 of the Internal Revenue Code (the “Code”) for U.S. employees. In addition, the 2019 ESPP authorizes grants of purchase rights that do not
comply with Section 423 of the Code under a separate non-423 component for non-U.S. employees and certain non-U.S. service providers. The Company
has reserved 268,295 shares of common stock for issuance under the 2019 ESPP. In addition, the number of shares reserved for issuance under the 2019
ESPP will be increased automatically on the first day of each fiscal year for a period of up to ten years, starting with the 2020 fiscal year, by a number
equal to the lesser of: (i) 536,589 shares; (ii) 1% of the shares of common stock outstanding on the last day of the prior fiscal year; or (iii) such lesser
number of shares determined by the Company’s Board of Directors. The 2019 ESPP is expected to be implemented through a series of offerings under
which participants are granted purchase rights to purchase shares of the Company’s common stock on specified dates during such offerings. The Company
has not yet approved an offering under the 2019 ESPP.
91
Note 10. Convertible Promissory Notes
In February 2017 the Company received $7.6 million from the issuance of convertible promissory notes to the Company’s current investors. In
June 2017 the Company received an additional $150,000 from an issuance under the same note facility to a new investor. In January 2018 the Company
received $250,000 from a new investor under the same note facility for a total of $8.0 million in principal value under the note facility. The notes accrue
simple interest on the outstanding principal amount at the rate of 8% per annum and were set to mature on February 1, 2019.
The convertible promissory notes have conversion and repayment options as follows: (a) in the event that the Company has an equity financing
event of at least $10 million to new investors on or before the maturity date, then the outstanding principal amount of this convertible promissory note and
any unpaid accrued interest will automatically convert in whole into equity securities sold in the qualified financing at a conversion price equal to 80% of
the cash price paid per share for equity securities by the investors in the qualified financing, or (b) the Company consummates a merger of the Company
where it does not maintain majority voting power or conducts a sale, lease, transfer, exclusive license or other disposition of all or substantially all of its
assets while the convertible promissory notes remain outstanding, the Company shall repay the holders in cash in an amount equal to 200% of the
outstanding principal and accrued interest amount of the convertible promissory notes.
The Company evaluated its convertible notes and determined that the redemption premium feature qualified as a derivative liability to be
separately accounted for in accordance with ASC 815. The convertible promissory notes contained put options as follows:
1.
2.
On or before the maturity date, the principal and accrued interest of the notes will automatically convert into equity securities issued
and sold in the initial closing of the Company’s next qualified equity financing with gross proceeds of at least $10,000,000, exclusive
of the conversion of the notes. The number of shares to be issued to the note holders will be equal to dividing the outstanding principal
and any unpaid accrued interest by 80% of the price paid per share of the next equity security sold to investors. The discount in share
price to note holders is not considered clearly and closely related to the debt host and results in an embedded derivative that must be
bifurcated and accounted for separately from the debt host.
In the event of a merger or sale, lease, transfer, exclusive license or other disposition of all or substantially all of its assets prior to
repayment, the outstanding principal and unpaid accrued interest will be repaid in cash, plus a repayment premium equal to 100% of
the outstanding principal and accrued interest at the time of the merger or sale of assets. The premium to note holders is not considered
clearly and closely related to the debt host and results in an embedded derivative that must be bifurcated and accounted for separately
from the debt host.
Accordingly, upon the issuance of the February 2017 convertible promissory notes, the estimated fair value of the embedded derivative liability
was determined using a bond plus option valuation model and assuming a probability of 80% that a qualified financing would occur and a zero probability
that a merger or sale would occur. The Company recorded the estimated fair value of these put options (embedded derivatives) as a liability of $1.55
million with an offsetting amount recorded as debt discount, which offsets the carrying amount of the debt. The debt discount is amortized over the debt’s
expected term. The derivative liability is revalued at the end of each reporting period and any change in fair value is recognized in other income.
Upon the issuance of the June 2017 convertible promissory notes, the estimated fair value of the embedded derivatives were determined using
a bond plus option valuation model and assuming a probability of 80% that a qualified financing would occur and a zero probability that a sale or merger
would occur. The Company recorded the estimated fair value of these put options (embedded derivatives) as a liability of $30,000 with an offsetting
amount recorded as debt discount, which offsets the carrying amount of the debt.
Upon issuance of the January 2018 convertible promissory notes, the estimated fair value of the embedded derivatives was determined using a
bond plus option valuation model and assuming a probability of 90% that a qualified financing would occur and a zero probability that a merger or sale
would occur. The Company recorded the estimated fair value of these put options (embedded derivatives) as a liability of $56,250 with an offsetting
amount recorded as debt discount, which offsets the carrying amount of the debt.
The derivative liability is revalued at the end of each reporting period and any change in fair value is recognized in “Change in fair value of
redemption premium liability” in the Statement of Operations.
In May 2018, the notes converted into 1,147,205 shares of the Company’s Series B redeemable convertible preferred stock in conjunction with
the Company’s Series B redeemable convertible preferred stock financing (the “Series B Financing”), which was considered a Qualified Financing under
the terms of the notes. In conjunction with the closing, the holders of the notes also converted their accrued and unpaid interest of $0.8 million and the
Company recorded a change in the fair value of the derivative liability of $206,000.
92
Note 11. Related Party Transactions
In June 2014, the Company entered into a research grant and license agreement (the Agreement) with a stockholder of the Company. The
Agreement requires the Company to pay royalties to the stockholder in the amount of 3% of gross revenues not to exceed $1.05 million. This agreement
was amended in April 2019 and the royalty payment provision was removed.
As described in Note 1, on February 10, 2020, the Company issued and sold shares of common stock at a purchase price of $50.00 per share in
a private placement. In the private placement, the Company issued and sold 30,000 shares of common stock for an aggregate purchase price of $1,500,000
to an entity affiliated with David A. Lamond, a member of the Company’s Board of Directors.
On January 13, 2021, the Company entered into an agreement with LifeSci Advisors, LLC for investor relations consulting services. The
Company’s Chief Operating Officer and Chief Financial Officer, Christopher Lowe, has an investment in a sister entity to LifeSci Advisors, LLC whose
business is unrelated to the services being offered by LifeSci Advisors, LLC to the Company. The Company will pay $180,000 to LifeSci Advisors, LLC
over the one-year term of the agreement.
Note 12. Income taxes
From inception through 2020, the Company has only generated pretax losses in the United States and has not generated any pretax income or
loss outside of the United States. The Company did not record a provision (benefit) for income taxes for the years ended December 31, 2020, 2019 and
2018.
The provision for income taxes differs from the amount expected by applying the federal statutory rate to the loss before taxes as follows:
Federal statutory income tax rate
State income taxes
Income tax credits
Non-deductible expenses and others
Non-deductible expenses related to the convertible promissory notes
Change in valuation allowance
Year ended December 31,
2020
2019
2018
21.00 %
0.55
2.14
0.44
—
(24.13)
— %
21.00 %
(1.12)
3.67
(0.38)
—
(23.17)
— %
21.00 %
6.24
—
(1.02)
(1.96)
(24.26)
— %
As of December 31, 2020 and 2019, the components of the Company’s deferred tax assets are as follows (in thousands):
Deferred tax asset:
Federal and State net operating loss carryforwards
Stock based compensation
Other accruals and deferred expense
Tax credits
Gross deferred tax asset
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Property and equipment
Capitalized leases
Gross deferred tax liabilities
Net deferred tax assets
Year ended December 31,
2020
2019
$
28,072 $
2,633
566
3,928
35,199
(35,034)
165
(14)
(151)
(165)
$
— $
93
14,219
238
185
1,867
16,509
(16,489)
20
(20)
—
(20)
—
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.
The Company’s accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of its net deferred tax
assets. The Company primarily considered such factors as its history of operating losses, the nature of the Company’s deferred tax assets, and the timing,
likelihood and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible. At
present, the Company does not believe that it is more likely than not that the deferred tax assets will be realized; accordingly, a full valuation allowance has
been established and no deferred tax asset is shown in the accompanying balance sheets. The valuation allowance increased by approximately $18.5 million
and $8.5 million and $3.0 million respectively for the years ended December 31, 2020, 2019 and 2018.
At December 31, 2020, the Company has federal net operating loss carryforwards of approximately $128.2 million of which $112.3 million
will not expire and $15.9 million begin expiring in 2034. The Company also has state net operating loss carryforwards of approximately $4.9 million which
begin to expire in 2034. Additionally, the Company has federal tax credits of approximately $4.9 million which begin to expire in 2036 and state tax credits
of approximately $1.1 million which do not expire.
Use of the net operating loss and credit carryforwards may be subject to a substantial annual limitation due to the ownership change provisions
of U.S. tax law and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before use.
Pursuant to the Internal Revenue Code, as amended (the “Code”) Sections 382 and 383, annual use of a company’s NOL and research and
development credit carryforwards may be limited if there is a cumulative change in ownership of greater than 50% within a three-year period. The amount
of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may
further affect the limitation in future years. If limited, the related tax asset would be removed from the deferred tax asset schedule with a corresponding
reduction in the valuation allowance. The Company has not completed such an analysis pursuant to Sections 382 and 383 and therefore has established a
valuation allowance as the realization of such deferred tax assets has not met the more likely than not threshold requirement. Due to the existence of the
valuation allowance, further changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.
Uncertain Tax Positions
The Company follows the provisions of the FASB ASC 740-10, Accounting for Uncertainty in Income Taxes. ASC 740-10 prescribes a
comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of uncertain tax positions that have been taken
or expected to be taken on a tax return. No liability related to uncertain tax positions is recorded in the financial statements.
The Company is subject to taxation in the United States. Because of the net operating loss and research credit carryforwards, all of the
Company’s tax years, from 2013 to 2020, remain open to U.S. federal, California, and other state tax examinations. There were no interest or penalties
accrued at December 31, 2020, 2019 and 2018.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Beginning balance
Additions for tax positions taken in a prior year
Additions for tax positions taken in a current year
Ending balance
Year ended December 31,
2020
2019
2018
$
$
1,059 $
—
917
1,976 $
356 $
168
535
1,059 $
171
—
185
356
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") into law. The Company
has reviewed the aspects of this law as it relates to income taxes and have concluded that at this time, the CARES Act will have no material impact to the
Company’s 2020 provision for income taxes.
94
Note 13. Net Loss per Share
The following table sets forth the computation of basic and diluted net loss per share (in thousands except for share and per share amounts):
Numerator:
Net loss
Denominator
Weighted average common shares outstanding
Net loss per share, basic and diluted
2020
December 31,
2019
2018
$
$
(76,849) $
(36,980) $
(12,476)
29,176,232
19,031,940
(2.63) $
(1.94) $
3,362,192
(3.71)
The following outstanding potentially dilutive securities were excluded from the computation of diluted net loss per share for the periods
presented because including them would have been antidilutive:
Series A convertible preferred stock
Series B convertible preferred stock
Stock options issued and outstanding
Performance stock options
Warrants
Note 14. Employee Benefit Plan
2020
—
—
4,790,327
675,000
—
5,465,327
December 31,
2019
—
—
2,393,934
—
—
2,393,934
2018
9,008,919
9,152,108
1,885,504
—
27,941
20,074,472
The Company sponsors a 401(k) defined contribution plan for its employees. This plan provides for pre-tax and post-tax contributions for all
employees. Employee contributions are voluntary. Employees may contribute up to 100% of their annual compensation to this plan, as limited by an annual
maximum amount as determined by the Internal Revenue Service. The Company may match employee contributions, and may make profit sharing
contributions, in amounts to be determined at the Company’s sole discretion. The Company made no contributions to the plan for the years ended
December 31, 2020, 2019, and 2018, respectively.
95
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
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and
our Chief Operating Officer and Chief Financial Officer, of the effectiveness of our “disclosure controls and procedures” as of the end of the period covered
by this Annual Report, pursuant to Rules 13a-15(b) and 15d-15(b) under the Exchange Act. In connection with that evaluation, our Chief Executive Officer
and our Chief Operating Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and designed to provide
reasonable assurance that the information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the
SEC rules and forms as of December 31, 2020. For the purpose of this review, disclosure controls and procedures means controls and procedures designed
to ensure that information required to be disclosed by us in the reports that we file or submit is recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed
to ensure that information required to be disclosed by us in the reports that we file or submit is accumulated and communicated to management, including
our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) of the Exchange Act. Our management used the Committee of Sponsoring Organizations of the Treadway Commission Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), or the COSO framework, to
evaluate the effectiveness of internal control over financial reporting. Management believes that the COSO framework is a suitable framework for its
evaluation of financial reporting because it is free from bias, permits reasonably consistent qualitative and quantitative measurements of our internal control
over financial reporting, is sufficiently complete so that those relevant factors that would alter a conclusion about the effectiveness of our internal control
over financial reporting are not omitted and is relevant to an evaluation of internal control over financial reporting.
Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2020 and has concluded that
such internal control over financial reporting is effective.
Our independent registered public accounting firm, BDO USA, LLP, has audited the financial statements included in this Annual Report and
has issued a report on the effectiveness of our internal control over financial reporting. The report of BDO USA, LLP is included in Part II, Item 8 of this
Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during our fourth quarter ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect our internal control over
financial reporting.
Item 9B. Other Information
None
96
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this item will be included in our 2021 Proxy Statement, which will be filed with the SEC within 120 days after the
end of the fiscal year to which this report relates and is incorporated herein by reference.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all of the members of our board of directors, officers and employees.
Our Code of Business Conduct and Ethics is posted on the Investor Relations section of our website, which is located at https://ir.cortexyme.com/investor-
relations, by clicking on “Governance Documents” in the “Governance” section of our website. We intend to satisfy the disclosure requirement under Item
5.05 of Form 8 K regarding amendment to, or waiver from, a provision of our Code of Business Conduct and Ethics by posting such information on our
website at the location specified above.
Item 11. Executive Compensation
Executive Compensation
The information required by this item will be included in our 2021 Proxy Statement, which will be filed with the SEC within 120 days after the
end of the fiscal year to which this report relates and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters
The information required in this item will be included in our 2021 Proxy Statement, which will be filed with the SEC within 120 days after the
end of the fiscal year to which this report relates and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required in this item will be included in our 2021 Proxy Statement, which will be filed with the SEC within 120 days after the
end of the fiscal year to which this report relates and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required in this item will be included in our 2021 Proxy Statement, which will be filed with the SEC within 120 days after the
end of the fiscal year to which this report relates and is incorporated herein by reference.
97
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this report:
1. Financial Statements
PART IV
See Index to Financial Statements in Part II Item 8 of this Annual Report on Form 10-K.
2. Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3. Exhibits
The documents listed in the Exhibit Index are incorporated by reference or are filed with this report, in each case as indicated therein
(numbered in accordance with Item 601 of Regulation S-K).
Item 16. Form 10-K Summary
None
98
Exhibit No.
Exhibit title
Form
File No.
Exhibit No.
Filing date
Exhibit Index
Incorporated by reference
Filed or
furnished
herewith
3.1
3.2
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5+
10.6+
10.7+
10.8+
23.1
24.1
31.1
31.2
32.1*
32.2*
Amended and Restated Certificate of Incorporation
Amended and Restated Bylaws
Specimen Stock Certificate
Amended and Restated Investors’ Rights Agreement,
dated May 23, 2018, by and among the Registrant and
certain of its stockholders.
Description of Securities
Sub-Sublease Agreement by and between Cortexyme,
Inc. and Verily Life Sciences LLC, dated June 18, 2018.
Amendment No. 1 to Sub-Sublease by and between
Cortexyme, Inc. and Verily Life Sciences LLC dated
April 2, 2019.
Second Amendment to Sub-Sublease by and between
Cortexyme, Inc. and Verily Life Sciences LLC dated
May 26, 2020
8-K
8-K
S-1/A
S-1
3.1
001-38890
001-38890
3.2
333-230853 4.1
333-230853 4.2
5/13/2019
5/13/2019
4/29/2019
4/12/2019
S-1
333-230853 10.1
4/12/2019
10-Q
001-38890
10.1
8/9/2019
10-Q
001-38890
10.1
8/14/2020
Form of Indemnification Agreement between
S-1/A
333-230853 10.2
4/29/2019
Cortexyme, Inc. and each of its officers and directors.
2014 Stock Plan, as amended as of November 28, 2018,
and related forms of stock award agreements.
S-1
333-230853 10.3
4/12/2019
2019 Equity Incentive Plan and forms of stock award
S-1/A
333-230853 10.4
4/29/2019
S-1/A
S-1
333-230853 10.5
333-230853 10.6
4/29/2019
4/12/2019
agreements thereunder.
2019 Employee Stock Purchase Plan.
Executive Incentive Bonus Plan.
Consent of Independent Registered Public Accounting
Firm
Power of Attorney (incorporated by reference to the
signature page of this Annual Report on Form 10-K)
Certification of Chief Executive Officer pursuant to
Rules 13a-14(a) and Rule 15d-14(a) of the Exchange Act
Certification of Chief Financial Officer pursuant to Rules
13a-14(a) and Rule 15d-14(a) of the Exchange Act
Certification of Chief Executive Officer pursuant to Rule
13a-14(b) of the Exchange Act and 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Rule
13a-14(b) of the Exchange Act and 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
101.INS
101.SCH
101.CAL
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase
Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase
Document
101.LAB
101.PRE
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase
*
+
Document
Furnished and not filed.
Indicates a management contract or compensatory plan or arrangement.
99
X
X
X
X
X
X
X
X
X
X
X
X
X
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 1, 2021
Cortexyme, Inc.
By:
/s/ Casey C. Lynch
Casey C. Lynch
President, Chief Executive Officer and Chairman
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Casey C. Lynch, Christopher Lowe and Caryn McDowell, and each of
them, as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents
and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or
his substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons
on behalf of the Registrant in the capacities and on the dates indicated.
Name
Title
Date
/s/ Casey C. Lynch
Casey C. Lynch
/s/ Christopher Lowe
Christopher Lowe
/s/ Ted Monohon
Ted Monohon
/s/ Stephen S. Dominy
Stephen S. Dominy, M.D.
/s/ David A. Lamond
David A. Lamond
/s/ Margaret McLoughlin
Margaret McLoughlin, Ph.D.
/s/ Una Ryan
Una Ryan, OBE Ph.D.
/s/ Christopher J. Senner
Christopher J. Senner
/s/ Kevin Young
Kevin Young, CBE
President, Chief Executive Officer and Chairman of our Board of
Directors
March 1, 2021
(Principal Executive Officer)
Chief Operating Officer and Chief Financial Officer
(Principal Financial Officer)
Chief Accounting Officer and Vice President, Finance
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
100
March 1, 2021
March 1, 2021
March 1, 2021
March 1, 2021
March 1, 2021
March 1, 2021
March 1, 2021
March 1, 2021
DESCRIPTION OF REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF
THE SECURITIES EXCHANGE ACT OF 1934
Exhibit 4.3
Cortexyme, Inc. (“we,” “our,” “us,” or the “Company”) has one class of securities registered under Section 12 of the Securities Exchange
Act of 1934, as amended (“1934 Act”): our common stock. The following summary of the terms of our common stock is based upon our amended and
restated certificate of incorporation and our amended and restated bylaws. This summary does not purport to be complete and is subject to, and is
qualified in its entirety by express reference to, the applicable provisions of our amended and restated certificate of incorporation and our amended and
restated bylaws, which are filed as exhibits to our Annual Report on Form 10-K and are incorporated by reference herein. We encourage you to read our
amended and restated certificate of incorporation, our amended and restated bylaws and the applicable provisions of the Delaware General Corporation
Law (“DGCL”) for more information.
Description of Common Stock
Under our amended and restated certificate of incorporation, we have authority to issue 100,000,000 shares of our common stock, par value
$0.001 per share. As of December 31, 2020, 29,543,222 shares of our common stock were issued and outstanding. All shares of our common stock will,
when issued, be duly authorized, fully paid and nonassessable.
Voting Rights
The holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the
stockholders. Cumulative voting for the election of directors is not provided for in our restated certificate of incorporation, which means the holders of a
majority of our shares of common stock can elect all of the directors then standing for election.
Dividends
Subject to preferences that may be applicable to any then outstanding preferred stock, holders of common stock are entitled to receive
dividends, if any, as may be declared from time to time by the board of directors out of legally available funds.
Liquidation
In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net assets legally
available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted
to the holders of any then outstanding shares of preferred stock.
Rights and Preferences
Holders of common stock have no preemptive, conversion, subscription or other rights, and there are no redemption or sinking fund
provisions applicable to the common stock. The rights, preferences and privileges of the holders of common stock are subject to and may be adversely
affected by, the rights of the holders of shares of any series of preferred stock that we may designate in the future.
Description of Preferred Stock
Under our amended and restated certificate of incorporation, we have authority, subject to any limitations prescribed by law and without
further stockholder approval, to issue from time to time up to 10,000,000 shares of preferred stock, par value $0.001 per share, in one or more series. As of
December 31, 2020, we had no shares of preferred stock issued and outstanding.
1
Pursuant to our amended and restated certificate of incorporation, our board of directors has the authority to designate the rights,
preferences, privileges and restrictions of each such series, including dividend rights, preferences, privileges and restrictions of each such series, including
dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences, sinking fund terms and the
number of shares constituting any series.
The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of the company without further
action by the stockholders. The issuance of redeemable convertible preferred stock with voting and conversion rights may also adversely affect the voting
power of the holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. In certain
circumstances, an issuance of preferred stock could have the effect of decreasing the market price of the common stock.
Registration Rights
Under our amended and restated investors’ rights agreement, certain holders of shares of our common stock, or their affiliates or
transferees, have the right to require us to register their shares under the Securities Act so that those shares may be publicly resold, or to include their shares
in any registration statement we file, in each case as described below. The registration rights terminate with respect to the registration rights of an individual
holder on the earliest to occur of May 8, 2024 (five years following our initial public offering), the liquidation, dissolution or indefinite cessation of the
business operations of our company, or the closing of a deemed liquidation, dissolution or winding up of our company pursuant to our amended and
restated certificate of incorporation, or with respect to any particular stockholder, such time after the effective date of the registration statement that such
stockholder can sell all of its shares under Rule 144 of the Securities Act during any three-month period without registration.
Demand Registration Rights
The holders of at least 35% of the registrable securities may demand that we effect a registration under the Securities Act covering the
public offering and sale of at least the number of registrable securities held by such stockholders having an anticipated aggregate offering price of at least
$10,000,000. Upon any such demand we must effect the registration of such registrable securities that have been requested to register together with all
other registrable securities that we may have been requested to register by other stockholders pursuant to the incidental registration rights described
below. We are only obligated to effect two registrations in response to these demand registration rights.
Piggyback Registration Rights
If we register any securities for public sale, including pursuant to any stockholder-initiated demand registration, holders of such registrable
securities will have the right to include their shares in the registration statement for such offering, subject to certain exceptions. The underwriters of any
underwritten offering will have the right to limit the number of registrable securities to be included in the registration statement, subject to certain
restrictions.
Form S-3 Registration Rights
We may be obligated to effect a registration on Form S-3 under the Securities Act. At any time after we are qualified to file a registration
statement on Form S-3, the holders of registrable securities anticipated to have an aggregate sale price, net of underwriting discounts and commission, of at
least $1,000,000 may request in writing that we effect a registration on Form S-3.
Expenses of Registration
We will pay all registration expenses related to any demand, piggyback or Form S-3 registration, including reasonable fees and
disbursements of one special counsel for the holders of such registrable securities, other than underwriting fees, discounts or commissions (if any), which
will be borne by the holders of such registrable securities.
2
Anti-Takeover Effects of Delaware Law and Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws
Our amended and restated certificate of incorporation and our amended and restated bylaws contain certain provisions that could have the
effect of delaying, deterring or preventing another party from acquiring control of us. These provisions and certain provisions of Delaware law, which are
summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed, in part, to
encourage persons seeking to acquire control of us to negotiate first with our board of directors. We believe that the benefits of increased protection of our
potential ability to negotiate more favorable terms with an unfriendly or unsolicited acquirer outweigh the disadvantages of discouraging a proposal to
acquire us.
Undesignated Preferred Stock
As discussed above, our board of directors have the ability to issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of us. These and other provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of our company.
Limits on Ability of Stockholders to Act by Written Consent or Call a Special Meeting
Our amended and restated certificate of incorporation provides that our stockholders may not act by written consent, which may lengthen
the amount of time required to take stockholder actions. As a result, a holder controlling a majority of our capital stock would not be able to amend our
amended and restated bylaws or remove directors without holding a meeting of our stockholders called in accordance with our amended and restated
bylaws. In addition, our amended and restated bylaws provides that special meetings of the stockholders may be called only by the chairperson of the
board, the Chief Executive Officer, the lead independent director, or at the request of a majority of our board of directors. Stockholders may not call a
special meeting, which may delay the ability of our stockholders to force consideration of a proposal or for holders controlling a majority of our capital
stock to take any action, including the removal of directors.
Requirements for Advance Notification of Stockholder Nominations and Proposals
Our amended and restated bylaws establish advance notice procedures with respect to stockholder proposals and the nomination of
candidates for election as directors, other than nominations made by or at the direction of our board of directors or a committee of our board of
directors. These provisions may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed. These
provisions may also discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or
otherwise attempting to obtain control of our company.
Board Classification
Our board of directors is divided into three classes, one class of which is elected each year by our stockholders. The directors in each class
will serve three-year terms. A third party may be discouraged from making a tender offer or otherwise attempting to obtain control of us as it is more
difficult and time-consuming for stockholders to replace a majority of the directors on a classified board.
No Cumulative Voting
Our amended and restated certificate of incorporation and amended and restated bylaws do not permit cumulative voting in the election of
directors. Cumulative voting allows a stockholder to vote a portion or all of its shares for one or more candidates for seats on the board of
directors. Without cumulative voting, a minority stockholder may not be able to gain as many seats on our board of directors as the stockholder would be
able to gain if cumulative voting were permitted. The absence of cumulative voting makes it more difficult for a minority stockholder to gain a seat on our
board of directors to influence our board’s decision regarding a takeover.
Amendment of Charter and Bylaws Provisions
3
The amendment of the above provisions of our amended and restated certificate of incorporation will require approval by holders of at least
two thirds of our outstanding capital stock entitled to vote generally in the election of directors. The amendment of our amended and restated bylaws will
require approval by the holders of at least two thirds of our outstanding capital stock entitled to vote generally in the election of directors.
Delaware Anti-Takeover Statute
We are subject to the provisions of Section 203 of the DGCL regulating corporate takeovers. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging, under certain circumstances, in a business combination with an interested stockholder for a period of three years
following the date the person became an interested stockholder unless:
•
•
•
prior to the date of the transaction, our board of directors approved either the business combination or the transaction which resulted
in the stockholder becoming an interested stockholder;
upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, calculated as provided
under Section 203; or
at or subsequent to the date of the transaction, the business combination is approved by our board of directors and authorized at an
annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two thirds of the
outstanding voting stock which is not owned by the interested stockholder.
Generally, a business combination includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested
stockholder. An interested stockholder is a person who, together with affiliates and associates, owns or, within three years prior to the determination of
interested stockholder status, did own 15% or more of a corporation’s outstanding voting stock. We expect the existence of this provision to have an anti-
takeover effect with respect to transactions our board of directors does not approve in advance. We anticipate that Section 203 may also discourage
attempts that might result in a premium over the market price for the shares of common stock held by stockholders.
The provisions of Delaware law and the provisions of our amended and restated certificate of incorporation and amended and restated
bylaws, could have the effect of discouraging others from attempting hostile takeovers and, as a consequence, they might also inhibit temporary
fluctuations in the market price of our common stock that often result from actual or rumored hostile takeover attempts. These provisions might also have
the effect of preventing changes in our management. It is possible that these provisions could make it more difficult to accomplish transactions that
stockholders might otherwise deem to be in their best interests.
Authorized but Unissued Shares
Our authorized but unissued shares of common stock and preferred stock will be available for future issuances without stockholder
approval, except as required by the listing standards of the Nasdaq Global Select Market, and could be utilized for a variety of corporate purposes,
including future offerings to raise additional capital, acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved
common stock and preferred stock could render more difficult or discourage an attempt to obtain control of the company by means of a proxy contest,
tender offer, merger or otherwise.
Choice of Forum
Our amended and restated certificate of incorporation provides that, unless we consent to the selection of an alternative forum, to the fullest
extent permitted by law, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for: (i) any derivative action or proceeding
brought on behalf of us; (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees or agents to
us or our stockholders; (iii) any action asserting a claim against us arising pursuant to any provision of the Delaware General
4
Corporation Law or our amended and restated certificate of incorporation or amended and restated bylaws; or (iv) any action asserting a claim against us
governed by the internal affairs doctrine; provided that, the exclusive forum provision will not apply to suits brought to enforce any liability or duty created
by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction; and provided further that, if and only if the Court of
Chancery of the State of Delaware dismisses any such action for lack of subject matter jurisdiction, such action may be brought in another state or federal
court sitting in the State of Delaware. Our amended and restated certificate of incorporation also provides that the federal district courts of the United
States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action against us or any of our directors, officers,
employees or agents and arising under the Securities Act. While the Delaware Supreme Court recently determined that such choice of forum provisions are
facially valid, a stockholder may nevertheless seek to bring such a claim arising under the Securities Act against us, our directors, officers, employees or
agents in a venue other than in the federal district courts of the United States of America. In such instance, we would expect to vigorously assert the
validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation, and this may require significant
additional costs associated with resolving such action in other jurisdictions.
Business Combinations with Interested Stockholders
Subject to certain exceptions, Section 203 of the DGCL prohibits a public Delaware corporation from engaging in a business combination
(as defined in such section) with an “interested stockholder” (defined generally as any person who beneficially owns 15% or more of the outstanding voting
stock of such corporation or any person affiliated with such person) for a period of three years following the time that such stockholder became an
interested stockholder, unless (i) prior to such time the board of directors of such corporation approved either the business combination or the transaction
that resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the voting stock of such corporation at the time the transaction commenced
(excluding for purposes of determining the voting stock of such corporation outstanding (but not the outstanding voting stock owned by the interested
stockholder) those shares owned (A) by persons who are directors and also officers of such corporation and (B) by employee stock plans in which
employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange
offer); or (iii) at or subsequent to such time the business combination is approved by the board of directors of such corporation and authorized at a meeting
of stockholders (and not by written consent) by the affirmative vote of at least 66 2/3% of the outstanding voting stock of such corporation not owned by
the interested stockholder.
Limitation of Liability and Indemnification
Our amended and restated certificate of incorporation and amended and restated bylaws provide that we will indemnify our directors and
officers, and may indemnify our employees and other agents, to the fullest extent permitted by Delaware law.
Delaware law prohibits our amended and restated certificate of incorporation from limiting the liability of our directors for the following:
•
•
•
•
any breach of the director’s duty of loyalty to us or to our stockholders;
acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;
unlawful payment of dividends or unlawful stock repurchases or redemptions; and
any transaction from which the director derived an improper personal benefit.
If Delaware law is amended to authorize corporate action further eliminating or limiting the personal liability of a director, then the liability
of our directors will be eliminated or limited to the fullest extent permitted by Delaware law, as so amended. Our amended and restated certificate of
incorporation does not eliminate a director’s duty of care and, in appropriate circumstances, equitable remedies, such as injunctive or other forms of non-
monetary
5
relief, remain available under Delaware law. This provision also does not affect a director’s responsibilities under any other laws, such as the federal
securities laws or other state or federal laws. Under our amended and restated bylaws, we can purchase insurance on behalf of any person whom we are
required or permitted to indemnify.
In addition to the indemnification required in our amended and restated certificate of incorporation and amended and restated bylaws, we
have entered into an indemnification agreement with each member of our board of directors and each of our officers. These agreements provide for the
indemnification of our directors and officers for certain expenses and liabilities incurred in connection with any action, suit, proceeding or alternative
dispute resolution mechanism, or hearing, inquiry or investigation that may lead to the foregoing, to which they are a party or other participant, or are
threatened to be made a party or other participant, by reason of the fact that they are or were a director, officer, employee, agent or fiduciary of our
company, by reason of any action or inaction by them while serving as an officer, director, agent or fiduciary, or by reason of the fact that they were serving
at our request as a director, officer, employee, agent or fiduciary of another entity. In the case of an action or proceeding by or in the right of our company,
no indemnification will be provided for any claim where a court determines that the indemnified party is prohibited from receiving indemnification. We
believe that these charter and bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and
officers.
The limitation of liability and indemnification provisions in our restated certificate of incorporation and amended and restated
bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. They may also reduce the likelihood of
derivative litigation against directors and officers, even though an action, if successful, might benefit us and our stockholders. Moreover, a stockholder’s
investment may be harmed to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification
provisions. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. There is no pending litigation or proceeding naming any of our directors or officers as to
which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any
director or officer.
Listing. Our common stock is listed on the Nasdaq Global Select Market under the symbol “CRTX.”
Transfer Agent and Registrar. The transfer agent for our common stock is American Stock Transfer &Trust Company, LLC. Its address is
6201 15th Avenue, Brooklyn, NY 11219.
6
Cortexyme, Inc.
South San Francisco, California
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-238851) and Form S-8 (No. 333-237199 and
333-231307) of Cortexyme, Inc. of our reports dated March 1, 2021, relating to the financial statements and the effectiveness of Cortexyme, Inc.’s internal
control over financial reporting, which appear in this Form 10 K.
Exhibit 23.1
/s/ BDO USA, LLP
San Jose, California
March 1, 2021
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Casey C. Lynch, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Cortexyme, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in exchange act rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 1, 2021
By:
/s/ Casey C. Lynch
Casey C. Lynch
President, Chief Executive Officer and Chairman of our Board of
Directors
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Christopher Lowe, certify that:
1.
2.
3.
I have reviewed this Annual Report on Form 10-K of Cortexyme, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in exchange act rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 1, 2021
By:
/s/ Christopher Lowe
Christopher Lowe
Chief Operating Officer and Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350)
Exhibit 32.1
In connection with the Annual Report of Cortexyme, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2020 as filed with
the Securities and Exchange Commission on the date hereof to which this Certification is attached as Exhibit 32.1 (the “Report”), I certify, pursuant to Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-
Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Exchange Act; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 1, 2021
By:
/s/ Casey C. Lynch
Casey C. Lynch
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350)
Exhibit 32.2
In connection with the Annual Report of Cortexyme, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2020 as filed with
the Securities and Exchange Commission on the date hereof to which this Certification is attached as Exhibit 32.1 (the “Report”), I certify, pursuant to Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-
Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Exchange Act; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 1, 2021
By:
/s/ Christopher Lowe
Christopher Lowe
Chief Operating Officer and Chief Financial Officer
(Principal Financial Officer)