Enanta Pharmaceuticals
Annual Report 2016

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 Form 10-K xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended September 30, 2016OR ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934Commission File Number 001-35839 ENANTA PHARMACEUTICALS, INC.(Exact name of registrant as specified in its charter) DELAWARE 2834 04-3205099(State or other jurisdiction ofincorporation or organization) (Primary Standard IndustrialClassification Code Number) (I.R.S. EmployerIdentification Number)500 Arsenal StreetWatertown, Massachusetts 02472(617) 607-0800(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) Securities registered pursuant to Section 12(b) of the Act: Title of each class:Common Stock, $0.01 Par Value Name of each exchange on which registered:The NASDAQ Stock Market LLC (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 xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate 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 preceding12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past90 days: Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post suchfiles): Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act: Large accelerated filer ¨ Accelerated filer xNon-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No xThe aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completedsecond fiscal quarter, March 31, 2016, based on the last reported sale price of the registrant’s common stock of $29.37 per share was $556,755,420. The number of shares of theregistrant’s Common Stock, $0.01 par value, outstanding as of December 1, 2016, was 19,038,927 shares.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s Definitive Proxy Statement for its 2017 Annual Meeting of Stockholders scheduled to be held on February 16, 2017, which Definitive Proxy willbe filed with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year end of September 30, 2016, are incorporated by reference into Part IIIof this Form 10-K. Table of ContentsAs used in this Form 10-K, “Enanta,” “the Company,” “we,” “our,” and “us” refer to Enanta Pharmaceuticals, Inc., except where the context otherwise requiresor as otherwise indicated.NOTE REGARDING FORWARD LOOKING STATEMENTSThis Annual Report on Form 10-K contains forward-looking statements concerning our business, operations and financial performance and condition, as wellas our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are notstatements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminologysuch as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,”“plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would,” and other similar expressions that are predictions of or indicatefuture events and future trends, or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limitedto, statements about overall trends, royalty revenue trends, liquidity and capital needs and other statements of expectations, beliefs, future plans andstrategies, anticipated events or trends and similar expressions. These forward-looking statements are based on our management’s current expectations,estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs and assumptions. These forward-looking statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are insome cases beyond our control. As a result, any or all of our forward-looking statements in this Annual Report on Form 10-K may turn out to be inaccurate.Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” anddiscussed elsewhere in this Annual Report on Form 10-K. These forward-looking statements speak only as of the date of this Annual Report on Form 10-K.Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomesavailable in the future. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the dateof this Annual Report on Form 10-K.Table of ContentsENANTA PHARMACEUTICALS, INC.ANNUAL REPORT ON FORM 10-KFor the year ended September 30, 2016INDEX Item No. Page PART I 1. Business 1 1A. Risk Factors 26 1B. Unresolved Staff Comments 56 2. Properties 56 3. Legal Proceedings 56 4. Mine Safety Disclosures 56 PART II 5. Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 56 6. Selected Consolidated Financial Data 58 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 59 7A. Quantitative and Qualitative Disclosures about Market Risk 73 8. Consolidated Financial Statements and Supplementary Data 73 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 74 9A. Controls and Procedures 74 9B. Other Information 74 PART III 10. Directors, Executive Officers and Corporate Governance 75 11. Executive Compensation 75 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 75 13. Certain Relationships and Related Transactions, and Director Independence 76 14. Principal Accounting Fees and Services 76 PART IV 15. Exhibits, Financial Statement Schedules 76 Signatures 79 Table of ContentsPART I ITEM 1.BUSINESSBUSINESSOverviewWe are a research and development-focused biotechnology company that uses our robust, chemistry-driven approach and drug discovery capabilities tocreate small molecule drugs primarily for the treatment of viral infections and liver diseases. Our success to date has been built on protease inhibitors wediscovered for the treatment of hepatitis C virus, or HCV, which are licensed to AbbVie and included in its HCV treatment regimens. Our new research anddevelopment programs are currently focused primarily on the following three disease areas: • non-alcoholic steatohepatitis, or NASH, a liver disease estimated to affect approximately 6 million individuals in the U.S. alone; • respiratory syncytial virus, or RSV, the most common cause of bronchiolitis and pneumonia in children under 1 year of age in the U.S., resultingin an estimated 75,000 to 125,000 hospitalizations each year in the U.S.; and • hepatitis B virus, or HBV, the most prevalent chronic hepatitis, which is estimated to affect approximately 240 million individuals worldwide.Our development and licensing collaboration with AbbVie has produced one licensed product and a second product candidate in Phase 3 development forHCV. The licensed product, paritaprevir, a protease inhibitor designed for use against HCV, is a key compound in AbbVie’s direct-acting-antiviral, or DAA,regimen VIEKIRA PAK® and its other 3-DAA and 2-DAA treatment regimens currently on the market for HCV. Our second HCV protease inhibitor,glecaprevir (ABT-493), has completed several Phase 3 registrational studies in combination with pibrentasvir, AbbVie’s second NS5A inhibitor. AbbVie hasindicated it plans to submit a New Drug Application, or NDA, for this combination in the U.S. by the end of 2016 and similar applications in the EU andJapan early in 2017. AbbVie anticipates regulatory approvals and commercialization starting in calendar 2017.We had $242.2 million in cash and marketable securities at September 30, 2016. In our fiscal 2016, we received $30.0 million in milestone payments forcommercialization regulatory approvals of paritaprevir, and earned $57.7 million in royalties on the portion of AbbVie’s net sales of its HCV regimensallocated to paritaprevir. We expect our existing financial resources and cash flows will allow us to continue to invest for the foreseeable future in our whollyowned research and development programs.Our Wholly Owned ProgramsOur wholly owned research and development programs are in liver disease (non-virology), namely NASH and primary biliary cholangitis, or PBC, and invirology, namely HBV, HCV and RSV: • NASH and PBC: We are working on multiple compounds that selectively bind to and activate the farnesoid X receptor, or FXR. We plan todevelop these compounds, referred to as FXR agonists, for use in the treatment of NASH, and possibly PBC, both of which are liver diseases withvery few therapeutic options. Our lead FXR agonist, EDP-305, represents a new class of FXR agonist designed to take advantage of increasedbinding interactions with the receptor. We believe this class is significantly different from other FXR agonists in clinical development. • In September 2016, we initiated a Phase 1 clinical study of EDP-305, which includes healthy subjects and subjects withpresumptive non-alcoholic fatty liver disease, or NAFLD, who are obese and may also have pre-diabetes or type 2 diabetes. 1Table of Contents • In November 2016, we published data at the AASLD meeting that demonstrated that EDP-305 is a highly selective FXR agonistand shows more potent activity in a variety of in vitro and in vivo NASH models compared to the most advanced NASH candidatein development, obeticholic acid, or OCA. • We also intend to explore development of EDP-305 for PBC. • In addition, we are pursuing research in other classes of FXR agonists. • RSV: Our initial efforts in RSV are concentrated on non-fusion inhibitors which we believe will differentiate our compounds from fusioninhibitors currently in development for RSV because non-fusion inhibitors directly target the virus replication process and have demonstratedhigh barriers to viral resistance in vitro. To develop successful therapies for RSV, we believe that it may be necessary to utilize more than onecompound/mechanism and therefore we are pursuing multiple approaches and compounds that provide in vitro and in vivo evidence ofsynergistic potential. • HBV: We also have a program to discover and develop new chemical entities for the treatment of HBV. Our initial focus is on core inhibitors, amechanism with early clinical validation. We believe that it may be necessary to utilize more than one compound/mechanism for the treatmentof HBV and therefore we are pursuing multiple approaches. We continue to make significant progress in discovering, characterizing, and seekingpatent protection for new core inhibitors of HBV. • HCV: We also have a cyclophilin inhibitor, EDP-494, for which we initiated Phase 1a/b clinical development in the first quarter of calendar2016. This study includes a proof-of-concept study in HCV patients, to demonstrate EDP-494’s potential benefit as a host-targeted antiviral.Further development of EDP-494 for HCV will depend in part on the results of this study and in part on our assessment of the potential marketopportunities in HCV and in other possible indications.We intend to advance a candidate compound into clinical development for either RSV or HBV, in calendar 2017.Licensed Product/CandidateUnder our Collaborative Development and License Agreement with AbbVie, we have developed and licensed to AbbVie: • Paritaprevir: Paritaprevir is the protease inhibitor contained in VIEKIRA PAK® and AbbVie’s other HCV treatment regimens currently marketedin the U.S., EU, Japan and other countries around the world. First approved and sold in the U.S. in December 2014 for treatment of genotype 1, orGT-1, HCV, AbbVie’s HCV regimens containing paritaprevir are now also approved for GT-4 HCV and are available in most major markets.AbbVie’s net sales of these regimens provided us $57.7 million in royalty revenue in our fiscal 2016, compared to $34.1 million in fiscal 2015.We have also received a total of $155.0 million in milestone payments upon the initial commercialization regulatory approvals of a paritaprevir-containing regimen in major markets. • Glecaprevir (ABT-493): Our second protease inhibitor, glecaprevir, is being developed by AbbVie with its second NS5A inhibitor, pibrentasvir(ABT-530), as AbbVie’s next treatment regimen for HCV. This combination, which is currently referred to as G/P, is a once daily, all oral, fixed-dose treatment for all major HCV genotypes (GT1-6), which is referred to as being pan-genotypic. • In November 2016, AbbVie announced results from several Phase 3 studies of this investigational combination demonstrating 97.5percent of chronic HCV infected patients without cirrhosis and new to treatment across all major genotypes (GT1-6) achievedSVR12 with just 8 weeks of G/P treatment. • AbbVie also announced results of its EXPEDITION-4 study in chronic HCV patients with chronic kidney disease (CKD), in which98 percent of patients (n=102/104) across all major genotypes (GT-1-6) achieved SVR12 with 12 weeks of treatment with G/P. 2Table of Contents • The FDA has granted Breakthrough Therapy Designation for G/P for the treatment of GT-1 patients with chronic HCV who failedprevious therapy with direct-acting antivirals (DAAs), including previous therapy with an NS5A inhibitor and/or proteaseinhibitor. • Upon commercialization regulatory approval of G/P in major markets, Enanta would be eligible for up to $80.0 million dollars inmilestone payments, as well as annually tiered, double-digit royalties on 50% of the net sales of this 2-DAA product.Our StrategyOur primary objective is to become a leader in the field of viral infections and liver diseases in order to provide new treatments for patients with unmetmedical needs. Our focus is on antiviral targets for viruses such as RSV, HBV and HCV, as well as non-viral liver diseases, such as NASH and PBC. All ofthese disease areas involve significant market opportunities and have attracted the research and development efforts of many competitors. Our strategyincludes the following key elements: • Develop novel treatment options for NASH and PBC. We have a significant research effort underway to identify potent and efficacious FXRagonists for the treatment of NASH and PBC. We are seeking to develop at least two classes of novel FXR agonists with improved efficacy andsafety properties versus OCA and other published FXR agonists currently in clinical development. EDP-305, our lead FXR agonist now in Phase1 clinical development, is in a non-bile-acid class of compounds that contain steroid and non-steroid components and do not contain thecarboxylic acid group that can lead to the formation of taurine and glycine conjugates and is normally present in other classes of FXR agonistsand natural bile acids. We also are seeking to identify a lead candidate in a second class of FXR agonists in 2017. • Invest in research and development of product candidates in RSV and HBV. We are continuing to invest significant resources in our RSV andHBV research programs in an effort to identify and advance novel compounds that have the potential to address significant unmet medical needsin these disease areas. We plan to advance at least one of these programs into clinical development in 2017. In addition, we may seek to augmentour product candidate pipeline through the acquisition or in-licensing of external assets and/or technologies. • Use our existing resources and future cash flow from our AbbVie collaboration to fund our research and development activities. Our existingfinancial resources and any future royalty or milestone payment revenues from our AbbVie collaboration will provide us substantial resources tofund our research and development programs for the foreseeable future. These resources will allow us to advance up to several compounds intoclinical development and progress the most promising ones at least through proof-of-concept for further development as monotherapy or incombinations with other therapeutic agents when we believe such combinations will provide the most promising opportunities. • Collaborate, where and when appropriate, with pharmaceutical partners to create combination therapies and accelerate the development andcommercialization of our proprietary compounds. We are prepared to join forces, where and when appropriate, with collaborators withcompounds targeting other mechanisms of action in diseases such as NASH and HBV, where there is the potential for better treatments withcombination therapies. Our decisions regarding our proprietary programs will be based on the results of our early phase clinical studies and thepotential for combinations with one or more drugs targeting other mechanisms of action in these diseases. 3Table of ContentsOur Research and Development PipelineThe following table summarizes our licensed products and product development pipeline in antivirals and potential treatments for non-viral liver diseases: Our FXR Program in NASH and PBCBackground and Overview of NASH and PBCNon-alcoholic fatty liver disease, or NAFLD, is the accumulation of excessive fat in the form of triglycerides, a process known as steatosis, in liver cells that isnot caused by alcohol. It is normal for the liver to contain some fat. However, if more than 5%-10% of the liver’s weight is fat, then it is called a fatty liver. Asubgroup of NAFLD patients have liver cell injury and inflammation (steatohepatitis) in addition to excessive fat. Progression of this condition leads to non-alcoholic steatohepatitis, or NASH. NASH is widely considered to be the liver expression of metabolic diseases related to type 2 diabetes, insulin resistance,obesity, hyperlipidemia and hypertension.According to the World Gastroenterology Organization Global Guidelines 2014, NASH is an increasingly common chronic liver disease with worldwidedistribution that is closely associated with diabetes and obesity, which have both reached epidemic proportions. It is estimated that there are at least 1.46billion obese adults worldwide. Approximately 6 million individuals in the USA are estimated to have progressed to NASH and some 600,000 to NASH-related cirrhosis. NASH and NAFLD are now considered the number one cause of liver disease in Western countries. 4Table of ContentsCurrently, there are no approved treatments for NASH. While patients presenting with NASH are counseled on lifestyle modifications, new effectivetreatments are urgently needed, particularly in the setting of advanced fibrosis and cirrhosis. Currently, two compounds in advanced Phase 3 trials areunderway in NASH, conducted by Intercept Pharmaceuticals and Genfit, respectively. In addition, several Phase 2 and earlier stage studies of other classes ofcompounds are underway by different companies.Primary biliary cholangitis (formerly known as primary biliary cirrhosis), or PBC, is a chronic, or long-term, disease of the liver that slowly destroys themedium-sized bile ducts within the liver. Bile is a digestive liquid that is made in the liver. It travels through the bile ducts to the small intestine, where ithelps digest fats and absorb fatty vitamins. In patients with PBC, the bile ducts are destroyed by inflammation. This causes bile to remain in the liver, wheregradual injury damages liver cells and causes cirrhosis, or scarring of the liver. As cirrhosis progresses and the amount of scar tissue in the liver increases, theliver loses its ability to function, leading to potential liver failure, liver transplantation or hepatocellular carcinoma. While PBC is a relatively rare disease (inthe U.S., the incidence has been estimated as 4.5 cases for women and 0.7 cases per 100,000 for men), it remains as one of the major causes of liver failureand/or the need for liver transplant.Agonists of the farnesoid X receptor, referred to as FXR agonists, have shown promising activity in many preclinical models of liver disease. One FXRagonist, obeticholic acid, or OCA (brand name Ocaliva TM), which was approved by the FDA in May 2016 for the treatment of PBC, has alreadydemonstrated favorable clinical results in NASH. We believe that new FXR agonists may provide substantial therapeutic benefit in NASH and PBC and mayovercome some of the potential shortcomings of OCA, including limited effects on resolution of NASH, elevation of low-density lipoprotein, or LDL, anditching, also called pruritis.Scientific BackgroundThe farnesoid X receptor, or FXR, is a nuclear hormone receptor that functions to modulate gene expression in response to various metabolic stimuli. FXRsare expressed at high levels in the liver and intestine. Bile acids have been identified as important physiological ligands for FXRs, able to bind and activatethe receptor. The downstream gene modulation resulting from bile acid engagement of FXRs not only contribute to the regulation of bile acid synthesis andmetabolism, but is also involved in a number of other metabolic processes, in particular lipid metabolism. More recently, it has been discovered that bileacids, via FXR, are able to promote insulin sensitivity and decrease lipid synthesis in the liver. In addition, studies have shown that bile acid-dependent FXRactivation is able to provide beneficial effects on fibrosis in the liver as well. For these reasons, FXR is considered to be a viable target for NASH. Indeed,recent Phase 2b trials with OCA, a synthetic analog of natural bile acids known to activate FXR, demonstrated efficacy in NASH patients. In PBC, improvedoutcomes would be expected due to the reduction of bile acid synthesis by activation of FXR. OCA has demonstrated efficacy in a Phase 3 trial in PBC,which was the basis for its approval in the U.S. in May 2016 for use in PBC patients.EDP-305 and Our Approach to the Treatment of NASH and PBCEven through there has been clinical validation demonstrated by the FXR agonist, OCA, we believe that there is opportunity for the development of atreatment that shows improvements in potency and efficacy and reductions in potential safety liabilities for the treatment of NASH and PBC. Using our strongchemistry capabilities, we have undertaken the discovery and development of new FXR agonists that we believe may provide substantial improvements overthe FXR agonists currently in clinical development.We initiated Phase 1 clinical trials of our lead FXR agonist candidate, EDP-305, in September 2016. Our double-blind, placebo-controlled Phase 1 study isdesigned to evaluate the safety, tolerability and pharmacokinetics of single ascending doses (SAD) and multiple ascending doses (MAD) of EDP-305 inhealthy adults, and in adults with presumptive non-alcoholic fatty liver disease, known as NAFLD. By presumptive NAFLD, we mean adults who are obese,with or without pre-diabetes or type 2 diabetes, whom we are including in order to obtain initial 5Table of Contentssafety data and additional data regarding the relationship between EDP-305 plasma concentration levels and certain pharmacological effects in the context offatty liver disease. This relationship will be explored by using bio-markers that are relevant to the disease and to the activity of EDP-305, such as evaluationof lipids, glucose, insulin resistance and specific markers of FXR activity. The study will enroll approximately 90 subjects and is designed to evaluate up to 5dose cohorts, with EDP-305 administered orally, once daily.Our HCV Product and Product CandidatesBackground and Overview of HCV MarketHCV is a virus that is a common cause of viral hepatitis, an inflammation of the liver. HCV is typically contracted by contact with the blood or other bodyfluids of another individual infected with HCV. HCV is a leading cause of chronic liver disease, including cirrhosis, liver failure and cancer, and the leadingcause of death from liver disease in the United States. HCV disease progression occurs over a period of 20 to 30 years, with the majority of HCV-infectedindividuals generally exhibiting no major symptoms in the early stages of the disease. Therefore, until a major symptom is diagnosed, many individuals areunaware they are infected and live undiagnosed without seeking treatment. For that reason, combined with the new availability of effective treatments forHCV, the United States Centers for Disease Control and Prevention, or CDC, issued new guidelines in 2013 recommending screening for all Americans bornbetween the years 1945 and 1965 so that HCV-infected individuals will be aware of their condition and can consider treatment options.An estimated 130-170 million people worldwide are chronically infected with HCV and have an increased risk of eventually developing liver cirrhosis orliver cancer. More than 350,000 people die every year from HCV-related liver diseases. The CDC estimated in 2016 that 2.7-3.9 million people in the UnitedStates are chronically infected with HCV, with an estimated 30,500 new infections in 2014, the most recent year for which the CDC has published data. Webelieve that the chronically infected population remains largely untreated, even with the introduction of several new regimens beginning in 2013. Thereported worldwide sales of the first of the currently available therapies for HCV (sofosbuvir and simeprevir) in 2014 totaled approximately $15.0 billion.With the introduction of Gilead’s Harvoni® and AbbVie’s VIEKIRA PAK® in late 2014, the reported worldwide sales of the five leading HCV therapies in2015 totaled approximately $23 billion. However, after the introduction of Merck’s 2-DAA regimen (brand name ZEPATIER™) and Gilead’s pan-genotypic2-DAA regimen (brand name Epclusa™), reported worldwide sales of the seven leading HCV therapies in the first nine months of 2016 totaled approximately$15 billion.HCV is a small, single-stranded RNA virus. The specific genetic makeup, or genotype, of the virus can vary and at least six genotypes have beencharacterized in HCV-infected patients, with over 50 sub-types identified. Genotypes are designated with numbers (genotypes 1-6) and subtypes with letters(e.g., genotype 1a). HCV genotypes 1, 2, 3 and 4 are found worldwide, but their prevalence varies among geographic regions. Genotype 1, including itssubtypes 1a and 1b, is the most common genotype globally, accounting for approximately 74% of all HCV infections. It is estimated that patients withgenotype 2 or 3 represent approximately 12% of the worldwide chronically infected HCV population, with approximately 6% comprised of genotypes 4through 6 and the remaining 8% of patients in other undesignated categories. The specific genotype and subtype of HCV in a patient appears to play asignificant role in the degree of efficacy of standard of care therapy. Genotype 1a is the most common genotype in North America, and genotype 1b is themost common in Europe and Japan.The first DAAs approved to treat HCV were protease inhibitors, telaprevir (Incivek®, Vertex Pharmaceuticals) and boceprevir (Victrelis®, Merck), whichshowed cure rates of approximately 70% in GT-1-infected patients, when co-administered with an interferon-based regimen. These were approved in 2011,and combination therapy incorporating a protease inhibitor emerged as a new standard of care for a segment of HCV patients. In November 2013, the FDAapproved Janssen Therapeutics’ protease inhibitor, simeprevir (Olysio®), in 6Table of Contentscombination with pegylated interferon and ribavirin, for the treatment of genotype 1 chronic hepatitis C in adult patients with compensated liver disease. InDecember 2013, the FDA approved Gilead’s sofosbuvir (Sovaldi®), a nucleotide analogue inhibitor of the HCV NS5B polymerase enzyme, as a once-a-daytreatment given in combination with ribavirin for the treatment of chronic hepatitis C in adult patients with GT-2 or GT-3 infection. Sofosbuvir was alsoapproved in combination with pegylated interferon and ribavirin for the treatment of GT-1 (the predominant genotype in the major world markets) andgenotype 4 infection. However, medical practice quickly evolved to use a combination of sofosbuvir and simeprevir for these genotypes, which the FDA thenapproved in November 2014 for genotype 1 patients. Meanwhile, in October 2014, the FDA approved Gilead’s Harvoni®, an interferon-free combinationtherapy containing sofosbuvir and an NS5A inhibitor, as a once-a-day treatment for genotype 1 infection. AbbVie’s 3-DAA regimen (VIEKIRA PAK®) wasthen approved by the FDA in December 2014. In January 2016, Merck received FDA approval for its combination of a protease inhibitor and an NS5Ainhibitor (brand name ZepatierTM) for the treatment of patients with genotypes 1 or 4 HCV infection, and in June 2016, Gilead received FDA approval ofEpclusa® for its combination of sofosbuvir and a new NS5A, velpatasvir, the first all-oral, pan-genotypic (any of genotypes 1-6) treatment of adults withchronic HCV infection. Other all-oral treatment regimens are under development at AbbVie, Merck, Gilead and Johnson & Johnson (Janssen) and may obtainregulatory approvals for the treatment of HCV, beginning in the next one to three years, for use in various combinations for specific subpopulations and, insome cases, as pan-genotypic treatments.The previously approved treatments for HCV have provided significant benefit to HCV patients, as will others still in development. To date these treatmentshave cure rates approaching 100% in several subpopulations. Medical practice defines a “cure” as the point at which there is no quantifiable virus in apatient’s blood for a sustained period of time after cessation of therapy, which is often referred to as a sustained virologic response, or SVR.Scientific BackgroundMost of the currently approved HCV therapies and others under development targeting HCV focus directly on the viral life cycle and proteins that are criticalto HCV replication. Replication of the HCV genome occurs on intracellular membranes and requires the participation of multiple viral proteins, some ofwhich have enzymatic activities. Agents, often referred to as inhibitors, that target viral proteins directly are generally referred to as direct acting antivirals, orDAAs. Current DAA therapies typically include some combination of one or more inhibitors of the NS3 protease, the NS5A protein, and the NS5Bpolymerase. In addition to targets in HCV itself, there are human host proteins that are critical to viral replication. Inhibitors that interfere with host targetsresulting in antiviral activity are referred to as host-targeted antivirals, or HTAs. One of the most promising HTA approaches to HCV treatment focuses on thehuman host protein known as cyclophilin A, or cyclophilin. 7Table of ContentsKey Proteins in the HCV Replication Complex NS3 Protease. As HCV replicates, it generates long strands of protein that must be processed into many individual active functional proteins that are referredto as non-structural proteins with the designated abbreviation NS, including NS3 and NS5A. The NS3 protease is responsible for most of this proteinprocessing of the newly translated HCV protein, and plays an essential role in the viral life cycle. Inhibition of the protease prevents these new criticalproteins from forming and therefore prevents replication and survival of the virus.NS5A. The NS5A protein has key roles in both the RNA replication of HCV and modulation of the physiology of its host cell in the body. Research hasshown that targeting NS5A gives rise to profound antiviral activity, and as a result, this protein has emerged as an additional important DAA target for anti-HCV drugs.NS5B Polymerase. HCV is a single-stranded RNA virus, and NS5B is an HCV RNA polymerase responsible for synthesis of new HCV RNA, allowing the HCVgenome to be copied and the virus to survive and replicate. Two separate classes of DAA inhibitors of NS5B polymerase are used as treatments for HCV.Nucleoside/nucleotide inhibitors of NS5B directly inhibit the active site of that enzyme and prevent further elongation of the RNA, and thus are equallyactive against all HCV genotypes. A second class, known as non-nucleoside inhibitors, affects replication of the RNA by altering the shape of the enzyme atremote sites on the enzyme surface, with the result being that any given non-nucleoside inhibitor is usually only active against certain HCV genotypes.Cyclophilin. Viral function of HCV requires an interaction of the viral protein NS5A with the human host protein known as cyclophilin. Inhibitors thatinterfere with this NS5A-cyclophilin interaction would essentially provide a treatment that protects the human host cells from infection by the virus. Clinicalproof-of-concept of a cyclophilin inhibitor was established with alisporivir, a non-immunosuppressive cyclosporine A derivative that has demonstratedeffectiveness against many HCV genotypes and as a high barrier to HCV resistance, with no cross-resistance with several DAAs.Our Evolving Approach to the Development of Treatments for HCVWe have successfully identified clinical development candidates for inhibitors of three of the fundamental, validated targets within the HCV field, includinginhibitors of the NS3 protease and the NS5A protein, as well inhibitors of the human host protein cyclophilin. We have already combined our first proteaseinhibitor with AbbVie’s marketed HCV therapies and our second protease inhibitor with AbbVie’s next combination therapy for HCV, currently in Phase 3clinical development. In addition, we initiated clinical studies of EDP-494, our lead cyclophilin inhibitor, into clinical trials in the first quarter of calendar2016, including a proof-of-concept study in HCV patients, to demonstrate its potential benefit as a host-targeted antiviral, or HTA. 8Table of ContentsParitaprevir, the Protease Inhibitor in AbbVie’s marketed therapies for HCV InfectionOur protease inhibitor, paritaprevir, was discovered through our collaboration with AbbVie. Co-administration of paritaprevir with ritonavir, which we referto together as paritaprevir/r, combines paritaprevir with a commonly used boosting agent that increases the blood concentrations of many protease inhibitorsand has enabled once-daily dosing of paritaprevir. AbbVie developed paritaprevir/r in a 3-DAA combination with its non-nucleoside polymerase and NS5Ainhibitors, with or without ribavirin, for treatment of genotype 1 HCV patients, which was approved in the U.S. in December 2014 and in the EU in January2015. This 3-DAA combination is sold as VIEKIRA PAK in the U.S. and as VIEKIRAX®+EXVIERA® in the EU for non-cirrhotic patients and those with earlystage, or compensated, cirrhosis. In genotype 1a and 1b HCV patients AbbVie’s clinical trials showed SVR rates of 90-100% depending on the patient andgroup. AbbVie also markets a 2-DAA combination with the same NS5A inhibitor for genotype 4 HCV patients in the U.S. and EU under the name VIEKIRAX,which is also approved for genotype 1 patients in Japan.Glecaprevir (ABT-493), the Protease Inhibitor in AbbVie’s Next Combination for HCV InfectionAbbVie is also developing our second protease inhibitor, glecaprevir (ABT-493), discovered within the Enanta-AbbVie collaboration. AbbVie has co-formulated glecaprevir with AbbVie’s second NS5A inhibitor, pibrentasvir (ABT-530), and is developing them as its next combination, currently referred toas G/P, for HCV treatment. G/P would be a pan-genotypic, once daily, all oral, fixed-dose combination treatment for HCV.In November 2016, AbbVie announced results of several of its registrational Phase 3 clinical trials for the investigational G/P combination, demonstratinghigh cure rates across all the major HCV genotypes in treatment naïve patients with only 8 weeks of treatment, and in patients co-infected with chronickidney disease with 12 weeks of treatment. Study Name Patient Population TreatmentDuration TreatmentRegimen SVR12 RateENDURANCE-1 GT1 without cirrhosis, new to treatment ornot cured with previous IFN-basedtreatments (pegIFN +/- RBV or SOF/RBV+/- pegIFN), and patients co-infected with HIV-1 8 week G/P 99%(n=348/351)ENDURANCE-3 GT3 without cirrhosis,new to treatment 8 week G/P 95%(n=149/157)SURVEYOR-2(Part 4) GT2, 4, 5, or 6 without cirrhosis, new to treatment or not curedwith previous IFN-based treatments (pegIFN, SOF/RBV orpegIFN/SOF) 8 week G/P 97%(n=196/203)EXPEDITION-IV GT1-6 chronic HCV infection and chronic kidney disease(CKD), including those on dialysis, not cured with previoustreatment with sofosbuvir (SOF) plus ribavirin (RBV)or with interferon (IFN) plus RBV, with or without SOF 12 weeks G/P 98%(n=102/104)EDP-494, Cyclophilin (Cyp) Inhibitor for HCV InfectionIn anticipation of resistance arising to DAA HCV therapy that targets viral proteins, we have been developing an alternative HTA approach that targets thehuman host protein, cyclophilin, which is essential for replication of HCV. We have demonstrated in replicon assays that our lead cyclophilin-targetinginhibitor, EDP-494, is a 9Table of Contentspotent inhibitor of HCV replication in wild-type virus and in virus with resistance associated variants (RAVs) and is more potent than the clinical stagecyclophilin inhibitor alisporivir. We are currently testing EDP-494 in a proof-of-concept study in HCV patients to demonstrate its potential benefit as a host-targeted antiviral. Further development of EDP-494 for HCV will depend in part on the results of this study and in part on our assessment of the potentialmarket opportunities in HCV and in other possible indications.EDP-239, an NS5A Inhibitor for HCV InfectionWe have also discovered EDP-239, an NS5A inhibitor. This compound has demonstrated potent activity against major genotypes in the replicon assay, whichis a common in vitro test for determining potency of an active compound in reducing HCV replication. EDP-239 successfully completed Phase 1 studies in2015, including a proof-of-concept study. Its further development will depend upon opportunities for us to out-license EDP-239 for use as a potentialadditional component in a combination therapy.Our RSV ProgramBackground Overview of RSVRespiratory syncytial virus, or RSV, is a virus that infects the lungs and represents a serious unmet medical need in infants and children, as well as immune-compromised individuals and the elderly. RSV is the most common cause of bronchiolitis (inflammation of the small airways in the lung) and pneumonia inchildren under 1 year of age in the United States. Each year, 75,000 to 125,000 children in this age group are hospitalized due to RSV infection. In one largeUS-based study, RSV infection in children was associated with 20% of hospitalizations, 18% of emergency department visits, and 15% of pediatric officevisits for acute respiratory infections in the November-April timeframe. Though a prophylactic monoclonal antibody-based treatment is available for infantsconsidered at high risk for RSV infection, this study found that most young children affected by RSV infection were previously healthy, and thus would notnormally be considered for prophylaxis. There is currently no effective treatment available for treating RSV infection.Our approach to the treatment of RSVRSV is a single-stranded, negative-sense RNA virus. The viral genome encodes for 11 proteins, several of which may be suitable targets for the discovery ofnew treatments for RSV. While a number of companies are developing potential approaches geared towards the F protein (or fusion protein, responsible formediating viral entry into host cells), we are focused on non-fusion mechanisms that target the replication process of the virus. It is possible that non-fusioninhibitors may also be effective at later stages of infection. Through our internal chemistry efforts, we have identified multiple series of non-fusion inhibitorsthat possess potent antiviral activity, including versus clinical isolates, and present a high barrier of resistance. We will continue to profile our most advancedleads in preclinical studies, with the goal of selecting a candidate compound in 2017.Our HBV ProgramBackground and Overview of HBVHepatitis B virus, or HBV, can cause potentially life-threatening liver infection. The virus is transmitted through contact with the blood or other bodily fluidsof an infected person. It is estimated that 240 million people worldwide are chronically infected, and 15-25% of patients with chronic HBV infection developchronic liver disease, including cirrhosis, liver cancer, or liver decompensation. It is also estimated that more than 780,000 people die every year due tocomplications of HBV. Estimates for the total number of persons chronically infected with HBV in the U.S. vary but generally range between 0.5 million and2.0 million. Combining U.S., Japan, and major EU populations, estimates of HBV prevalence have been as high as 4.9 million.Current approaches to treatment include interferon therapy and/or inhibitors of HBV reverse transcriptase, the enzyme responsible for viral DNA synthesis,which is necessary for HBV replication. Treatment with interferon 10Table of Contentsoffers modest cure rates, and is accompanied by serious side effects. Reverse transcriptase inhibitors can be very effective at suppressing the virus but oftenrequire lifelong therapy and rarely result in full eradication of the virus from the liver. New treatments that can provide functional cures to chronically-infected patients are urgently needed.Our approach to the treatment of HBVHBV is a partially double-stranded DNA virus, with a complex life cycle. There are multiple mechanisms associated with HBV replication that couldpotentially be targeted with new drugs, including mechanisms of entry, capsid assembly, cccDNA formation, transcription and secretion, as well as reversetranscriptase. In addition, host factor and immunological mechanisms could play a role as well. We are initially focusing on new core inhibitors that weexpect to have an impact on capsid assembly and possibly interfere with other viral processes. This approach has some early clinical validation, with the coreinhibitor NVR 3-778 from Novira demonstrating clinical reduction of viral DNA in chronic HBV patients. We are making significant progress in discovering,characterizing, and securing patent protection for new core inhibitors.In calendar 2017, our goal is to identify a candidate compound from either our HBV program or our RSV program, or both.Drug Discovery and Chemical DevelopmentWe have internally developed all of the initial compounds in our research and development programs. Our scientists have expertise in the areas of medicinalchemistry, molecular virology and pharmacology, with highly developed sets of skills in compound generation, target selection, screening andpharmacology, preclinical development and lead optimization. We are utilizing these skills and capabilities in our discovery and development of antiviraland other product candidates.We focus on virology and liver disease indications representing large and growing market opportunities with significant unmet medical needs. Our selectionof a particular therapeutic target within those disease indications takes into consideration the experience and expertise of our scientific team. The finalselection is based on the possibility of being able to generate robust medicinal chemistry structure-activity relationships to assist lead optimization andsecure relevant intellectual property rights. Once we have identified lead compounds, they are tested using in vitro and in vivo pharmacology studies and invivo research models of antiviral or antibacterial efficacy.Bicyclolide AntibioticsThrough our internal chemistry efforts, we created a new family of antibiotics called Bicyclolides to overcome resistance associated with existing macrolideantibiotics. The main focus of our antibiotic work had been on new mechanisms targeting resistant, Gram-positive pathogens, including bacteria resistant tocurrently marketed macrolides. In September 2011, National Institute of Allergy and Infectious Diseases, or NIAID, contracted for us to undertake the initialclinical development of our lead product candidate, which NIAID wanted to investigate as a medical biodefense countermeasure against several pathogens.NIAID funded our preclinical and early clinical development of this candidate. Based primarily on the competitive landscape for antibiotics for Gram-positive bacterial infections, in December 2014 we decided not to continue commercial development of our antibiotic program. Given that we were no longerpursuing a commercial indication for our lead antibiotic candidate, we and NIAID amended our contract so that it was completed in August 2015 upon ourdelivery of the study report for the Phase 1 clinical study. We are not currently conducting any research in the field of antibiotics. 11Table of ContentsCollaboration and License AgreementsAbbVieWe entered into a Collaborative Development and License Agreement with Abbott Laboratories in November 2006 to develop and commercialize HCV NS3and NS3/4A protease inhibitors. The agreement, which was amended in January and December 2009, was assigned to AbbVie Inc. on January 1, 2013 inconnection with Abbott’s transfer of its research-based pharmaceuticals business to AbbVie. Under the agreement, we have granted AbbVie an exclusive,worldwide, royalty-bearing license, including a right to grant sublicenses, to specified intellectual property, including several issued U.S. patents, relating toprotease inhibitors. We also granted AbbVie access to our drug discovery capabilities in the HCV NS3 and NS3/4A protease inhibitor field. AbbVie grantedus a co-exclusive (together with AbbVie), royalty-free, fully paid license, without the right to grant sublicenses, to certain of AbbVie’s intellectual property,AbbVie’s interest in joint intellectual property and improvements discovered by AbbVie, for the purpose of allowing us to conduct certain development andcommercialization activities in the United States relating to protease inhibitors. AbbVie is responsible for and funds all costs associated with thedevelopment, manufacturing and commercialization of paritaprevir, ABT-493 and any other compounds under this agreement. We are eligible to receivemilestone payments and royalties with respect to these compounds. So long as a product candidate is being developed or commercialized under theagreement, we undertake not to conduct any activity, or grant licenses to a third party, relating to protease inhibitors.A joint steering committee was established under the agreement with review and oversight responsibilities for all research, development andcommercialization activities. The joint steering committee is comprised of three of our senior personnel and three senior personnel from AbbVie; however,AbbVie has final authority to make all decisions regarding development and commercialization activities.The research program and the evaluation period, which was performed by both parties, ended in June 2011. The first commercialized compound isparitaprevir, and glecaprevir (ABT-493) is the second protease inhibitor compound under development. The first clinical milestone for paritaprevir wasachieved in 2010. Through September 30, 2016, we have received a total of approximately $394.0 million from AbbVie as part of our collaboration,consisting of license payments, proceeds from a sale of preferred stock, research funding payments, milestone payments and royalties. We are eligible toreceive additional milestone payments totaling up to $80.0 million upon achievement of commercialization regulatory approval in the U.S. and otherselected world markets for any additional protease inhibitor commercialized by AbbVie.We are eligible to receive annually tiered royalties on each product developed under the agreement, ranging from the low double digits up to twenty percent,or up to the high teens on a blended basis, based on the annual net sales of the product. However, if a product is determined to be a combination product, aswas the case for paritaprevir and would be the case for glecaprevir, the net sales of the combination product will be adjusted on a country-by-country andproduct-by-product basis to reflect a good faith determination of the relative value of each pharmaceutically active ingredient, based on the estimated fairmarket value. This means that AbbVie’s worldwide annual net sales of a combination product will first be allocated to determine the royalty-bearing portion,and then multiplied by the annually tiered royalty rates to determine Enanta’s actual royalty for a given period. In October 2014, we entered into anamendment to our agreement with AbbVie to finalize the net sales allocations for regimens containing paritaprevir, as well as for any regimen containingglecaprevir. Under the terms of this agreement, 30% of net sales of a 3-DAA regimen containing paritaprevir and 45% of net sales of a 2-DAA regimencontaining paritaprevir are allocated to paritaprevir. In the case of the G/P combination containing glecaprevir, 50% of AbbVie’s net sales would be allocatedto this 2-DAA regimen.Royalties owed to us under the agreement can be reduced by AbbVie in certain circumstances, including (i) if AbbVie exercises its right to license orotherwise acquire rights to intellectual property controlled by a third party where a product could not be legally developed or commercialized in a countrywithout the third-party intellectual property right, (ii) where a product developed under the collaboration agreement is sold in a country 12Table of Contentsand not covered by a valid patent claim in such country, or (iii) where sales of a generic product are equal to at least a specified percentage of AbbVie’smarket share of a product in a country.AbbVie’s obligation to pay royalties on a product developed under the agreement expires on a country-by-country basis upon the later of (i) the date ofexpiration of the last of the licensed patents with a valid claim covering the product in the applicable country, and (ii) ten years after the first commercial saleof the product in the applicable country.Our intellectual property existing as of the effective date of the agreement remains our property. Any intellectual property jointly developed is jointly owned.We will have unilateral right to enforce Enanta patent rights on any covered product following the first commercial sale of such product, as will AbbVie. Inthe event of infringement related to any Enanta patents, we will have the first right and option to initiate legal proceedings or take other actions. In the eventof infringement related to any AbbVie patents, AbbVie will have the first right and option to initiate legal proceedings or take other actions. In the event ofinfringement of a joint patent right, we will discuss with AbbVie whether to initiate legal proceedings or take other actions. AbbVie will have the obligationto defend at its sole expense any actions brought against either party alleging infringement of third-party rights by reason of the activities conducted underthe agreement and we will have the right to obtain separate counsel at our own expense. Additionally, AbbVie, at its sole expense, will be responsible for alltrademark prosecution.Subject to the exceptions described above, a party’s rights and obligations under the agreement continue until: (i) such time as AbbVie is no longerdeveloping a product candidate or (ii) if, as of the time AbbVie is no longer developing any product candidates, AbbVie is commercializing any otherprotease inhibitor product, such time as all royalty terms for all covered products and all co-development terms for all co-developed products have ended.Accordingly, the final expiration date of the agreement is currently indeterminable.Either party may terminate the agreement for cause in the event of a material breach, subject to prior notice and the opportunity to cure, or in the event of theother party’s bankruptcy. Additionally, AbbVie may terminate the agreement for any reason upon specified prior notice.If we terminate the agreement for cause or AbbVie terminates without cause, any licenses and other rights granted to AbbVie will terminate and AbbVie willbe deemed to have granted us (i) a non-exclusive, perpetual, fully paid, worldwide, royalty-free license, with the right to sublicense, under AbbVie’sintellectual property used in any product candidate and (ii) an exclusive (even as to AbbVie), perpetual, fully paid, worldwide, royalty-free license, with theright to sublicense, under AbbVie’s interest in joint intellectual property rights to develop product candidates resulting from covered compounds and tocommercialize any products derived from such compounds. Upon our request, AbbVie will also transfer to us all right, title and interest in any related producttrademarks, regulatory filings and clinical trials.If AbbVie terminates the agreement for our uncured breach, the milestone and royalty payments payable by AbbVie may be reduced, the licenses granted toAbbVie will remain in place, we will be deemed to have granted AbbVie an exclusive license under our interest in joint intellectual property, AbbVie willcontinue to have the right to commercialize any covered products, and all rights and licenses granted to us by AbbVie will terminate.NIAID ContractIn September 2011, we were awarded a contract from NIAID to fund preclinical and early clinical development of our lead candidate in a new class of bridgedbicyclic antibiotics known as Bicyclolides. Under the terms of the NIAID contract, which was completed in August 2015, NIAID has paid us research anddevelopment funding totaling approximately $20.6 million through January 31, 2016. Under the contract, all intellectual property rights held by us and anyinventions, know-how or other intellectual property rights derived as a result of this contract will be our property, subject to certain rights of the United Statesfederal government. See “Risk Factors—We could be unsuccessful in obtaining or maintaining adequate patent protection for one or more of our productcandidates.” 13Table of ContentsCompetitionWe are engaged in segments of the pharmaceutical industry that are highly competitive and rapidly changing. Many large pharmaceutical and biotechnologycompanies, academic institutions, governmental agencies and other public and private research organizations are commercializing or pursuing thedevelopment of products that target HCV, NASH, HBV, RSV and other viral and liver diseases that we may target in the future.Many of our competitors have substantially greater commercial infrastructures and greater financial, technical and personnel resources than we have, as wellas drug candidates in late-stage clinical development. Our competitors may succeed in developing competing products and obtaining regulatory approvalbefore us or any collaborator of ours does with our product candidates, or they may gain acceptance for the same markets that we are targeting. If we are not“first to market” with one of our product candidates in one or more disease indications, our competitive position could be compromised because it may bemore difficult for us to obtain marketing approval for that product candidate and market acceptance of that product candidate as a second competitor. Inaddition, any new product that competes with an approved product typically must demonstrate compelling advantages in efficacy, convenience, tolerabilityor safety, or some combination of these factors, in order to overcome price competition and be commercially successful.We expect our licensed product and product candidates for HCV to face intense and increasing competition as new products continue to enter the HCVmarket. Our HCV protease inhibitors licensed to AbbVie currently face competition in various world markets and subpopulations of HCV from Gilead’sSovaldi® (sofosbuvir), Harvoni® (a fixed-dose combination of sofosbuvir and ledipasvir) and Epclusa® (a fixed dose combination of sofosbuvir andvelpatasvir), Bristol-Myers Squibb’s Daclinza™ (daclatasvir) and daclatasvir in combination with asunaprevir, and Merck’s ZepatierTM (a fixed-dosecombination of grazoprevir and elbasvir). Other all-oral treatment regimens are under development at Merck, Gilead and Johnson & Johnson and may obtainregulatory approvals for the treatment of HCV beginning in the next one to three years. These other potential new treatment regimens may render AbbVie’sapproved treatment regimens or its next combination regimen currently in clinical development, each of which contains one of our HCV protease inhibitors,noncompetitive. In addition, AbbVie’s regimens may not be able to compete successfully with other products and regimens still under active developmentthat involve multiple classes of inhibitors of HCV, including protease inhibitors, polymerase inhibitors (nucleoside and non-nucleoside), NS5A inhibitors,and other mechanism. These potential regimens are under development by companies such as, Co-Crystal Pharma, Microbio Co., Regulus, Roche, Taigen,and Trek.Competitive products in the form of other treatment methods or a vaccine for HCV may render our product candidates licensed to AbbVie, as well as anyother product candidates we may develop ourselves, obsolete or noncompetitive. Even if successfully developed and subsequently approved by the FDA, ourproduct candidates will face competition based on their safety and effectiveness, the timing and scope of the regulatory approvals, reimbursement coverage,price, patent position, the availability and cost of supply, marketing and sales capabilities, and other factors. If the product candidates developed under ourcollaboration agreement with AbbVie face competition from generic products, the collaboration agreement provides that the royalty rate applicable to suchproduct candidates is reduced significantly by a specified percentage on a product-by-product, country-by-country basis. If we and our collaborator are notable to compete effectively against our current and future competitors, our business will not grow and our financial condition, operations and stock price willsuffer.We also expect our other product candidates to face intense and increasing competition as new products continue to enter the NASH and antiviral marketsand advanced technologies become available. Though there is currently no approved treatment for NASH, we expect significant competition from othercompanies in the development of new treatments for NASH and related conditions. We are aware of several companies with NASH programs that aresignificantly more advanced than ours, including companies with compounds in Phase 3 clinical trials, namely Intercept and Genfit. In May 2016, the FDAapproved Intercept’s FXR agonist (brand name Ocaliva™) for the treatment of primary biliary cholangitis (PBC). In addition, a number of companies are inPhase 2 clinical 14Table of Contentstrials for NASH or related conditions. These companies include Alberio, Arisaph, Astra-Zeneca, BMS, Cempra, Conatus, Galectin, Galmed, Gilead,GlaxoSmithKline, Immuron, Medicinova, Novartis, NGM, Novo Nordisk, Octeta, Shire, and Tobira/Allergan. A significant number of other companies areconducting earlier stage clinical trials of compounds that may be appropriate for treatment of NASH and other cholestatic diseases, including BoehringerIngelheim, Can-Fite Biopharma, Cymabay, Durect, Genkyotex, Ionis, Islet and Viking, and there are additional companies conducting preclinical studies inthese disease areas.For RSV, there are no safe and effective approved therapies. Several companies are seeking new antiviral treatments for RSV in adult and pediatric settings.Aviragen (formerly Biota), Johnson & Johnson and Gilead each have compounds in Phase 2 development, as does Ablynx with a potential therapeuticantibody. Earlier stage programs have also been reported by Ark Biosciences, Medivir, Pulmocide, and ReViral.While there are effective antiviral medications prescribed for HBV, they generally have low true cure rates. Many companies are seeking to develop new HBVdrugs that alone or in combination with other mechanisms could lead to a functional cure of HBV. Arrowhead Pharmaceuticals, Gilead, Roche, Arbutus,Maxwell, Janssen, Replicor, and Spring Bank have Phase 2 programs in progress, and a number of companies have Phase 1 or earlier stage HBV programs,including Alnylam, Arbutus, Assembly, Enyo, Johnson & Johnson, Ionis, and Benitec.If we are not able to develop new products that can compete effectively against our current and future competitors, our business will not grow and ourfinancial condition, operations and stock price will suffer.Many of our competitors have substantially greater commercial infrastructures and financial, technical and personnel resources than we have. We will not beable to compete successfully unless we are able to: • design and develop products that are superior to other products in the market; • attract qualified scientific, medical, sales and marketing and commercial personnel; • obtain patent and/or other proprietary protection for our processes and product candidates; • obtain required regulatory approvals; and • collaborate with others in the development and commercialization of new products.Established competitors may invest heavily to quickly discover and develop novel compounds that could make our product candidates obsolete. In addition,any new product that competes with an approved product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in orderto overcome price competition and to be commercially successful. If we and our collaborators are not able to compete effectively against current and futurecompetitors for our product candidates, our business will not grow and our financial condition will be adversely affected.Intellectual PropertyAs part of our business strategy, we actively seek patent protection for our product candidates in the United States and certain major foreign jurisdictions andfile additional patent applications, when appropriate, to cover improvements to our compounds. We also rely on trade secrets, internal know-how,technological innovations and agreements with third parties to develop, maintain and protect our competitive position. Our ability to be competitive willdepend on the success of this strategy.Each of our major programs, including HCV, NASH, HBV and RSV, typically has several issued patents and pending patent claims in the program areacontaining claims to compounds, methods of use and processes for synthesis. However, only a few of the issued patents and/or pending patent applicationscover the lead product candidate in the program. 15Table of ContentsHCV NS3 Protease Inhibitor Program. The patent portfolio directed to the HCV protease inhibitor program with AbbVie include U.S. patents and foreignpatents, as well as non-provisional applications. The issued U.S. composition-of-matter patent covering paritaprevir is expected to expire in 2031. If G/P isapproved, the issued United States composition-of-matter patent covering glecaprevir would expire later, after taking into account any extensions that maybe obtained through patent term extension or adjustment, or term reduction due to filing of terminal disclaimers. AbbVie is a joint owner of a number of thesepatent applications. AbbVie also has rights to some or all of these patents and patent applications pursuant to its collaboration agreement with us.Other HCV Patents. Our patent portfolio directed to HCV NS5A inhibitors and cyclophilin inhibitors includes issued U.S. patents and foreign patents, as wellas non-provisional applications. The issued U.S. patents and the applications, if granted, would expire between 2030 and 2035 before taking into accountany extensions that may be obtained through patent term extension or adjustment, or term reduction due to filing of terminal disclaimers.Antibacterial Program. Our issued U.S. patents and foreign patents covering our portfolio of antibacterials will expire between 2020 and 2032 before takinginto account any extension that may be obtained through patent term extension or adjustment, or term reduction due to filing of terminal disclaimers.NASH, HBV and RSV Programs. Our patent portfolio directed to FXR agonists for NASH, PBC and fibrosis, core inhibitors for HBV and non-fusion inhibitorsfor RSV includes pending U.S. patent applications as well as numerous foreign patent applications.We may obtain patents for certain compounds many years before we obtain marketing approval for products containing such compounds. Because patentshave a limited life, which usually begins to run well before the first commercial sale of the related product, the commercial value of the patent may be limited.However, we may be able to apply for patent term extensions in the United States and in a number of European countries, compensating in part for delays inobtaining marketing approval, but we cannot be certain we will obtain such extensions.It is also very important that we do not infringe patents or other proprietary rights of others. If we do infringe such patents or other proprietary rights, we couldbe prevented from developing or selling products or from using the processes covered by those patents, could be required to pay substantial damages, orcould be required to obtain a license from the third party to allow us to use their technology, which may not be available on commercially reasonable termsor at all. If we were not able to obtain a required license or develop alternative technologies, we may be unable to develop or commercialize some or all of ourproducts, and our business could be adversely affected.In addition, we jointly own patent applications, together with AbbVie, that claim paritaprevir or glecaprevir as a chemical entity. However, there is noguarantee that such applications will issue. We also own one issued patent that claims EDP-239 as a chemical entity. Further, the existence of issued patentsdoes not guarantee our right to practice the patented technology or commercialize the patented product. Third parties may have already or could obtainrights to patents that could be used to prevent or attempt to prevent us from commercializing our product candidates. If these other parties are successful inobtaining valid and enforceable patents, and establishing our infringement of those patents, we could be prevented from commercializing our productcandidates unless we were able to obtain a license under such patents, which may not be available on commercially reasonable terms or at all.Much of our scientific capabilities depend upon the knowledge, experience and skills of key scientific and technical personnel. To protect our rights to ourproprietary know-how and technology, we endeavor to require all employees, as well as our consultants and advisors, when feasible, to enter intoconfidentiality agreements that require disclosure and assignment to us of ideas, developments, discoveries and inventions made by these employees,consultants and advisors in the course of their service to us. 16Table of ContentsWe may be unable to obtain, maintain and protect the intellectual property rights necessary to conduct our business, and we may be subject to claims that weinfringe or otherwise violate the intellectual property rights of others, which could materially harm our business. For more information, see “Risk Factors—Risks Related to Our Intellectual Property Rights.”Government RegulationGovernment authorities in the United States, at the federal, state and local level, and in other countries extensively regulate, among other things, the research,development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of products such as those we develop. Any pharmaceutical candidate that we developmust be approved by the FDA before it may be legally marketed in the United States and by the appropriate foreign regulatory agency before it may belegally marketed in foreign countries.United States Drug Development ProcessIn the United States, the FDA regulates drugs under the Federal Food, Drug and Cosmetic Act, or FDCA, and implementing regulations. Drugs are also subjectto other federal, state and local statutes and regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriatefederal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure to comply with theapplicable United States requirements at any time during the product development process, approval process or after approval, may subject an applicant toadministrative or judicial sanctions. FDA sanctions could include refusal to approve pending applications, withdrawal of an approval, a clinical hold,warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts,restitution, disgorgement or civil or criminal penalties. Any agency or judicial enforcement action could have a material adverse effect on us.The process required by the FDA before a drug may be marketed in the United States generally involves the following: • Completion of preclinical laboratory tests, animal studies and formulation studies according to GLPs or other applicable regulations; • Submission to the FDA of an Investigational New Drug Application, or an IND, which must become effective before human clinical trials maybegin; • Performance of adequate and well-controlled human clinical trials according to the FDA’s current Good Clinical Practices, or GCPs, to establishthe safety and efficacy of the proposed drug for its intended use; • Submission to the FDA of a New Drug Application, or an NDA, for a new drug product; • Satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the drug is to be produced to assess compliancewith the FDA’s current Good Manufacturing Practice standards, or cGMP, to assure that the facilities, methods and controls are adequate topreserve the drug’s identity, strength, quality and purity; • Potential FDA audit of the nonclinical and clinical trial sites that generated the data in support of the NDA; and • FDA review and approval of the NDA.The lengthy process of seeking required approvals, which can often take anywhere from six months from the time the NDA is filed if there is a priority reviewfor a breakthrough therapy to twelve months for a standard review, and the continuing need for compliance with applicable statutes and regulations requirethe expenditure of substantial resources. There can be no certainty that approvals will be granted. 17Table of ContentsBefore testing any compounds with potential therapeutic value in humans, the product candidate enters the preclinical testing stage. Preclinical tests includelaboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies to assess the potential safety and activity of the productcandidate. The conduct of the preclinical tests must comply with GLP and other federal regulations and requirements. The sponsor must submit the results ofthe preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and a proposed clinical protocol, to theFDA as part of the IND. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA places the clinical trial on a clinical holdwithin that 30-day time period. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. TheFDA may also impose clinical holds on a drug at any time before or during clinical trials due to safety concerns or non-compliance. Accordingly, we cannotassure that submission of an IND will result in the FDA allowing clinical trials to begin, or that, once begun, issues will not arise that result in suspension ortermination of such trial.Clinical trials involve the administration of the product candidate to healthy volunteers or patients having the disease being studied under the supervision ofqualified investigators, generally physicians not employed by or under the trial sponsor’s control. Clinical trials are conducted under protocols detailing,among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitorsubject safety. Each protocol must be submitted to the FDA as part of the IND. Clinical trials must be conducted in accordance with the FDA’s GCPrequirements. Further, each clinical trial must be reviewed and approved by an independent institutional review board, or IRB, at or servicing each institutionat which the clinical trial will be conducted. An IRB is charged with protecting the welfare and rights of trial participants and considers such items as whetherthe risks to individuals participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves theinformed consent form that must be provided to each clinical trial subject or his or her legal representative and must monitor the clinical trial until it iscompleted.Human clinical trials prior to approval are typically conducted in three sequential phases that may overlap or be combined: • Phase 1. The drug is initially introduced into healthy humans and tested for safety, dosage tolerance, absorption, metabolism, distribution andexcretion. In the case of some products for severe or life-threatening diseases, especially when the product may be too inherently toxic toethically administer to healthy volunteers, the initial human testing is often conducted only in patients having the specific disease. • Phase 2. The drug is evaluated in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate theefficacy of the product for specific targeted diseases and to determine dosage tolerance, optimal dosage and dosing schedule for patients havingthe specific disease. • Phase 3. Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population atgeographically dispersed clinical trial sites. These clinical trials, which usually involve more patients than earlier trials, are intended to establishthe overall risk/benefit ratio of the product and provide an adequate basis for product labeling. Generally, at least two adequate and well-controlled Phase 3 clinical trials are required by the FDA for approval of an NDA.Post-approval studies, or Phase 4 clinical trials, may be conducted after initial marketing approval. These studies are used to gain additional experience fromthe treatment of patients in the intended therapeutic indication and may be required by the FDA as part of the approval process.Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and written IND safety reports must be submitted tothe FDA by the investigators for serious and unexpected adverse events or any finding from tests in laboratory animals that suggests a significant risk forhuman patients. Phase 1, 18Table of ContentsPhase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, if at all. The FDA, or the sponsor or its data safetymonitoring board, may suspend a clinical trial at any time on various grounds, including a finding that the research patients are being exposed to anunacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted inaccordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients.Concurrent with clinical trials, companies usually complete additional animal studies and develop additional information about the chemistry and physicalcharacteristics of the drug as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. Themanufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, must include methodsfor testing the identity, strength, quality and purity of the final drug. Additionally, appropriate packaging must be selected and tested and stability studiesmust be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its shelf life.U.S. Review and Approval ProcessesThe results of product development, preclinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests conducted onthe chemistry of the drug, proposed labeling and other relevant information are submitted to the FDA as part of an NDA requesting approval to market theproduct. The submission of an NDA is subject to the payment of substantial user fees by the applicant; a waiver of such fees may be obtained under certainlimited circumstances.In addition, under the Pediatric Research Equity Act, or PREA, an NDA or supplement to an NDA must contain data to assess the safety and effectiveness ofthe drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation forwhich the product is safe and effective. The FDA may grant deferrals for submission of pediatric data or full or partial waivers.The FDA reviews all NDAs submitted before it accepts them for filing and may request additional information rather than accepting an NDA for filing. Oncethe submission is accepted for filing, the FDA begins an in-depth review of the NDA. Under the goals and policies agreed to by the FDA under thePrescription Drug User Fee Act, or PDUFA, the FDA has twelve months in which to complete its initial review of a standard NDA and respond to theapplicant, and six months for a priority NDA. The FDA does not always meet its PDUFA goal dates for standard and priority NDAs.After the NDA submission is accepted for filing, the FDA reviews the NDA to determine, among other things, whether the proposed product is safe andeffective for its intended use and whether the product is being manufactured in accordance with cGMP to assure and preserve the product’s identity, strength,quality and purity. In addition to its own review, the FDA may refer applications for novel drug products or drug products that present difficult questions ofsafety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as towhether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but itconsiders such recommendations carefully when making decisions. During the approval process, the FDA also will determine whether a Risk Evaluation andMitigation Strategy, or REMS, is necessary to assure the safe use of the drug. If the FDA concludes that a REMS is needed, the sponsor of the NDA mustsubmit a proposed REMS; the FDA will not approve the NDA without a REMS, if required.Before approving an NDA, the FDA will inspect the facilities at which the product is to be manufactured. The FDA will not approve the product unless itdetermines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of theproduct within required specifications. Additionally, before approving an NDA, the FDA will typically inspect one or more clinical sites 19Table of Contentsto assure compliance with GCP. If the FDA determines that the application, manufacturing process or manufacturing facilities are not acceptable it willoutline the deficiencies in the submission and often will request additional testing or information.The NDA review and approval process is lengthy and difficult, and the FDA may refuse to approve an NDA if the applicable regulatory criteria are notsatisfied or may require additional clinical data or other data and information. Even if such data and information is submitted, the FDA may ultimately decidethat the NDA does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive and may be susceptible to varyinginterpretations, which could delay, limit or prevent regulatory approval. The FDA will issue a “complete response” letter if the agency decides not to approvethe NDA. The complete response letter usually describes all of the specific deficiencies in the NDA identified by the FDA. The deficiencies identified may beminor, for example, requiring labeling changes, or major, for example, requiring additional clinical trials. Additionally, the complete response letter mayinclude recommended actions that the applicant might take to place the application in a condition for approval. If a complete response letter is issued, theapplicant may either resubmit the NDA, addressing all of the deficiencies identified in the letter, or withdraw the application.If a product receives regulatory approval, the approval may be limited to specific diseases and dosages or the indications for use may otherwise be limited,which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings or precautions be included inthe product labeling. In addition, the FDA may require Phase 4 testing, which involves clinical trials designed to further assess a product’s safety andeffectiveness and may require testing and surveillance programs to monitor the safety of approved products that have been commercialized.Expedited Development and Review ProgramsThe FDA has four programs intended to expedite the development and review of new drugs addressing unmet medical needs or treating serious or life-threatening conditions: fast track, breakthrough therapy, priority review, and accelerated approval.The FDA “fast track” program is intended to expedite or facilitate the process for reviewing new products to treat serious or life-threatening conditions andaddress unmet medical needs. Fast track designation applies to the combination of the product and the specific indication for which it is being studied. Underthe fast track program, the sponsor will have more frequent interactions with the FDA during drug development, and may also submit sections of the NDA ona rolling basis to the FDA for review before submitting the complete application. Fast track does not guarantee that a product will be reviewed more quicklyor receive FDA approval.The FDA “breakthrough therapy” program is intended to expedite the development and review of drugs for serious or life-threatening conditions. Preliminaryclinical evidence must show that the drug may have substantial improvement over existing therapies on one or more clinically significant endpoints.Although the drug does not have to address an unmet medical need, designation of breakthrough therapy status carries all the “fast track” program features.Additionally, the breakthrough therapy program entitles the sponsor to earlier and more frequent interaction with the FDA review team regardingdevelopment of nonclinical and clinical data, and allows the FDA to offer product development and regulatory advice necessary to shorten the time forproduct approval. The breakthrough therapy status does not guarantee a quicker development or review of the product, and does not ensure FDA approval.The FDA also has a “priority review” program for products offering significant improvement in the treatment, diagnosis or prevention of a disease. The goalof the priority review program is to shorten the review period to six months from the ten months required for standard review. Any drug with breakthroughtherapy, accelerated approval designation, or fast track can be granted priority review if it meets the necessary criteria.The FDA “accelerated approval” program is intended to expedite the development and review of products with the potential to treat serious or life-threatening illnesses and provide meaningful therapeutic benefit over existing 20Table of Contentstreatments. The program allows approval of a product on the basis of adequate and well-controlled clinical studies establishing that the product has an effecton a surrogate endpoint that is reasonably likely to predict a clinical benefit, or on the basis of an effect on a clinical endpoint that can be measured earlierthan survival or irreversible morbidity. As a condition of approval, the FDA generally requires that a sponsor of the product perform adequate and well-controlled post-marketing clinical studies to establish safety and efficacy for the approved indication. Failure to conduct such studies or failure of the studiesto establish required safety and efficacy may result in revocation of approval. The FDA also requires, as a condition for accelerated approval, pre-approval ofpromotional materials, which could adversely impact the timing of the commercial launch or subsequent marketing of the product.Post-Approval RequirementsAny drug products for which we receive FDA approvals are subject to continuing regulation by the FDA. Certain requirements include, among other things,record-keeping requirements, reporting of adverse experiences with the product, providing the FDA with updated safety and efficacy information on anannual basis or more frequently for specific events, product sampling and distribution requirements, complying with certain electronic records and signaturerequirements and complying with FDA promotion and advertising requirements. These promotion and advertising requirements include, among others,standards for direct-to-consumer advertising, prohibitions against promoting drugs for uses or in patient populations that are not described in the drug’sapproved labeling (known as “off-label use”), rules for conducting industry-sponsored scientific and educational activities and promotional activitiesinvolving the internet. Failure to comply with FDA requirements can have negative consequences, including the immediate discontinuation ofnoncomplying materials, adverse publicity, enforcement letters from the FDA, mandated corrective advertising or communications with doctors, and civil orcriminal penalties. Although physicians may prescribe legally available drugs for off-label uses, manufacturers may not market or promote such off-labeluses.We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our product candidates. Manufacturers ofour product candidates are required to comply with applicable FDA manufacturing requirements contained in the FDA’s cGMP regulations. These regulationsrequire, among other things, quality control and quality assurance as well as the corresponding maintenance of comprehensive records and documentation.Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are also required to register their establishments andlist any products they make with the FDA and to comply with related requirements in certain states. These entities are further subject to periodicunannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue toexpend time, money and effort in the area of production and quality control to maintain cGMP compliance. Discovery of problems with a product afterapproval may result in serious and extensive restrictions on a product, manufacturer or holder of an approved NDA. These restrictions may includesuspension of a product until the FDA is assured that quality standards can be met, continuing oversight of manufacturing by the FDA under a “consentdecree,” which frequently includes the imposition of costs and continuing inspections over a period of many years, as well as possible withdrawal of theproduct from the market. In addition, changes to the manufacturing process generally require prior FDA approval before being implemented. Other types ofchanges to the approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and approval.The FDA also may require post-marketing testing, known as Phase 4 testing, as well as risk minimization action plans and surveillance to monitor the effectsof an approved product or place conditions on an approval that could otherwise restrict the distribution or use of the product.U.S. Patent Term Restoration and Marketing ExclusivityDrug Price Competition and Patent Term Restoration Act of 1984Depending upon the timing, duration and specifics of the FDA approval of the use of our product candidates, some of our United States patents may beeligible for limited patent term extension under the Drug Price 21Table of ContentsCompetition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit apatent restoration term of up to five years as compensation for patent term lost during federal regulatory review preceding the FDA regulatory review process.However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent termrestoration period is generally one-half the time between the effective date of an IND and the submission date of an NDA plus the time between thesubmission date of an NDA and the approval of that application. Only one patent applicable to an approved drug is eligible for the extension and theapplication for the extension must be submitted within 60 days of approval, prior to the expiration of the patent. The United States Patent and TrademarkOffice, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the future, we may apply forrestoration of patent term for one of our currently owned or licensed patents to add patent life beyond its current expiration date, depending on the expectedlength of the clinical trials and other factors involved in the filing of the relevant NDA. However, there is no guarantee that any such application will beapproved.Federal Food, Drug and Cosmetic Act (“FDCA”)Market exclusivity provisions under the FDCA, which are independent of patent status and any patent related extensions, can also delay the submission orthe approval of certain applications of other companies seeking to reference another company’s NDA. If the new drug is a new chemical entity subject to anNDA, the FDCA provides a five-year period of non-patent marketing exclusivity within the United States to the first applicant to obtain approval of an NDAfor a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety,which is the molecule or functional group of a molecule responsible for the action of the drug substance. During the exclusivity period, the FDA may notaccept for review an abbreviated new drug application, or ANDA, or a so-called Section 505(b)(2) NDA, submitted by another company for another version ofsuch drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, such an application may besubmitted after four years if it contains a certification of patent invalidity or non-infringement to one of the patents listed with the FDA by the innovator NDAholder. The FDCA also provides three years of marketing exclusivity for an NDA, or supplement to an existing NDA if new clinical investigations, other thanbioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, forexample new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the conditions associated with the new clinicalinvestigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five-year and three-year exclusivity willnot delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of referenceto all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.Other U.S. Healthcare Laws and Compliance RequirementsIn the United States, our activities are potentially subject to regulation by various federal, state and local authorities in addition to the FDA, including theCenters for Medicare and Medicaid Services (formerly the Health Care Financing Administration), other divisions of the United States Department of Healthand Human Services (e.g., the Office of Inspector General), the United States Department of Justice and individual United States Attorney offices within theDepartment of Justice, state attorney generals and state and local governments. For example, sales, marketing and scientific/educational grant programs mustcomply with the anti-fraud and abuse provisions of the Social Security Act, the False Claims Act, the privacy and security provisions of the Health InsurancePortability and Accountability Act, or HIPAA, and similar state laws, each as amended. Pricing and rebate programs must comply with the Medicaid rebaterequirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Health Care Act of 1992, each as amended. If products are made availableto authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. Under the VeteransHealth Care Act, or VHCA, drug companies are required to offer certain pharmaceutical products at a reduced price to a number of federal agencies includingthe United States 22Table of ContentsDepartment of Veterans Affairs and United States Department of Defense, the Public Health Service and certain private Public Health Service—designatedentities in order to participate in other federal funding programs including Medicare and Medicaid. Recent legislative changes purport to require thatdiscounted prices be offered for certain United States Department of Defense purchases for its TRICARE program via a rebate system. Participation under theVHCA requires submission of pricing data and calculation of discounts and rebates pursuant to complex statutory formulas, as well as the entry intogovernment procurement contracts governed by the Federal Acquisition Regulations.In order to distribute products commercially, we must comply with state laws that require the registration of manufacturers and wholesale distributors ofpharmaceutical products in a state, including, in certain states, manufacturers and distributors who ship products into the state even if such manufacturers ordistributors have no place of business within the state. Some states also impose requirements on manufacturers and distributors to establish the pedigree ofproduct in the chain of distribution, including some states that require manufacturers and others to adopt new technology capable of tracking and tracingproduct as it moves through the distribution chain. Several states have enacted legislation requiring pharmaceutical companies to establish marketingcompliance programs, file periodic reports with the state, make periodic public disclosures on sales, marketing, pricing, clinical trials and other activities,and/or register their sales representatives, as well as to prohibit pharmacies and other healthcare entities from providing certain physician prescribing data topharmaceutical companies for use in sales and marketing, and to prohibit certain other sales and marketing practices. All of our activities are potentiallysubject to federal and state consumer protection and unfair competition laws.Europe / Rest of World Government RegulationIn addition to regulations in the United States, we will be subject to a variety of regulations in other jurisdictions governing, among other things, clinicaltrials and any commercial sales and distribution of our products.Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in foreign countries prior to thecommencement of clinical trials or marketing of the product in those countries. Certain countries outside of the United States have a similar process thatrequires the submission of a clinical trial application much like the IND prior to the commencement of human clinical trials. In the European Union, forexample, a clinical trial application, or CTA, must be submitted to each country’s national health authority and an independent ethics committee, much likethe FDA and IRB, respectively. Once the CTA is approved in accordance with a country’s requirements, clinical trials may proceed.The requirements and process governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In allcases, the clinical trials are conducted in accordance with International Conference on Harmonisation (ICH) / WHO Good Clinical Practice standards and theapplicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.To obtain regulatory approval of an investigational drug under European Union regulatory systems, we must submit a marketing authorization application tothe European Medicines Agency, or the EMA. The application used to file an NDA in the United States is similar to that required in the European Union, withthe exception of, among other things, country-specific document requirements.For other countries outside of the European Union, such as countries in Eastern Europe, Latin America or Asia, the requirements governing the conduct ofclinical trials, product licensing, pricing and reimbursement vary from country to country. In all cases, again, the clinical trials are conducted in accordancewith GCPs and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines, suspension or withdrawal of regulatoryapprovals, product recalls, seizure of products, operating restrictions and criminal prosecution. 23Table of ContentsPharmaceutical Coverage, Pricing and ReimbursementSignificant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we obtain regulatory approval. In the UnitedStates and markets in other countries, sales of any products for which we receive regulatory approval for commercial sale will depend in part on theavailability of reimbursement from third-party payors. Third-party payors include government health administrative authorities, managed care providers,private health insurers and other organizations. The process for determining whether a payor will provide coverage for a drug product may be separate fromthe process for setting the price or reimbursement rate that the payor will pay for the drug product. Third-party payors may limit coverage to specific drugproducts on an approved list, or formulary, which might not include all of the FDA-approved drug products for a particular indication. Third-party payors areincreasingly challenging the price and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safetyand efficacy. We may need to conduct expensive pharmaco-economic studies in order to demonstrate the medical necessity and cost-effectiveness of ourproducts, in addition to the costs required to obtain the FDA approvals. Our product candidates may not be considered medically necessary or cost-effective.A payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Adequate third-partyreimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in productdevelopment.In 2003, the United States government enacted legislation providing a partial prescription drug benefit for Medicare recipients, which became effective at thebeginning of 2006. Government payment for some of the costs of prescription drugs may increase demand for any products for which we receive marketingapproval. However, to obtain payments under this program, we would be required to sell products to Medicare recipients through prescription drug plansoperating pursuant to this legislation. These plans will likely negotiate discounted prices for our products. Federal, state and local governments in the UnitedStates continue to consider legislation to limit the growth of healthcare costs, including the cost of prescription drugs. Future legislation could limitpayments for pharmaceuticals such as the product candidates that we are developing.The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively known as the Affordable CareAct, substantially changed the way healthcare is financed by both governmental and private insurers, and significantly impacted the pharmaceutical industry.The comprehensive overhaul has extended coverage to approximately 20 million previously uninsured Americans. Since its adoption, the Affordable CareAct contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse,which have affected existing government healthcare programs and have resulted in the development of new programs, including Medicare payment forperformance initiatives and improvements to the physician quality reporting system and feedback program. Additionally, the Affordable Care Act, as limitedby the United States Supreme Court’s decision in June 2012: • increases the minimum level of Medicaid rebates payable by manufacturers of brand-name drugs from 15.1% to 23.1%; • requires collection of rebates for drugs paid by Medicaid managed care organizations; • requires manufacturers to participate in a coverage gap discount program, under which they must agree to offer 50% point-of-sale discounts offnegotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’soutpatient drugs to be covered under Medicare Part D, beginning January 2011; and • imposes a non-deductible annual fee on pharmaceutical manufacturers or importers who sell “branded prescription drugs” to specified federalgovernment programs.There have been proposed in Congress a number of legislative initiatives regarding healthcare, including possible repeal of the Affordable Care Act. At thistime, it remains unclear whether there will be any changes made to the 24Table of ContentsAffordable Care Act, whether to certain provisions or its entirety. The full impact that the Affordable Care Act and other new laws will have on our businessremains uncertain. Nor is it clear whether other legislative changes will be adopted, if any, or how such changes would affect the demand for our licensedproducts or our product candidates once commercialized.Different pricing and reimbursement schemes exist in other countries. In the European Community, governments influence the price of pharmaceuticalproducts through their pricing and reimbursement rules and control of national healthcare systems that fund a large part of the cost of those products toconsumers. Some jurisdictions operate positive and negative list systems under which products may only be marketed once a reimbursement price has beenagreed. To obtain reimbursement or pricing approval, some of these countries may require the completion of clinical trials that compare the cost-effectivenessof a particular product candidate to currently available therapies. Other member states allow companies to fix their own prices for medicines, but monitor andcontrol company profits. The downward pressure on healthcare costs in general, particularly prescription drugs, has become very intense. As a result,increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert acommercial pressure on pricing within a country.The marketability of any drug candidates for which we receive regulatory approval for commercial sale may suffer if the government and third-party payersfail to provide adequate coverage and reimbursement. In addition, emphasis on managed care in the United States has increased and we expect will continueto increase the pressure on pharmaceutical pricing. Coverage policies and third-party reimbursement rates may change at any time. Even if favorablecoverage and reimbursement status is attained for one or more products for which we receive regulatory approval, less favorable coverage policies andreimbursement rates may be implemented in the future.ManufacturingWe do not have our own manufacturing capabilities, except with respect to limited amounts of active pharmaceutical ingredients needed for preclinicaldevelopment. In the past we have relied on third-party manufacturers for supply of active pharmaceutical ingredients, and we expect that in the future we willrely on such manufacturers for supply of ingredients that will be used in clinical trials of our product candidates that we are developing ourselves.Manufacturing for each of our two lead product candidates, namely paritaprevir and ABT-493 are being conducted by AbbVie. We do not expect to establishour own manufacturing facilities and we will continue to rely on third-party manufacturers to produce commercial quantities of any product candidates thatwe commercialize ourselves. We believe that all of the materials required for the manufacture of those product candidates could be obtained from more thanone source.Sales and MarketingWe currently do not have any commercialization or sales and marketing capabilities, and currently have no fixed plans to invest in or build such capabilitiesinternally. We have partnered our lead product candidate with AbbVie. We may also partner or collaborate with, or license commercial rights to, other largerpharmaceutical or biopharmaceutical companies to support the development of our cyclophilin inhibitor product candidates, or other product candidates forlarge market indications, through late-stage clinical development and, if successful, commercialization. However, we still retain all commercial rights to ourindependent programs and we will continue to evaluate our alternatives for commercializing them once they are more advanced in their clinicaldevelopment.EmployeesAs of September 30, 2016, we had 76 full-time employees, 43 of whom hold Ph.D. or M.D. degrees. None of our employees are subject to a collectivebargaining agreement or represented by a trade or labor union. We consider our relations with our employees to be good. 25Table of ContentsITEM 1A.RISK FACTORSRISK FACTORSOur business faces significant risks and uncertainties. Certain factors may have a material adverse effect on our business prospects, financial condition andresults of operations, and you should carefully consider them. Accordingly, in evaluating our business, we encourage you to consider the followingdiscussion of risk factors, in its entirety, in addition to other information contained in or incorporated by reference into this Annual Report on Form 10-Kand our other public filings with the SEC. Other events that we do not currently anticipate or that we currently deem immaterial may also affect ourbusiness, prospects, financial condition and results of operations.Risks Related to Our BusinessOur financial prospects for the next several years are dependent upon the development and commercialization efforts of AbbVie for combination therapiesincorporating our protease inhibitors paritaprevir or glecaprevir (ABT-493) for the treatment of HCV. AbbVie may act in its best interest rather than inour best interest, which could adversely affect our business.We rely on AbbVie to fund and conduct the clinical development and commercialization of regimens containing paritaprevir or glecaprevir (ABT-493) (oursecond protease inhibitor, completing clinical development), over which AbbVie has complete control. Our ability to generate significant revenue in the nearterm will depend primarily on the success of AbbVie’s continued efforts to commercialize its paritaprevir-containing regimens in markets worldwide, as wellas the successful regulatory approval, marketing and commercialization by AbbVie of its investigational combination therapy incorporating glecaprevir.Such successes are subject to significant uncertainty, and we have no control over the resources, time and effort that AbbVie may devote to its regimenscontaining paritaprevir or glecaprevir. Any of several events or factors could have a material adverse effect on our ability to generate revenue from AbbVie’scommercialization of paritaprevir or potentially glecaprevir in combination therapies. For example, AbbVie: • may not achieve satisfactory levels of market acceptance and reimbursement by physicians, patients and third-party payers for combinationtherapies incorporating one of our protease inhibitor product candidates in the various markets of the world where these therapies are beingintroduced and sold by AbbVie; • may not compete successfully with its combination therapies against other products and therapies for HCV, especially as new therapies areintroduced into the market over the next few years; • may experience different competitive challenges and market opportunity for its paritaprevir-containing regimens as it approaches potentialapproval and launch of its HCV combination containing glecaprevir; • may have to comply with additional requests and recommendations from the FDA, including label restrictions for paritaprevir or similarrestrictions or additional clinical trials for glecaprevir; • may not make all regulatory filings and obtain all necessary approvals from the FDA and similar foreign regulatory agencies, and allcommercially necessary reimbursement approvals; • may not commit sufficient resources to the regulatory approval of regimens containing glecaprevir or to the marketing and distribution ofregimens containing paritaprevir or glecaprevir, whether for competitive or strategic reasons or otherwise due to a change in business priorities; • may cease to perform its obligations under the terms of our collaboration agreement; • may unilaterally terminate our collaboration agreement on specified prior notice without any reason and without any further commitment tocontinue development of any of our protease inhibitor candidates; • may not be able to manufacture paritaprevir or glecaprevir in compliance with requirements of the FDA and similar foreign regulatory agenciesand in commercial quantities sufficient to meet market demand; and 26Table of Contents • may independently develop products that compete with regimens containing paritaprevir or glecaprevir in the treatment of HCV.We do not have access to all information regarding the products being developed and potentially commercialized by AbbVie, including information aboutclinical trial design and execution, safety reports from clinical trials, spontaneous safety reports for any marketed product, regulatory affairs, processdevelopment, manufacturing, marketing, sales and other areas known by AbbVie. Thus, our ability to keep our stockholders informed about the status ofproducts and product candidates under our collaboration is limited by the degree to which AbbVie keeps us informed. If AbbVie does not perform in themanner we expect or fulfill its responsibilities in a timely manner, or at all, the further development and global commercialization of paritaprevir and theregulatory approval and commercialization efforts related to glecaprevir could be delayed or terminated or be commercially unsuccessful. In addition,AbbVie has the right to make decisions regarding the development and commercialization of product candidates without consulting us, and may makedecisions with which we do not agree. If AbbVie acts in a manner that is not in our best interest, then it could adversely affect our business and prospects.Our royalty revenues are derived from AbbVie’s net sales of regimens to treat HCV. If AbbVie is unable to maintain current levels of sales of theseregimens, our royalty revenues and results of operations would be adversely affected.Our quarterly royalty revenue from AbbVie’s net sales of HCV treatment regimens containing paritaprevir has declined since those sales peaked in the firstquarter of our fiscal 2016. While commercialization of these regimens is exclusively in AbbVie’s control without any input from us, we believe it is possiblethat prices will decline further due to payers obtaining additional discounts, a shift in AbbVie’s payer mix toward more deeply discounted segments,particularly outside of the United States, and a decline in AbbVie’s market share due to increased competition.In addition, in light of continued fiscal crises experienced by several countries in the European Union and Japan, governments have announced orimplemented measures to manage healthcare expenditures. AbbVie may experience global pricing pressure for its HCV regimens from such measures. Also,private and public payers may choose to exclude AbbVie’s regimens from their formulary coverage lists or limit the types of patients for whom coverage willbe provided, which would negatively affect the demand for such regimens and our royalty revenues from them.We and AbbVie face substantial competition in the markets for HCV drugs, and there are many companies developing potential therapies for NASH, HBVand RSV, as well as other liver diseases and viral infections, which may result in others discovering, developing or commercializing products before we door doing so more successfully than we or our collaborators.The pharmaceutical and biotechnology industries are intensely competitive and rapidly changing. Many large pharmaceutical and biotechnologycompanies, academic institutions, governmental agencies and other public and private research organizations are commercializing or pursuing thedevelopment of products that target HCV, NASH, HBV, RSV and other viral infections or liver diseases that we may target in the future.Many of our competitors have substantially greater commercial infrastructure and greater financial, technical and personnel resources than we have, as well asdrug candidates in late-stage clinical development.Our competitors may succeed in developing competing products and obtaining regulatory approval before we or any collaborator of ours does with ourproduct candidates, or they may gain acceptance for the same markets that we are targeting. If we are not “first to market” with one of our product candidatesin one or more disease indications, our competitive position could be compromised because it may be more difficult for us to obtain marketing approval forthat product candidate and market acceptance of that product candidate as a second 27Table of Contentscompetitor. In addition, any new product that competes with an approved product typically must demonstrate compelling advantages in efficacy,convenience, tolerability or safety, or some combination of these factors, in order to overcome price competition and be commercially successful.We expect AbbVie’s HCV treatment regimens containing any of our licensed protease inhibitors to face intense and increasing competition as new productscontinue to enter the HCV market. AbbVie’s HCV treatment regimens currently face competition in various world markets and subpopulations of HCV fromGilead’s Sovaldi® (sofosbuvir), Harvoni® (a fixed-dose combination of sofosbuvir and ledipasvir) and Epclusa® (a fixed dose combination of sofosbuvir andvelpatasvir), Bristol-Myers Squibb’s Daclinza™ (daclatasvir) and daclatasvir in combination with asunaprevir , and Merck’s Zepatier™ (a fixed-dosecombination of grazoprevir and elbasvir). Other all-oral treatment regimens are under development at Merck, Gilead and Johnson & Johnson and may obtainregulatory approvals for the treatment of HCV beginning in the next one to three years. These other potential new treatment regimens may render AbbVie’sapproved treatment regimens or its next combination regimen currently in clinical development, each of which contains one of our HCV protease inhibitors,noncompetitive. In addition, AbbVie’s regimens may not be able to compete successfully with other products and regimens still under active developmentthat involve multiple classes of inhibitors of HCV, including protease inhibitors, polymerase inhibitors (nucleoside and non-nucleoside), NS5A inhibitors,and others mechanisms. These potential regimens are under development by companies such as Co-Crystal Pharma, Microbio Co., Regulus, Roche, Taigenand Trek.Competitive products in the form of other treatment methods or a vaccine for HCV may render our product candidates licensed to AbbVie, as well as anyother product candidates we may develop ourselves, obsolete or noncompetitive. Even if successfully developed and subsequently approved by the FDA, ourproduct candidates will face competition based on their safety and effectiveness, the timing and scope of the regulatory approvals, reimbursement coverage,price, patent position, the availability and cost of supply, marketing and sales capabilities, and other factors. If the product candidates developed under ourcollaboration agreement with AbbVie face competition from generic products, the collaboration agreement provides that the royalty rate applicable to suchproduct candidates is reduced significantly by a specified percentage on a product-by-product, country-by-country basis. If we and our collaborator are notable to compete effectively against our current and future competitors, our business will not grow and our financial condition, operations and stock price willsuffer.We also expect our other product candidates to face intense and increasing competition as new products continue to enter the NASH and antiviral marketsand advanced technologies become available. Though there is currently no approved treatment for NASH, we expect significant competition from othercompanies in the development of new treatments for NASH and related conditions. We are aware of several companies with programs that are significantlymore advanced than ours, including companies with compounds in Phase 3 in NASH, namely Intercept and Genfit. In May 2016, the FDA approvedIntercept’s FXR agonist (brand name Ocaliva™) for the treatment of primary biliary cholangitis (PBC).In addition, a number of companies are in Phase 2clinical trials for NASH or related conditions. These companies include Alberio, Arisaph, Astra-Zeneca, BMS, Cempra, Conatus, Galectin, Galmed, Gilead,GlaxoSmithKline, Immuron, Medicinova, Novartis, NGM Novo Nordisk, Oceta, Shire and Tobira/Allergan. A significant number of other companies areconducting earlier clinical trials that may be applicable in NASH and other cholestatic diseases, including Boehringer Ingelheim, Can-Fite Biopharma,Cymabay, Durect, Genkyotex, Ionis, Islet and Viking, and there are additional companies conducting preclinical studies in these disease areas.Similarly, HBV and RSV represent competitive therapeutic areas. While there are effective antiviral medications prescribed for HBV, they generally have lowtrue cure rates. Many companies are seeking to develop new HBV drugs that alone or in combination with other mechanisms could lead to a functional cureof HBV. Gilead, Roche, Arbutus, Maxwell, and Arrowhead Pharmaceuticals have Phase 2 programs in progress, and a number of companies have Phase 1 orearlier stage HBV programs, including Alnylam, Arbutus, Assembly, Enyo, Johnson & Johnson, Ionis, Spring Bank and Replicor. 28Table of ContentsFor RSV, there are no safe and effective approved therapies. Several companies are seeking new antiviral treatments for RSV in adult and pediatric settings.Aviragen (formerly Biota), Johnson & Johnson and Gilead each have compounds in Phase 2 development, as does Ablynx with a potential therapeuticantibody. Earlier stage programs have also been reported by Ark Biosciences, Medivir, Pulmocide, and ReViral.While there are medications prescribed for HBV that are effective at lowering viral load, they generally have low true cure rates, which would be theelimination of detectable viruses. Many companies are seeking to develop new HBV drugs that alone or in combination with other mechanisms could lead toa functional cure of HBV. Arrowhead Pharmaceuticals, Gilead, Roche, Arbutus, Maxwell, Janssen, Replicor, and Spring Bank have Phase 2 programs inprogress, and a number of companies have Phase 1 or earlier stage HBV programs, including Alnylam, Arbutus, Assembly, Enyo, Johnson & Johnson, Ionis,and Benitec.If we are not able to develop new products that can compete effectively against our current and future competitors, our business will not grow and ourfinancial condition, operations and stock price will suffer.We have not developed independently any approved products and we have limited clinical development experience, which makes it difficult to assess ourability to develop and commercialize our product candidates.AbbVie has been and will continue to be responsible for all of the clinical development of our paritaprevir and glecaprevir protease inhibitor productcandidates. We have not yet demonstrated an ability to address successfully many of the risks and uncertainties associated with late stage clinicaldevelopment, regulatory approval and commercialization of therapeutic products such as the ones we plan to develop independently. For example, toexecute our business plan for development of our independent program for HCV using our cyclophilin inhibitor in one or more combination regimens as wellas for any of our other research programs beyond HCV, we will need to successfully: • execute clinical development of our product candidates and demonstrate acceptable safety and efficacy for them alone and, at least in the case ofHCV and possibly others, in combination with other drugs or drug candidates; • obtain required regulatory approvals for the development and commercialization of our product candidates; • develop and maintain any future collaborations we may enter into for any of these programs; • obtain and maintain patent protection for our product candidates and freedom from infringement of intellectual property of others; • establish acceptable commercial manufacturing arrangements with third-party manufacturers; • build and maintain robust sales, distribution and marketing capabilities, either independently or in collaboration with future collaborators; • gain market acceptance for our product candidates among physicians, payers and patients; and • manage our spending as costs and expenses increase due to clinical trials, regulatory approvals and commercialization.If we are unsuccessful in accomplishing these objectives, we may not be able to successfully develop and commercialize our product candidates and expandour business or continue our operations.If we are not successful in discovering further product candidates in addition to paritaprevir, glecaprevir, EDP-305 and EDP-494 our ability to expandour business and achieve our strategic objectives will be impaired.Most of our internal research programs are at preclinical stages. Research programs designed to identify product candidates require substantial technical,financial and human resources, whether or not any product candidates 29Table of Contentsare ultimately identified. Our research programs may initially show promise in identifying additional potential product candidates, yet fail to yield productcandidates for clinical development or commercialization for many reasons, including the following: • the research methodology used may not be successful in identifying additional potential product candidates; • competitors may develop alternatives that render our product candidates less commercially viable or obsolete; • competitors may obtain intellectual property protection that effectively prevents us from developing a product candidate; • a product candidate may, on further study, be shown not to be an effective treatment in humans or to have harmful side effects or othercharacteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria; and • a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all.Additional drug candidates that we may develop will require significant research, preclinical and clinical studies, regulatory approvals and commitments ofresources before they can be commercialized. We cannot give assurance that our research will lead to the discovery of any additional drug candidates thatwill generate additional revenue for us. If we are unable to identify additional compounds suitable for preclinical and clinical development, we may not beable to obtain sufficient product revenue in future periods, which likely would result in significant harm to our financial position and adversely impact ourstock price.If we fail to attract and keep senior management and key scientific personnel, we may be unable to successfully develop our product candidates, conductour clinical trials and commercialize our product candidates.Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel. We arehighly dependent upon our senior management, particularly Jay R. Luly, Ph.D., our Chief Executive Officer and President, and Yat Sun Or, Ph.D., our SeniorVice President, Research and Development and Chief Scientific Officer, as well as other employees and consultants. Although none of these individuals hasinformed us to date that he or she intends to retire or resign in the near future, the loss of the services of any of these individuals or one or more of our othermembers of senior management could delay or prevent the successful development of our product candidates.Although we have not historically experienced unique difficulties attracting and retaining qualified employees, we could experience such problems in thefuture. For example, competition for qualified personnel in the biotechnology and pharmaceutical fields is intense. In addition, we will need to hireadditional personnel as we expand our clinical development and commercial activities. We may not be able to attract and retain quality personnel onacceptable terms.We may encounter difficulties in managing our growth and expanding our operations successfully.As we expand our research efforts and seek to advance our product candidates through clinical trials, we will need to expand our development, regulatory,manufacturing, marketing and sales capabilities or contract with third parties to provide these capabilities for us. As our operations expand, we expect that wewill need to manage additional relationships with various strategic partners, suppliers and other third parties. Future growth will impose significant addedresponsibilities on members of management. Our future financial performance and our ability to commercialize our product candidates and to competeeffectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to manage our development efforts and 30Table of Contentsclinical trials effectively and hire, train and integrate additional management, administrative and sales and marketing personnel. We may not be able toaccomplish these tasks, and our failure to accomplish any of them could prevent us from successfully growing our company.Expenses associated with development of our product candidates may cause our earnings to fluctuate from period to period.Many of the preclinical and clinical development activities required for our product candidates will have to be contracted out to CROs at significantexpense. It is difficult to accurately predict the timing of these expenses, and we expect that they will vary from quarter to quarter. In addition, the FDA orother regulatory agencies may require more preclinical or clinical testing than we originally anticipated for any of our drug candidates. We may also berequired to purchase expensive competitor drugs for use in our trials, either to demonstrate potential treatment combinations or as comparators to our productcandidates. As a result, the expenses of our development programs and our operating results may fluctuate significantly from quarter to quarter, and our stockprice may be adversely affected.To date, our principal sources of revenue have been our collaboration agreements, including our current agreement with AbbVie and our prior agreementwith Novartis. Future milestone payments and the level of royalties under the AbbVie agreement are uncertain. We have had no products approved forcommercial sale by us. Therefore, it is possible that we may incur operating losses in one or more years in the future, and our ability to achieve sustainedprofitability is unproven.In each of our 2016, 2015 and 2014 fiscal years our net income resulted primarily from license payments, including milestone payments we earned fromAbbVie and royalties we earned since December 2014 on AbbVie’s net sales allocated to paritaprevir. There is no assurance, however, that we will report netincome in subsequent years. To date, we have not commercialized any products ourselves.Our principal source of revenue historically has been our collaboration agreements, including our current agreement with AbbVie. The level of futureroyalties on paritaprevir are uncertain given the competitive nature of the market for HCV therapies, the emergence of new, and in some cases, not yetapproved, therapies for HCV, the changing nature of payer contracts of AbbVie and others, and the varying rates of reimbursement in different countries.Future milestone payments are uncertain because AbbVie may choose not to continue development activities for glecaprevir and its commercialization. Forexample, under our previous collaboration with Novartis for the development of our NS5A inhibitor, Novartis decided in September 2014 not to pursuefurther development of the licensed product candidate in light of its decision that HCV was no longer a strategic focus of Novartis, which resulted in theNS5A inhibitor program being transferred back to us and our collaboration being terminated. In addition, under our AbbVie collaboration we may notachieve the specified milestones for glecaprevir, that product candidate may not be approved by the FDA or other regulatory authorities or, if glecaprevir isapproved, the combination containing it may not be accepted in the market. If we are unable to develop and commercialize any more of our productcandidates, either alone or with a collaborator, or if any such product candidate does not achieve market acceptance, we may never generate sufficientproduct royalties or product sales. In addition, for any of our product candidates other than paritaprevir or glecaprevir included in a treatment regimen withmore than one active compound, it would be uncertain what portion of net sales of the regimen would be allocated to our product candidate. The existence ofmultiple active compounds in the regimen or an unfavorable allocation to our product candidate could adversely affect our royalty revenue. Even if we dogenerate significant product royalties or product sales, we may not be able to sustain profitability on a quarterly or annual basis. Our failure to sustainprofitability could depress the market price of our common stock and ultimately could impair our ability to raise capital, expand our business, diversify ourproduct offerings or continue our operations. A decline in the market price of our common stock also could cause you to lose all or a part of your investment. 31Table of ContentsWe may require substantial additional financing in the longer term to achieve our goals if the further commercialization of paritaprevir is curtailed or ifthe development or regulatory approval of glecaprevir is delayed or terminated. A failure to obtain this necessary capital when needed could force us todelay, limit, reduce or terminate some or all of our product development efforts.Since our inception, most of our resources have been dedicated to the discovery and preclinical development of our product candidates. In particular, wehave expended, and believe that we will continue to expend for the foreseeable future, substantial resources discovering and developing our proprietaryproduct candidates. These expenditures will include costs associated with research and development, preclinical manufacturing of product candidates,conducting preclinical experiments and clinical trials and obtaining regulatory approvals, as well as commercializing any products later approved for sale.For the foreseeable future, we expect to incur substantial additional costs associated with research and development for our internally developed programs,exclusive of costs incurred by our collaborator in developing our licensed product candidate glecaprevir. In addition, we may seek opportunities to in-licenseor otherwise acquire new therapeutic candidates and therapies.Our future capital requirements depend on many factors, including: • the number and characteristics of the product candidates we pursue; • the scope, progress, results and costs of researching and developing any of our product candidates on our own, including conducting preclinicalresearch and clinical trials; • the timing of, and the costs involved in, obtaining regulatory approvals for any product candidates we develop independently; • the cost of commercialization activities, if any, of any product candidates we develop independently that are approved for sale, includingmarketing, sales and distribution costs; • the cost of manufacturing our product candidates and any products we successfully commercialize independently, including manufacturing forclinical development; • the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patents, including litigation costs and the outcome ofsuch litigation; and • the level of future sales of paritaprevir-containing regimens and the resulting levels of annually tiered royalties on paritaprevir, as well as thelevel of potential sales, if any, of the combination containing glecaprevir and the levels of its annually tiered royalties.Additional funds may not be available if and when we need them, on terms that are acceptable to us, or at all. Our ability to raise funds will depend onfinancial, economic and market conditions and other factors, many of which are beyond our control. If adequate funds are not available to us on a timelybasis, we may be required to delay, limit, reduce or terminate preclinical studies, clinical trials or other research and development activities for one or more ofour product candidates.Our government funded contract for our antibiotic program, which was concluded in fiscal 2015, is subject to audit and adjustments that could affect ourpreviously reported revenues.Our contract with the National Institute of Allergy and Infectious Diseases, or NIAID, a division of the National Institutes of Health, an agency of the UnitedStates Department of Health and Human Services, to support our antibiotic program, was completed in fiscal 2015. Our contract-related costs and fees,including allocated indirect costs, are subject to audits and adjustments by negotiation between us and the U.S. government. As part of the audit process, thegovernment audit agency verifies that all charges made by a contractor against a contract are legitimate and appropriate. Audits may result in recalculation ofcontract revenues and non-reimbursement of some contract costs and fees. Any audits of our contract related costs and fees could result in materialadjustments to our reported revenue and require payments by us to the U.S. government. 32Table of ContentsRisks Related to Development, Clinical Testing and Regulatory Approval of Our Product CandidatesClinical drug development involves a lengthy and expensive process with uncertain timelines and uncertain outcomes. If clinical trials are prolonged ordelayed, we, AbbVie or any other future collaborator may be unable to commercialize our product candidates on a timely basis.Clinical testing is expensive and, depending on the stage of development, can take a substantial time period to complete. Its outcome is inherently uncertain,and failure can occur at any time during clinical development. None of our product candidates in our pipeline other than paritaprevir and glecaprevir has yetadvanced beyond Phase 2 clinical trials. Any future clinical trials of our other product candidates may fail to demonstrate sufficient safety and efficacy.Moreover, regulatory and administrative delays for any product candidate in our pipeline may adversely affect our or any collaborator’s clinical developmentplans and jeopardize our or any collaborator’s ability to attain product approval, commence product sales and compete successfully against other therapies.Clinical trials can be delayed for a variety of reasons, including delays related to: • reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which canbe subject to extensive negotiation and may vary significantly among different CROs and trial sites; • failure of third-party contractors, such as CROs, or investigators to comply with regulatory requirements; • delay or failure in obtaining the necessary approvals from regulators or institutional review boards, or IRBs, in order to commence a clinical trialat a prospective trial site, or their suspension or termination of a clinical trial once commenced; • difficulty in recruiting suitable patients to participate in a trial; • difficulty in having patients complete a trial or return for post-treatment follow-up; • clinical sites deviating from trial protocol or dropping out of a trial; • problems with drug product or drug substance storage and distribution; • adding new clinical trial sites; • our inability to manufacture, or obtain from third parties, adequate supply of drug product sufficient to complete our preclinical studies andclinical trials; • governmental or regulatory delays and changes in regulatory requirements, policy and guidelines, including guidelines specifically addressingrequirements for the development of treatments for HBV, HCV, NASH or RSV; • program discontinuations or clinical holds for a program of a competitor, which could increase the level of regulatory scrutiny or delay datareview or other response times by regulators with respect to one of our programs in the same class as the competitor’s program; or • varying interpretations of data by the FDA, the EMA and similar foreign regulatory agencies.The results of any Phase 3 clinical trial may not be adequate to support marketing approval for AbbVie’s regimen containing glecaprevir. These clinical trialsare lengthy and usually involve from many hundreds to thousands of patients. In addition, if the FDA or the EMA disagrees with AbbVie’s choice of the keytesting criteria, or primary endpoint, or the results for the primary endpoint are not robust or significant relative to the control group of patients not receivingthe experimental therapy or are subject to confounding factors, or are not adequately supported by other study endpoints, the FDA or the EMA, or both, mayrefuse to approve AbbVie’s product candidate. The FDA or the EMA also may require additional clinical trials as a condition for approving any of theseproduct candidates. AbbVie estimates that it will be 2017 before an NDA for AbbVie’s HCV treatment combination containing glecaprevir could beapproved by the FDA or the EMA. 33Table of ContentsWe could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trial is being conducted, byany Data Safety Monitoring Board, or DSMB, for such trial, or by the FDA, the EMA or other regulatory authorities. Such authorities may impose such asuspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinicalprotocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold,unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrativeactions or lack of adequate funding to continue the clinical trial. In addition, delays can occur due to safety concerns arising from trials or other clinical dataregarding another company’s product candidate in the same compound class as one of ours. If we or our collaborators experience delays in the completion of,or termination of, any clinical trial of one of our product candidates, the commercial prospects of the product candidate will be harmed, and our or ourcollaborators’ ability to commence product sales and generate product revenues from the product candidate will be delayed. In addition, any delays incompleting our clinical trials will increase our costs and slow down our product candidate development and approval process. Any of these occurrences mayharm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement orcompletion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.EDP-305, EDP-494 or any other product candidate emerging from our current NASH, HBV and RSV programs may have undesirable side effects whichmay delay or prevent marketing approval, or, if approval is received, require our product candidate to be taken off the market, require us to include safetywarnings or otherwise limit sales.In our NASH program, we are developing agonists of the farnesoid X receptor, or FXR, that are designed to bind to that receptor and then trigger a responsefrom it. The adverse effects from long-term exposure to the FXR drug class are not well known since within this class only two drugs have been approved bythe FDA—Ocaliva®, approved in May 2016 for PBC, and an older drug not commonly used but approved to treat cholesterol gallstone (by dissolving them)and a rare lipid storage disease. Unforeseen side effects from any of our product candidates could arise either during clinical development or, if approved,after the approved product has been marketed. The range and potential severity of possible side effects from systemic therapies like FXR agonists could besignificant.In addition, our drug candidates for NASH may be developed as a potential treatment for a severe disease that commonly occurs in patients with other seriousconditions, including metabolic syndrome and diabetes. Any clinical trials in NASH will necessarily be conducted in patient populations that may be moreprone than the general population to exhibit certain disease states or adverse events. It may be difficult to discern whether certain events or symptomsobserved during our trials were due to our drug candidates or placebo, resulting in our company and our development programs being negatively affectedeven if such events or symptoms are ultimately determined to be unlikely related to our drug candidates.We have designed our EDP-494 program to be substantially different from another cyclophilin inhibitor, alisporivir. The combination of interferon withribavirin and alisporivir has been associated with pancreatitis in patients receiving treatment with the combination during clinical trials. We do not plan todevelop EDP-494 in combination with interferon or ribavirin, which have also been associated with pancreatitis in other clinical contexts not including acyclophilin inhibitor. However, we cannot give any assurance that EDP-494 will not result in any unforeseen side effects.If any of our product candidates receives marketing approval and we or others later identify undesirable or unacceptable side effects caused by such products: • regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication or field alerts to physicians andpharmacies; • we may be required to change instructions regarding the way the product is administered, conduct additional clinical trials or change thelabeling of the product; 34Table of Contents • we may be subject to limitations on how we may promote the product; • sales of the product may decrease significantly; • regulatory authorities may require us to take our approved product off the market; • we may be subject to litigation or product liability claims; and • our reputation may suffer.Any of these events could prevent us or any potential future collaborator from achieving or maintaining market acceptance of the affected product or couldsubstantially increase commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenue from the sale of anyproduct we develop.If we, or AbbVie in the case of glecaprevir, are required to suspend or discontinue clinical trials due to side effects or other safety risks associated with ourproduct candidates, or if we or AbbVie are required to conduct studies on the long-term effects associated with the use of any of those product candidates,efforts to commercialize any of those product candidates could be delayed or halted.Clinical trials involving our product candidates may be suspended or terminated at any time for a number of safety-related reasons. For example, we orAbbVie may voluntarily suspend or terminate clinical trials if at any time one of our product candidates, or a combination therapy including any of them,presents an unacceptable safety risk to the clinical trial patients. In addition, IRBs or regulatory agencies may order the temporary discontinuation ortermination of clinical trials at any time if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements,including if they present an unacceptable safety risk to patients. Administering any product candidate to humans may produce undesirable side effects. Theexistence of undesirable side effects resulting from any of our product candidates, or a combination therapy including any of them, could cause us, AbbVie orregulatory authorities, such as the FDA or EMA, to interrupt, delay or halt clinical trials of our product candidates and could result in the FDA or EMA orother regulatory agencies denying further development or approval of our product candidates for any or all targeted indications. This, in turn, could preventus or AbbVie from commercializing our product candidates.Results of earlier clinical trials may not be predictive of the results of later-stage clinical trials.The results of preclinical studies and early clinical trials of our product candidates, whether glecaprevir, EDP-494, EDP-305 or any of our future productcandidates, may not be predictive of the results of later-stage clinical trials, if any. In addition, results of Phase 3 clinical trials in one or more ethnic groupsare not necessarily indicative of results in other ethnic groups. Product candidates in later stages of clinical trials may fail to show the desired safety andefficacy results despite having progressed through preclinical studies and initial clinical trials. Many companies in the biopharmaceutical industry havesuffered significant setbacks in advanced clinical trials due to adverse safety profiles or lack of efficacy, notwithstanding promising results in earlier studies.Similarly, future clinical trial results may not be successful for these or other reasons.Product candidate development risk is heightened by any changes in the planned clinical trials compared to the completed clinical trials. As productcandidates are developed through preclinical early and late stage clinical trials towards approval and commercialization, it is customary that various aspectsof the development program, such as manufacturing and formulation, are altered along the way in an effort to optimize processes and results. Such changescarry the risk that they will not achieve these intended objectives. Any of these changes could make the results of planned clinical trials or other futureclinical trials we or our collaborators may initiate less predictable and could cause our product candidates to perform differently, which could delaycompletion of clinical trials, delay approval of our product candidates and/or jeopardize our or our collaborators’ ability to commence product sales andgenerate revenues. 35Table of ContentsThe regulatory approval processes of the FDA, the EMA and other comparable foreign authorities are lengthy, time-consuming and inherentlyunpredictable, and if we or our collaborators are ultimately unable to obtain timely regulatory approval for our product candidates, our business will besubstantially harmed.The regulatory approval process is expensive and, while the time required to gain FDA and foreign regulatory approval is uncertain, it may take years.Regulatory approvals are unpredictable and depend upon numerous factors, including the substantial discretion of the regulatory authorities. In addition,approval policies, regulations, or the type and amount of preclinical and clinical data necessary to gain approval may change during the course of a productcandidate’s clinical development and may vary among jurisdictions. We or our collaborators may be required to undertake and complete certain additionalpreclinical studies to generate toxicity and other data required to support the submission of a New Drug Application, or NDA, to the FDA or comparableapplication to other regulatory authorities. AbbVie obtained all regulatory approvals for paritaprevir, our sole approved product and is responsible forobtaining regulatory approvals for glecaprevir. We have not obtained regulatory approval by ourselves for any of our other product candidates and it ispossible that none of our existing product candidates or any of our future product candidates will ever obtain regulatory approval. Furthermore, approval inthe United States by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatoryauthority does not ensure approval by regulatory authorities in other foreign countries or by the FDA.Our product candidates could fail to receive regulatory approval for many reasons, including the following: • the FDA, the EMA or other comparable foreign regulatory authorities may disagree with the design or implementation of our or ourcollaborators’ clinical trials; • we or our collaborators may be unable to demonstrate to the satisfaction of the FDA, the EMA or other comparable foreign regulatory authoritiesthat a product candidate is safe and effective for its proposed indication; • the results of clinical trials may not meet the level of statistical significance required by the FDA, the EMA or other comparable foreignregulatory authorities for approval; • we or our collaborators may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks; • the FDA, the EMA or other comparable foreign regulatory authorities may disagree with our or our collaborators’ interpretation of data frompreclinical studies or clinical trials; • the data collected from clinical trials of our product candidates may not be sufficient to support the submission of an NDA or other submissionsor to obtain regulatory approval in the United States or elsewhere; • the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturerswith which we or our collaborators contract for clinical and commercial supplies of any of our product candidate; and • the approval policies or regulations of the FDA, the EMA or other comparable foreign regulatory authorities may significantly change in amanner rendering our or our collaborators’ clinical data insufficient for approval.We and our collaborators cannot be assured that after spending substantial time and resources, we or our collaborators will obtain regulatory approvals in anydesired jurisdiction. Even if we or our collaborators were to obtain approval, regulatory authorities may grant approval contingent on the performance ofcostly post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for thesuccessful commercialization of that product candidate. Significant clinical trial delays could allow our competitors to obtain marketing approval before weor our collaborators do or could in effect shorten the patent protection period during which we may have the exclusive right to commercialize our productcandidates. In addition, we or our collaborators may not be able to ultimately achieve the prices intended for our products. In many foreign countries,including those in the European Union, a product candidate must be 36Table of Contentsapproved for reimbursement before it can be approved for sale in that country. Any of the foregoing scenarios could materially harm the commercialprospects for our product candidates and our business.Even if we receive regulatory approval for any of our product candidates we develop independently, we will be subject to ongoing FDA obligations andcontinued regulatory review in other jurisdictions, which may result in significant additional expense. Additionally, our product candidates, if approved,could be subject to labeling and other restrictions and market withdrawal and we may be subject to penalties if we or our collaborators fail to comply withregulatory requirements or experience unanticipated problems with our products.Any regulatory approvals that we receive for our product candidates we develop independently may be subject to limitations on the approved indicated usesfor which the product may be marketed or subject to certain conditions of approval, or may contain requirements for potentially costly post-marketingtesting, including Phase 4 clinical trials, and surveillance to monitor the safety and efficacy of the product candidate.In addition, if the FDA approves any of our product candidates, the manufacturing processes, labeling, packaging, distribution, adverse event reporting,storage, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirementsinclude submissions of safety and other post-marketing information and reports, as well as continued compliance with current good manufacturing practices,or cGMP, and good clinical practices, or GCP, for any clinical trials that we or our collaborators conduct post-approval. Later discovery of previouslyunknown problems with a product, including adverse events of unanticipated severity or frequency, or with third-party manufacturers or manufacturingprocesses, or failure to comply with regulatory requirements, may result in, among other things: • restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market or voluntary or mandatory productrecalls; • fines, warning letters or holds on any post-approval clinical trials; • refusal by the FDA to approve pending applications or supplements to approved applications filed by us or our collaborators, or suspension orrevocation of product license approvals; • product seizure or detention, or refusal to permit the import or export of products; and • injunctions or the imposition of civil or criminal penalties.We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in theUnited States or abroad. If we or our collaborators are slow or unable to adapt to changes in existing requirements or the adoption of new requirements orpolicies, or if we or our collaborators are not able to maintain regulatory compliance, our product candidates may lose any marketing approval that may havebeen obtained and we may not achieve or sustain profitability, which would adversely affect our business.We, or only AbbVie in the case of glecaprevir, may delay or terminate the development of a product candidate at any time if we or AbbVie believe theperceived market or commercial opportunity does not justify further investment, which could materially harm our business and adversely affect our stockprice.Even though the results of preclinical studies and clinical trials that we or AbbVie have conducted or may conduct in the future may support furtherdevelopment of one or more of our product candidates, we, or only AbbVie in the case of glecaprevir, may delay, suspend or terminate the futuredevelopment of a product candidate at any time for strategic, business, financial or other reasons, including the determination or belief that the emergingprofile of the product candidate is such that it may not receive regulatory approvals in key markets, gain meaningful market acceptance, otherwise provideany competitive advantages in its intended indication or market or generate a significant return to stockholders. Such a delay, suspension or terminationcould materially 37Table of Contentsharm our business, results of operations or financial condition. In addition, AbbVie has the right to make decisions regarding the development andcommercialization of paritaprevir and glecaprevir without consulting us, and may make decisions with which we do not agree.Our internal computer systems, or those of our collaborators, CROs or other contractors or consultants, may fail or suffer security breaches, which couldresult in a material disruption of development programs for our product candidates.Despite the implementation of security measures, our internal computer systems and those of our collaborators, CROs, and other contractors and consultantsare vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Whilewe have not experienced any such system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations,it could result in a material disruption of our independent drug development programs or those of our collaborators. For example, the loss of clinical trial datafrom ongoing or future clinical trials for any of our product candidates could result in delays in regulatory approval efforts and significantly increase costs torecover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of or damage to data or applications, orinappropriate disclosure of confidential or proprietary information, we or our collaborators could incur liability and the further development of our productcandidates could be delayed.Risks Related to Commercialization of Our Product CandidatesEven if AbbVie successfully commercializes glecaprevir in its investigational HCV treatment regimen, or even if we are able to commercialize EDP-494 orany other treatment regimen containing one of our product candidates, the resulting products, as well as AbbVie’s existing products containingparitaprevir, may become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives in the UnitedStates, which would harm our business.The regulations that govern marketing approvals, pricing and reimbursement for new drug products vary widely from country to country. In the United States,the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010, collectively referredto as the ACA, is significantly changing the way healthcare is financed by both governmental and private insurers. While we cannot predict what impact onfederal reimbursement policies this law will have in general or specifically on any product or regimen that we or any of our collaborators commercializes, theACA may result in downward pressure on pharmaceutical reimbursement, which could negatively affect market acceptance of new products. In addition,although the United States Supreme Court has upheld the constitutionality of most of the ACA, several states have not implemented certain sections of theACA, including 19 that have rejected the expansion of Medicaid eligibility for low income citizens, and some members of the U.S. Congress are still workingto repeal the ACA. We cannot predict whether these challenges will continue or other proposals will be made or adopted, or what impact these efforts mayhave on us or AbbVie. AbbVie or any other collaborator’s ability to commercialize any products successfully also will depend in part on the extent to whichreimbursement for these products and related treatments will be available from government health administration authorities, private health insurers and otherorganizations. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide whichmedications they will pay for and establish reimbursement levels. A primary trend in the U.S. healthcare industry is cost containment. Government authoritiesand third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. In the case of HCV,limitations of coverage have recently been used to limit access to HCV treatments only for those patients with more advanced fibrosis. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and, in many cases involving HCV drugs, seekingdiscounts in exchange for greater patient access to a particular HCV drug. In addition, there are private and public payors challenging the prices charged formedical products. We cannot be sure that reimbursement will be available for any product that we or any collaborator commercialize 38Table of Contentsand, if reimbursement is available, the level of reimbursement. In addition, reimbursement may impact the demand for, or the price of, any product candidatefor which we or a collaborator obtains marketing approval. If reimbursement is not available or is available only to limited levels, we or AbbVie may not beable to successfully commercialize any product candidate for which marketing approval is obtained.There may be significant delays in obtaining reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which thedrug is approved by the FDA or comparable authorities in other jurisdictions. Moreover, eligibility for reimbursement does not imply that any drug will bepaid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim reimbursement levels fornew drugs, if applicable, may also be insufficient to cover our and any collaborator’s costs and may not be made permanent. Reimbursement rates may varyaccording 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 beincorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by governmenthealthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold atlower prices than in the United States. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their ownreimbursement policies. Our or any collaborator’s inability to promptly obtain coverage and profitable payment rates from both government-funded andprivate payors for any approved products that any collaborator or we develop could have a material adverse effect on our operating results, our ability to raisecapital needed to commercialize products and our overall financial condition.In general, the United States and several other jurisdictions are considering a number of legislative and regulatory proposals to change the healthcare systemin ways that could affect our ability to sell our products profitably. Among policy makers and payors in the United States and elsewhere, there is significantinterest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access tohealthcare. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by majorlegislative initiatives. We expect to experience pricing pressures in connection with the sale of any products that we develop or that are being developedunder our collaboration with AbbVie. The implementation of cost containment measures or other healthcare reforms may limit our ability to generaterevenue, maintain profitability or commercialize our product candidates.If, in the future, we are unable to establish our own sales, marketing and distribution capabilities or enter into licensing or collaboration agreements forthese purposes, we may not be successful in commercializing any product candidates.We do not have a sales or marketing infrastructure and have no sales, marketing or distribution experience. We will seek to either build our own commercialinfrastructure to commercialize any products if and when they are approved, or enter into licensing or collaboration agreements where our collaborator isresponsible for commercialization, as in the case of our collaboration with AbbVie, or where we have the right to assist in the future development andcommercialization of such products.To develop internal sales, distribution and marketing capabilities, we will have to invest significant amounts of financial and management resources, some ofwhich will be committed prior to any confirmation that any of our proprietary product candidates will be approved. For product candidates for which wedecide to perform sales, marketing and distribution functions ourselves, we could face a number of additional risks, including: • our inability to recruit and retain adequate numbers of effective sales and marketing personnel; • the inability of sales personnel to obtain access to physicians or persuade adequate numbers of physicians to prescribe any products; • the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies withmore extensive product lines; and • unforeseen costs and expenses associated with creating an independent sales and marketing organization. 39Table of ContentsWhere and when appropriate, we may elect to utilize contract sales forces or distribution partners to assist in the commercialization of our product candidates.If we enter into arrangements with third parties to perform sales, marketing and distribution services for our products, the resulting revenues or theprofitability from these revenues to us are likely to be lower than if we had sold, marketed and distributed our products ourselves. In addition, we may not besuccessful in entering into arrangements with third parties to sell, market and distribute our product candidates or may be unable to do so on terms that arefavorable to us. We likely will have little control over such third parties, and any of these third parties may fail to devote the necessary resources andattention to sell, market and distribute our products effectively.If we do not establish sales, marketing and distribution capabilities successfully, either on our own or in collaboration with third parties, we will not besuccessful in commercializing our product candidates.Our commercial success depends upon significant market acceptance among physicians, patients and healthcare payors of products containingparitaprevir or glecaprevir, as well as similar market acceptance of any other product candidates we plan to develop independently or in collaborationwith others.Paritaprevir, glecaprevir, as well as EDP-305, EDP-494 or any other product candidate that we may develop in the future that obtains regulatory approval,whether as part of a combination therapy or as a monotherapy, may not gain market acceptance among physicians, healthcare payors, patients and themedical community. For example, the standard of care in HCV is likely to continue to evolve rapidly as many new product candidates are being developedand tested. The degree of market acceptance of any product for which we or any collaborator of ours receives approval for commercial sale depends on anumber of factors, including: • the efficacy and safety of treatment regimens containing one of our product candidates, as demonstrated in clinical trials, and the degree to whichthese regimens represent a clinically meaningful improvement in care as compared with other available therapies; • the clinical indications for which any treatment regimen containing one of our product candidates become approved; • acceptance among physicians, major operators of clinics, payors and patients of any treatment regimen containing one of our product candidates; • the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies; • the potential and perceived advantages of treatment regimens containing one of our product candidates over alternative treatments; • the cost of treatment of regimens containing one of our product candidates in relation to the cost of alternative treatments; • the availability of adequate reimbursement and pricing by third parties and government authorities and successful negotiation of favorableagreements with payors by us or any collaborator of ours, as well as the impact of any agreements among any of the foregoing and one or more ofour competitors limiting access to our product in favor of one or more competitive products; • the continued growth and longevity of the HCV drug market or any other market for which we develop a drug; • the levels of funding provided by government-funded healthcare for HCV treatment or treatment of any other disease for which we develop adrug; • the relative convenience and ease of administration of any treatment regimen containing one of our product candidates compared to competitiveregimens; • the prevalence and severity of adverse side effects, whether involving the use of treatment regimens containing one of our products candidates orsimilar, competitive treatment regimens; and • the effectiveness of our or any collaborator’s sales and marketing efforts. 40Table of ContentsIf treatment regimens containing one of our product candidates are approved and then fail to achieve market acceptance, we may not be able to generatesignificant additional revenue. Further, if new, more favorably received therapies are introduced after any such regimen achieves market acceptance, then wemay not be able to maintain that market acceptance over time.Foreign governments tend to impose strict price controls, which may adversely affect our future profitability.In most foreign countries, particularly in the European Union, prescription drug pricing and/or reimbursement is subject to governmental control. In thosecountries that impose price controls, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval fora product. To obtain reimbursement or pricing approval in some countries, we or our collaborators may be required to conduct a clinical trial that comparesthe cost-effectiveness of our product candidate to other available therapies.Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing orproduct licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control evenafter initial approval is granted. As a result, we or our collaborators might obtain marketing approval for a product in a particular country, but then be subjectto price regulations that delay commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenues that are generatedfrom the sale of the product in that country. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactorylevels, or if there is competition from lower priced cross-border sales, our results of operations will be negatively affected.Risks Related to Our Dependence on Third PartiesWe may not be successful in establishing new product collaborations, which could adversely affect our ability to develop and commercialize one or moreof our product candidates. If we are unsuccessful in maintaining or forming alliances on favorable terms, our business may not succeed.We may seek to enter into additional product collaborations in the future, including alliances with other biotechnology or pharmaceutical companies, toenhance and accelerate the development and commercialization of one or more of our product candidates. We face significant competition in seekingappropriate collaborators and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish otherproduct collaborations or other alternative arrangements for any product candidates and programs because our research and development pipeline may beinsufficient, our product candidates and programs may be deemed to be at too early of a stage of development for collaborative effort and/or third parties maynot view our product candidates and programs as having the requisite potential to demonstrate safety and efficacy. Even if we are successful in our efforts toestablish product collaborations, the terms that we agree upon may not be favorable to us and we may not be able to maintain such product collaborations if,for example, development or approval of a product candidate is delayed or sales of an approved product are disappointing.If our existing collaboration agreement with AbbVie is terminated, or if we determine that entering into other product collaborations is in our best interest butwe either fail to enter into, delay in entering into or fail to maintain such collaborations: • the development of certain of our product candidates may be terminated or delayed; • our cash expenditures related to development of certain of our product candidates would increase significantly and we may need to seekadditional financing; • we may be required to hire additional employees or otherwise develop expertise, such as clinical, regulatory, sales and marketing expertise,which we do not currently have; • we will bear all of the risk related to the development of any such product candidates; and • the competitiveness of any product candidate that is commercialized could be reduced. 41Table of ContentsWe intend to rely on third-party manufacturers to produce our development-stage product candidate supplies and any commercial supplies of anyapproved product candidates. Any failure by a third-party manufacturer to produce acceptable supplies for us may delay or impair our ability to initiate orcomplete our clinical trials or sell any resulting product.We do not currently own or operate any manufacturing facilities. We plan to continue to work with third-party contract manufacturers to produce sufficientquantities of any product candidates for preclinical testing, clinical trials and commercialization. If we are unable to arrange for such a third-partymanufacturing source for any of our product candidates, or fail to do so on commercially reasonable terms, we may not be able to successfully produce,develop and market one or more of our product candidates, or we may be delayed in doing so.Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates ourselves, including reliance onthe third party for regulatory compliance and quality control and assurance, volume production, the possibility of breach of the manufacturing agreement bythe third party because of factors beyond our control (including a failure to synthesize and manufacture our product candidates in accordance with ourproduct specifications) and the possibility of termination or nonrenewal of the agreement by the third party at a time that is costly or damaging to us. Inaddition, the FDA and other regulatory authorities require that our product candidates be manufactured according to cGMP and similar foreign standards.Pharmaceutical manufacturers and their subcontractors are required to register their facilities and/or products manufactured at the time of submission of themarketing application and then annually thereafter with the FDA and certain state and foreign agencies. They are also subject to periodic unannouncedinspections by the FDA, state and other foreign authorities. Any subsequent discovery of problems with a product, or a manufacturing or laboratory facilityused by us or our collaborators, may result in restrictions on the product or on the manufacturing or laboratory facility, including marketed product recall,suspension of manufacturing, product seizure, or a voluntary withdrawal of the drug from the market. Any failure by our third-party manufacturers to complywith cGMP or failure to scale up manufacturing processes, including any failure to deliver sufficient quantities of product candidates in a timely manner,could lead to a delay in, or failure to obtain, regulatory approval of any of our product candidates.We plan to rely on third-party manufacturers to purchase from third-party suppliers the materials necessary to produce our product candidates for our clinicalstudies. There are a small number of suppliers for certain capital equipment and materials that we plan to use to manufacture our drugs. Such suppliers maynot sell these materials to our manufacturers at the times we need them or on commercially reasonable terms. Moreover, we currently do not have anyagreements for the production of these materials. Although we do not intend to begin a clinical trial unless we believe we have a sufficient supply of aproduct candidate to complete the clinical trial, any significant delay in the supply of a product candidate or the material components thereof for an ongoingclinical trial due to the need to replace a third-party manufacturer could considerably delay completion of our clinical studies, product testing and potentialregulatory approval of our product candidates. If our manufacturers or we are unable to purchase these materials after regulatory approval has been obtainedfor our product candidates, the commercial launch of our product candidates would be delayed or there would be a shortage in supply, which would impairour ability to generate revenue from the sale of our product candidates.Contract manufacturers may not be able to manufacture our product candidates at a cost or in quantities or in a timely manner necessary to develop andcommercialize them. If we successfully commercialize any of our product candidates, to meet our projected needs we may need to find third parties that willincrease their scale of production, or we may have to establish or access large-scale commercial manufacturing capabilities. We may require additional funds,personnel and other resources to build, lease or operate any manufacturing facility. 42Table of ContentsA portion of our research and a portion of our manufacturing of certain key intermediates used in the manufacture of the active pharmaceuticalingredients for our product candidates takes place in China through third-party researchers and manufacturers. A significant disruption in the operationof those researchers or manufacturers or political unrest in China could materially adversely affect our business, financial condition and results ofoperations.Although manufacturing for our lead product candidates paritaprevir and glecaprevir is being conducted by AbbVie, we have relied on third parties locatedin China to manufacture and supply certain key intermediates used in the manufacture of our active pharmaceutical ingredients, or API, for our researchproduct candidates, and we expect to continue to use such third party manufacturers for such intermediates for any product candidates we developindependently. Any disruption in production or inability of our manufacturers in China to produce adequate quantities to meet our needs, whether as a resultof a natural disaster or other causes, could impair our ability to operate our business on a day-to-day basis and to continue our research and development ofour product candidates. We also use contract researchers in China to conduct a portion of our research for our early stage programs. Any disruption in theteam conducting that research could cause delays in one or more of our research programs and could require us to curtail one or more programs, at least untilwe could contract for that research to be done elsewhere. Furthermore, since these researchers and manufacturers are located in China, we are exposed to thepossibility of product supply disruption and increased costs in the event of changes in the policies of the Chinese government, political unrest or unstableeconomic conditions in China. Any of these matters could materially and adversely affect our business and results of operations. Any recall of themanufacturing lots or similar action regarding our API used in clinical trials could delay the trials or detract from the integrity of the trial data and itspotential use in future regulatory filings. In addition, manufacturing interruptions or failure to comply with regulatory requirements by any of thesemanufacturers could significantly delay clinical development of potential products and reduce third-party or clinical researcher interest and support ofproposed trials. These interruptions or failures could also impede commercialization of our product candidates and impair our competitive position. Further,we may be exposed to fluctuations in the value of the local currency in China. Future appreciation of the local currency could increase our costs. In addition,our labor costs could continue to rise as wage rates increase due to increased demand for skilled laborers and the availability of skilled labor declines inChina.We will rely on third parties to monitor, support, conduct and/or oversee clinical trials of our product candidates that we develop independently and, insome cases, to maintain regulatory files for those product candidates. If we are not able to maintain or secure agreements with such third parties onacceptable terms, if these third parties do not perform their services as required, or if these third parties fail to timely transfer any regulatory informationheld by them to us, we may not be able to obtain regulatory approval for, or commercialize, our product candidates.We will rely on CROs, hospitals, clinics, academic institutions and other third-party collaborators who are outside our control to monitor, support, conductand/or oversee preclinical and clinical studies of our product candidates. We will also rely on third parties to perform clinical trials of our product candidateswhen they reach that stage. As a result, we have less control over the timing and cost of these studies and the ability to recruit trial subjects than if weconducted these trials wholly by ourselves. If we are unable to maintain or enter into agreements with these third parties on acceptable terms, or if any suchengagement is terminated, we may be unable to enroll patients on a timely basis or otherwise conduct our trials in the manner we anticipate. In addition, thereis no guarantee that these third parties will devote adequate time and resources to our studies or perform as required by a contract or in accordance withregulatory requirements, including maintenance of clinical trial information regarding our product candidates. If these third parties fail to meet expecteddeadlines, fail to timely transfer to us any regulatory information, fail to adhere to protocols or fail to act in accordance with regulatory requirements or ouragreements with them, or if they otherwise perform in a substandard manner or in a way that compromises the quality or accuracy of their activities or the datathey obtain, then clinical trials of our product candidates may be extended, delayed or terminated, or our data may be rejected by the FDA or regulatoryagencies. 43Table of ContentsTo the extent we elect to enter into additional licensing or collaboration agreements to partner our product candidates, our dependence on suchrelationships may adversely affect our business.Our commercialization strategy for some of our product candidates may depend on our ability to enter into collaboration agreements with other companies toobtain access to other compounds for use in combination with any of our product candidates or for assistance and funding for the development and potentialcommercialization of any of these product candidates, similar to what we have done with AbbVie. Supporting diligence activities conducted by potentialcollaborators and negotiating the financial and other terms of a collaboration agreement are long and complex processes with uncertain results. Even if we aresuccessful in entering into one or more additional collaboration agreements, collaborations can involve greater uncertainty for us, as we may have limited orno control over certain aspects of our collaborative programs. We may determine that continuing a collaboration under the terms provided is not in our bestinterest, and we may terminate the collaboration. Our collaborators could delay or terminate their agreements with us, and our product candidates subject tocollaborative arrangements may never be successfully commercialized.Further, our collaborators may develop alternative products or pursue alternative technologies either on their own or in collaboration with others, includingour competitors, and the priorities or focus of our collaborators may shift such that our programs receive less attention or resources than we would like, orthey may be terminated altogether. Any such actions by our collaborators may adversely affect our business prospects and ability to earn revenue. Inaddition, we could have disputes with our collaborators, such as the interpretation of terms in our agreements. Any such disagreements could lead to delays inthe development or commercialization of any potential products or could result in time-consuming and expensive litigation or arbitration, which may not beresolved in our favor.Even with respect to programs that we intend to commercialize ourselves, we may enter into agreements with collaborators to share in the burden ofconducting clinical trials, manufacturing and marketing our product candidates or products. In addition, our ability to apply our proprietary technologies todevelop proprietary compounds will depend on our ability to establish and maintain licensing arrangements or other collaborative arrangements with theholders of proprietary rights to such compounds. We may not be able to establish such arrangements on favorable terms or at all, and our collaborativearrangements may not be successful.Risks Related to Our Intellectual Property RightsWe could be unsuccessful in obtaining or maintaining adequate patent protection for one or more of our product candidates.Our commercial success will depend, in large part, on our ability to obtain and maintain patent and other intellectual property protection with respect to ourproduct candidates. We cannot be certain that patents will be issued or granted with respect to our patent applications that are currently pending, or thatissued or granted patents will not later be found to be invalid and/or unenforceable, be interpreted in a manner that does not adequately protect our products,or otherwise provide us with any competitive advantage. The patent position of biotechnology and pharmaceutical companies is generally uncertain becauseit involves complex legal and factual considerations. The standards applied by the United States Patent and Trademark Office and foreign patent offices ingranting patents are not always applied uniformly or predictably. For example, there is no uniform worldwide policy regarding patentable subject matter orthe scope of claims allowable in biotechnology and pharmaceutical patents. Consequently, patents may not issue from our pending patent applications. Assuch, we do not know the degree of future protection that we will have on our proprietary products and technology, if any, and a failure to obtain adequateintellectual property protection with respect to our product candidates and proprietary technology could have a material adverse impact on our business.In addition, certain of our activities have been funded, and may in the future be funded, by the United States federal government. For example, the preclinicaland early clinical development of our lead antibiotic candidate, which we are no longer developing, was funded under a contract with NIAID, an entity of theUnited States 44Table of Contentsfederal government. When new technologies are developed with United States federal government funding, the government obtains certain rights in anyresulting patents, including a nonexclusive license authorizing the government to use the invention for non-commercial purposes. These rights may permitthe government to disclose our confidential information to third parties and to exercise “march-in” rights to use or allow third parties to use our patentedtechnology. The government can exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application of theUnited States government-funded technology, or because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations orto give preference to United States industry. In addition, United States government-funded inventions must be reported to the government and United Statesgovernment funding must be disclosed in any resulting patent applications. In addition, our rights in such inventions are subject to certain requirements tomanufacture products in the United States.Issued patents covering one or more of our product candidates could be found invalid or unenforceable if challenged in court.Despite measures we take to obtain patent and other intellectual property protection with respect to our product candidates and proprietary technology, anyof our intellectual property rights could be challenged or invalidated. For example, if we were to initiate legal proceedings against a third party to enforce apatent covering one of our product candidates, the defendant could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in theUnited States and in some other jurisdictions, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validitychallenge could be an alleged failure to meet any of several statutory requirements, for example, lack of novelty, obviousness or non-enablement. Groundsfor an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from theUnited States Patent and Trademark Office, or the applicable foreign counterpart, or made a misleading statement, during prosecution. Although we believethat we have conducted our patent prosecution in accordance with the duty of candor and in good faith, the outcome following legal assertions of invalidityand unenforceability during patent litigation is unpredictable. With respect to the validity question, for example, we cannot be certain that there is noinvalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidityand/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on a product candidate. Even if a defendant does not prevail ona legal assertion of invalidity and/or unenforceability, our patent claims may be construed in a manner that would limit our ability to enforce such claimsagainst the defendant and others. Any loss of patent protection could have a material adverse impact on one or more of our product candidates and ourbusiness.Enforcing our intellectual property rights against third parties may also cause such third parties to file other counterclaims against us, which could be costlyto defend and could require us to pay substantial damages, cease the sale of certain products or enter into a license agreement and pay royalties (which maynot be possible on commercially reasonable terms or at all). Any efforts to enforce our intellectual property rights are also likely to be costly and may divertthe efforts of our scientific and management personnel.Claims that our product candidates or the sale or use of our products infringe the patent or other intellectual property rights of third parties could result incostly litigation or could require substantial time and money to resolve, even if litigation is avoided.Our commercial success depends upon our ability to develop, manufacture, market and sell our product candidates and use our proprietary technologywithout infringing the intellectual property rights of others. We cannot guarantee that our product candidates or any uses of our product candidates do notand will not in the future infringe third-party patents or other intellectual property rights. Third parties might allege that we or our collaborators are infringingtheir patent rights or that we have misappropriated their trade secrets, or that we are otherwise violating their intellectual property rights, whether with respectto the manner in which we have conducted our research or to the composition, use or manufacture of the compounds we have developed or are 45Table of Contentsdeveloping with our collaborators. Such third parties might resort to litigation against us or other parties we have agreed to indemnify, which litigation couldbe based on either existing intellectual property or intellectual property that arises in the future.It is also possible that we failed to identify, or may in the future fail to identify, relevant patents or patent applications held by third parties that cover ourproduct candidates. For example, applications filed before November 29, 2000 and certain applications filed after that date that will not be filed outside theUnited States remain confidential until patents issue. Other patent applications in the United States and several other jurisdictions are publishedapproximately 18 months after the earliest filing for which priority is claimed, with such earliest filing date being commonly referred to as the priority date.Furthermore, publication of discoveries in the scientific or patent literature often lags behind actual discoveries. Therefore, we cannot be certain that we orour collaborators were the first to invent, or the first to file patent applications on, our product candidates or for their uses, or that our product candidates willnot infringe patents that are currently issued or that are issued in the future. In the event that a third party has also filed a patent application covering one ofour product candidates or a similar invention, we may have to participate in an adversarial proceeding, known as an interference, declared by the U.S. Patentand Trademark Office or its foreign counterpart to determine priority of invention. Additionally, pending patent applications which have been published can,subject to certain limitations, be later amended in a manner that could cover our products or their use.In order to avoid or settle potential claims with respect to any patent or other intellectual property rights of third parties, we may choose or be required to seeka license from a third party and be required to pay license fees or royalties or both, which could be substantial. These licenses may not be available onacceptable terms, or at all. Even if we or any future collaborators were able to obtain a license, the rights may be nonexclusive, which could result in ourcompetitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced, by court orderor otherwise, to cease some or all aspects of our business operations, if, as a result of actual or threatened patent or other intellectual property claims, we areunable to enter into licenses on acceptable terms. Further, we could be found liable for significant monetary damages as a result of claims of intellectualproperty infringement. For example, we have received, and may in the future receive, offers to license and demands to license from third parties claiming thatwe are infringing their intellectual property or owe license fees and, even if such claims are without merit, there can be no assurance that we will successfullyavoid or settle such claims.In addition, if AbbVie licenses or otherwise acquires rights to intellectual property controlled by a third party in various circumstances, for example, where aproduct could not be legally developed or commercialized in a country without the third-party intellectual property right, it is entitled under ourcollaboration agreement to decrease payments payable to us on a product-by-product basis and, in certain cases, on a country-by-country basis. Any of theforegoing events could harm our business significantly.Defending against claims of patent infringement, misappropriation of trade secrets or other violations of intellectual property rights could be costly and timeconsuming, regardless of the outcome. Thus, even if we were to ultimately prevail, or to settle at an early stage, such litigation could burden us withsubstantial unanticipated costs. In addition, litigation or threatened litigation could result in significant demands on the time and attention of ourmanagement team, distracting them from the pursuit of other company business. Claims that our product candidates or the sale or use of our future productsinfringe, misappropriate or otherwise violate third-party intellectual property rights could therefore have a material adverse impact on our business.Unfavorable outcomes in intellectual property litigation could limit our research and development activities and/or our ability to commercialize certainproducts.If third parties successfully assert their intellectual property rights against us, we might be barred from using certain aspects of our technology, or barred fromdeveloping and commercializing certain products. Prohibitions against using certain technologies, or prohibitions against commercializing certain products,could be imposed by 46Table of Contentsa court or by a settlement agreement between us and a plaintiff. In addition, if we are unsuccessful in defending against allegations that we have infringed,misappropriated or otherwise violated patent or other intellectual property rights of others, we may be forced to pay substantial damage awards to theplaintiff. There is inevitable uncertainty in any litigation, including intellectual property litigation. There can be no assurance that we would prevail in anyintellectual property litigation, even if the case against us is weak or flawed. If litigation leads to an outcome unfavorable to us, we may be required to obtaina license from the intellectual property owner in order to continue our research and development programs or to market any resulting product. It is possiblethat the necessary license will not be available to us on commercially acceptable terms, or at all. Alternatively, we may be required to modify or redesign ourproducts in order to avoid infringing or otherwise violating third-party intellectual property rights. This may not be technically or commercially feasible,may render our products less competitive, or may delay or prevent the entry of our products to the market. Any of the foregoing could limit our research anddevelopment activities, our ability to commercialize one or more product candidates, or both.Most of our competitors are larger than we are and have substantially greater resources. They are, therefore, likely to be able to sustain the costs of complexintellectual property litigation longer than we could. In addition, the uncertainties associated with litigation could have a material adverse effect on ourability to raise the funds necessary to conduct our clinical trials, continue our internal research programs, in-license needed technology, or enter into strategicpartnerships that would help us bring our product candidates to market.In addition, any future intellectual property litigation, interference or other administrative proceedings will result in additional expense and distraction of ourpersonnel. An adverse outcome in such litigation or proceedings may expose us or any future strategic partners to loss of our proprietary position, expose usto significant liabilities, or require us to seek licenses that may not be available on commercially acceptable terms, if at all, each of which could have amaterial adverse effect on our business.Intellectual property litigation may lead to unfavorable publicity that harms our reputation and causes the market price of our common stock to decline.During the course of any intellectual property litigation, there could be public announcements of the results of hearings, rulings on motions, and otherinterim proceedings in the litigation. If securities analysts or investors regard these announcements as negative, the perceived value of our products, programsor intellectual property could be diminished. Accordingly, the market price of our common stock may decline. Such announcements could also harm ourreputation or the market for our future products, which could have a material adverse effect on our business.Confidentiality agreements with employees and third parties may not prevent unauthorized disclosure of trade secrets and other proprietary information.In addition to patents, we rely on trade secrets, technical know-how and proprietary information concerning our business strategy and product candidates inorder to protect our competitive position in the field of HCV, other antivirals and liver disease. In the course of our research and development activities andour business activities, we often rely on confidentiality agreements to protect our proprietary information. Such confidentiality agreements are used, forexample, when we talk to vendors of laboratory or clinical development services or potential strategic partners. In addition, each of our employees is requiredto sign a confidentiality agreement and invention assignment agreement upon joining our company. We take steps to protect our proprietary information,and our confidentiality agreements and invention assignment agreements are carefully drafted to protect our proprietary interests. Nevertheless, there can beno guarantee that an employee or an outside party will not make an unauthorized disclosure of our proprietary confidential information. This might happenintentionally or inadvertently. It is possible that a competitor will make use of such information, and that our competitive position will be compromised, inspite of any legal action we might take against persons making such unauthorized disclosures. In addition, to the extent that our employees, consultants orcontractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. 47Table of ContentsTrade secrets are difficult to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, business partnersor outside scientific collaborators might intentionally or inadvertently disclose our trade secret information to competitors or our trade secrets may otherwisebe misappropriated. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time consuming, and theoutcome is unpredictable. In addition, courts outside the United States sometimes are less willing than United States courts to protect trade secrets. Moreover,our competitors may independently develop equivalent knowledge, methods and know-how.Our collaborators may have rights to publish data and other information to which we have rights. In addition, we sometimes engage individuals or entities toconduct research relevant to our business. The ability of these individuals or entities to publish or otherwise publicly disclose data and other informationgenerated during the course of their research is subject to certain contractual limitations. These contractual provisions may be insufficient or inadequate toprotect our confidential information. If we do not apply for patent protection prior to such publication, or if we cannot otherwise maintain the confidentialityof our proprietary technology and other confidential information, then our ability to obtain patent protection or to protect our trade secret information maybe jeopardized, which could adversely affect our business.Intellectual property rights do not necessarily protect us from 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 notadequately protect our business, or permit us to maintain our competitive advantage. The following examples are illustrative: • others may be able to make compounds that are similar to our product candidates but that are not covered by the claims of the patents that we orour collaborators own or have exclusively licensed; • we or our collaborators or any future collaborators might not have been the first to make the inventions covered by the issued patents or pendingpatent applications that we own or may in the future exclusively license, which could result in the patent applications not issuing or beinginvalidated after issuing; • we or our collaborators or any future collaborators might not have been the first to file patent applications covering certain of our inventions,which could result in the patent applications not issuing or being invalidated after issuing; • the ownership of the intellectual property arising out of our collaborations is subject to complex legal and factual issues, and in certaincircumstances our collaborators may own or jointly own important intellectual property relating to our product candidates. Although we haverights to such intellectual property under our collaboration agreements, such rights could potentially be lost or diminished if the applicablecollaboration agreement is terminated, which could affect our ability to commercialize our product candidates; • others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectualproperty 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 not provide us with any competitive advantages, or may be held invalid orunenforceable, as a result of legal challenges by our competitors; we may obtain patents for certain compounds many years before we obtainmarketing approval for products containing such compounds, and because patents have a limited life, which may begin to run prior to thecommercial sale of the related product, the commercial value of our patents may be limited; • our competitors might conduct research and development activities in countries where we do not have patent rights and then use the informationlearned from such activities to develop competitive products for sale in our major commercial markets; 48Table of Contents • we may fail to develop additional proprietary technologies that are patentable; • the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States, or we mayfail to apply for or obtain adequate intellectual property protection in all the jurisdictions in which we operate; and • the patents of others may have an adverse effect on our business, for example by preventing us from marketing one or more of our productcandidates for one or more indications.Any of the aforementioned threats to our competitive advantage could have a material adverse effect on our business.Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.As is the case with many other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining,maintaining and enforcing patents in the biopharmaceutical industry involves both technological complexity and legal complexity. Therefore, the process ofobtaining, maintaining and enforcing biopharmaceutical patents is costly, time-consuming and inherently uncertain. In addition, recent legislative andjudicial developments in the United States and elsewhere have in some cases narrowed the protection afforded to patent owners, made patents more difficultto obtain, or increased the uncertainty regarding the ability to obtain, maintain and enforce patents. For example, Congress recently passed patent reformlegislation, and may pass patent reform legislation in the future. The United States Supreme Court has ruled on several patent cases in recent years, and incertain circumstances has narrowed the scope of patent protection available or otherwise weakened the rights of patent owners. In addition to increasinguncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents,once obtained. Depending on decisions and actions by the United States Congress, the federal courts, the United States Patent and Trademark Office, andtheir respective foreign counterparts, the laws and regulations governing patents could change in unpredictable ways that could weaken our ability to obtainnew patents or to maintain and enforce our existing patents and patents that we might obtain in the future.Risks Related to IndustryUnstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price.As has been widely reported, global credit and financial markets have been experiencing extreme disruptions over the past several years, including declinesin consumer confidence, declines in economic growth, and uncertainty about economic stability. There can be no assurance that deterioration in credit andfinancial markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by the volatile businessenvironment and continued unpredictable and unstable market conditions, particularly for securities of biotechnology companies such as our common stock.There is a possibility that our stock price may decline, due in part to the volatility of the stock market and any general economic downturn. If the currentequity and credit markets become more volatile, deteriorate or do not improve, it may make any debt or equity financing more difficult to secure, more costlyand/or more dilutive if our circumstances change and we seek such financing. Failure to secure any necessary financing in a timely manner and on favorableterms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon ourbusiness and clinical development plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners maynot survive these difficult economic times, which could directly affect our ability to attain our operating goals on schedule and on budget.If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our productcandidates.We face an inherent risk of product liability as a result of the clinical testing of our product candidates, and we will face an even greater risk if wecommercialize any product candidates. For example, we may be sued if any 49Table of Contentsof our product candidates, including any that are developed in combination therapies, allegedly causes injury or is found to be otherwise unsuitable duringproduct testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, afailure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumerprotection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limitcommercialization of our product candidates. Even successful defense would require significant financial and management resources. There is also risk thatthird parties we have agreed to indemnify could incur liability.Regardless of the merits or eventual outcome, liability claims may result in: • decreased demand for our product candidates or any resulting products; • injury to our reputation; • withdrawal of clinical trial participants; • costs to defend the related litigation; • a diversion of management’s time and our resources; • substantial monetary awards to trial participants or patients; • product recalls, withdrawals or labeling, marketing or promotional restrictions; • loss of revenue; • the inability to commercialize our product candidates; and • a decline in our stock price.Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims couldprevent or inhibit the commercialization of products we develop. We currently carry product liability insurance covering our clinical studies in the amount of$10.0 million in the aggregate. Although we maintain such insurance, any claim that may be brought against us could result in a court judgment orsettlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurancepolicies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amountsawarded 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 beable to obtain, sufficient capital to pay such amounts.Our relationships with customers and third-party payors in the United States and elsewhere will be subject to applicable anti-kickback, fraud and abuseand other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm anddiminished profits and future earnings.Healthcare providers, physicians and third-party payors in the United States and elsewhere play a primary role in the recommendation and prescription of anyproduct candidates for which we obtain marketing approval. Our future arrangements with third-party payors and customers may expose us to broadlyapplicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships throughwhich we market, sell and distribute our products for which we obtain marketing approval. Restrictions under applicable federal, state and foreign healthcarelaws and regulations include the following: • the federal healthcare anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving orproviding remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, orderor recommendation of, any good or service for which payment may be made under federal and state healthcare programs such as Medicare andMedicaid; 50Table of Contents • the federal False Claims Act imposes criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entitiesfor knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a falsestatement to avoid, decrease or conceal an obligation to pay money to the federal government; • the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic andClinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposesobligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individuallyidentifiable health information; • the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making anymaterially false statement in connection with the delivery of or payment for healthcare benefits, items or services; • the federal transparency requirements under the Patient Protection and Affordable Care Act of 2010 requires manufacturers of drugs, devices,biologics and medical supplies to report to the Department of Health and Human Services information related to physician payments and othertransfers of value and physician ownership and investment interests; • analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claimsinvolving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and some state lawsrequire pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant complianceguidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments tophysicians and other healthcare providers or marketing expenditures; and • analogous anti-kickback, fraud and abuse and healthcare laws and regulations in foreign countries.Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs.It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case lawinvolving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any othergovernmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion fromgovernment funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations, which could have a materialadverse effect on our business. If any of the physicians or other providers or entities with whom we expect to do business, including our collaborators, arefound not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from governmentfunded healthcare programs, which could also materially affect our business.If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that couldhave a material adverse effect on the success of our business.We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use,storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemicals.Our operations also produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannoteliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials or ouror third parties’ disposal of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We alsocould incur significant costs associated with civil or criminal fines and penalties. 51Table of ContentsWe may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future lawsand regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantialfines, penalties or other sanctions.We maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use ofhazardous materials. This insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmentalliability or toxic tort claims that may be asserted against us in connection with our storage or disposal of hazardous or radioactive materials.Risks Related to Our Common StockOur stock price has been, and is likely to continue to be, volatile, and thus our stockholders could incur substantial losses.Our stock price has been volatile and could be subject to wide fluctuations in response to various factors, many of which are beyond our control. Since ourinitial public offering in March 2013, the price of our common stock on The NASDAQ Global Select Market has ranged from $16.49 to $52.58. The stockmarket in general and the market for biopharmaceutical companies, and for those developing potential therapies for HCV in particular, have experiencedextreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, you may not be able to sellyour common stock at or above your purchase price, if at all. The market price for our common stock may be influenced by many factors, including: • actions by AbbVie regarding HCV treatment regimens containing paritaprevir or the G/P combination containing glecaprevir that it isdeveloping, including announcements regarding clinical, regulatory or commercial developments or our collaboration; • market expectations about and response to the levels of sales or scripts achieved by, or the announced prices or discounts for, AbbVie’sparitaprevir-containing HCV treatment regimens or competitive HCV drugs; • failure of AbbVie’s paritaprevir-containing HCV treatment regimens to maintain their sales levels or AbbVie’s G/P combination, if approved, toachieve commercial success; • results from or delays of clinical trials of our other product candidates, as well as results of regulatory reviews relating to the approval of ourproduct candidates; • new products, product candidates or new uses for existing products or technologies introduced or announced by our competitors and the timingof these introductions or announcements; • any collaborator’s decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial; • the results of our efforts to discover or develop additional product candidates; • our dependence on third parties, including our collaborators, CROs, clinical trial sponsors and clinical investigators; • regulatory, political or legal developments in the United States or other countries; • developments or disputes concerning patent applications, issued patents or other proprietary rights; • the recruitment or departure of key scientific or management personnel; • our ability to commercialize our product candidates we develop independently, if approved; • the level of expenses related to any of our product candidates or clinical development programs; • actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts; 52Table of Contents • period-to-period variations in our financial results or those of companies that are perceived to be similar to us; • sales of common stock by us or our stockholders in the future, as well as the overall trading volume of our common stock; • changes in the structure of healthcare payment systems or other actions that affect the effective reimbursement rates for treatment regimenscontaining our products or for competitive regimens; • market conditions in the pharmaceutical and biotechnology sectors; • general economic, industry and market conditions and other factors that may be unrelated to our operating performance or the operatingperformance of our competitors, including changes in market valuations of similar companies; and • the other factors described in this “Risk Factors” section.Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders,more difficult and may prevent attempts by our stockholders to replace or remove our current management.Provisions in our corporate charter and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholdersmay consider favorable, including transactions in which they might otherwise receive a premium for their shares.These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the marketprice of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisionsmay frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders toreplace members of our board of directors. Among other things, these provisions: • establish a classified or staggered board of directors such that not all members of the board are elected at one time; • allow the authorized number of our directors to be changed only by resolution of our board of directors; • limit the manner in which stockholders can remove directors from the board; • establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board ofdirectors; • require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by writtenconsent; • limit who may call stockholder meetings; • provide that the state courts or, in certain circumstances, the federal courts, in Delaware shall be the sole and exclusive forum for certain actionsinvolving us, our directors, officers, employees and stockholders; • provide our board of directors with the authority to designate the terms of and issue a new series of preferred stock without stockholder approval,which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectivelypreventing acquisitions that have not been approved by our board of directors; and • require the approval of the holders of at least 66 2/3% of the votes that all our stockholders would be entitled to cast to amend or repeal certainprovisions of our charter or bylaws. 53Table of ContentsMoreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, whichprohibit a person who owns 15% or more of our outstanding voting stock from merging or combining with us for a period of three years after the date of thetransaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribedmanner. Any provision in our corporate charter or our bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit theopportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing topay for our common stock.Our employment agreements with our named executive officers may require us to pay severance benefits to any of those persons who are terminated inconnection with a change of control of us, which could harm our financial condition or results.Our named executive officers are parties to employment agreements that provide for aggregate cash payments of up to approximately $4.0 million forseverance and other non-equity-based benefits in the event of a termination of employment in connection with a change of control of our company. Inaddition, based on the September 30, 2016 closing price of our common stock of $26.61 per share, the aggregate intrinsic value of unvested stock optionsand other equity awards subject to accelerated vesting upon these events was $4.0 million as of September 30, 2016. The accelerated vesting of awardsoptions could result in dilution to our stockholders and harm the market price of our common stock. The payment of these severance benefits could harm ourcompany’s financial condition and results. In addition, these potential severance payments may discourage or prevent third parties from seeking a businesscombination with us.We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to “emerging growth companies” willmake our common stock less attractive to investors.We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an “emerging growth company,” we may take advantageof exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including notbeing required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligationsregarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisoryvote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As an “emerging growth company”we are required to report periodic financial results and selected financial data related to two fiscal years compared to three and five years, respectively, forcomparable data required to be reported by other public companies in selected SEC reports. We may take advantage of these exemptions until we are nolonger an “emerging growth company.” We could be an “emerging growth company” until September 30, 2018, although circumstances could cause us tolose that status earlier, including if the market value of our common stock held by non-affiliates exceeds $700 million as of any March 31 (the end of oursecond fiscal quarter) before that time, in which case we would no longer be an “emerging growth company” as of the following September 30 (our fiscal yearend). Based on the market value of our common stock at March 31, 2016 and the number of shares of our common stock held by non-affiliates, we continuedto be an “emerging growth company” for our fiscal 2016. We cannot predict if investors will find our common stock less attractive because we may rely onthese exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and ourstock price may be more volatile.Under the JOBS Act, “emerging growth companies” can also delay adopting new or revised accounting standards until such time as those standards apply toprivate companies. We have irrevocably elected not to avail ourselves of this exemption to delay the adoption of new or revised accounting standards and,therefore, will be subject to adopting new or revised accounting standards at the same time as other public companies that are not “emerging growthcompanies.” 54Table of ContentsIf we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results orprevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the tradingprice of our common stock.Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controlsand procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in theirimplementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of theSarbanes-Oxley Act of 2002, or any subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controlsover financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements oridentify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financialinformation, which could have a negative effect on the trading price of our common stock.We are required to disclose changes made in our internal controls and procedures on a quarterly basis and our management is required to assess theeffectiveness of these controls annually. However, for as long as we are an “emerging growth company” under the JOBS Act, our independent registeredpublic accounting firm will not be required to attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404. We could bean “emerging growth company” until September 30, 2018. An independent assessment of the effectiveness of our internal controls could detect problems thatour management’s assessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements and requireus to incur the expense of remediation.Because we do not anticipate paying cash dividends on our common stock for the foreseeable future, investors in our common stock may never receive areturn on their investment.You should not rely on an investment in our common stock to provide dividend income. We do not anticipate that we will pay any cash dividends to holdersof our common stock for the foreseeable future. Instead, we plan to retain any earnings to maintain and expand our existing operations.Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any return ontheir investment. As a result, investors seeking cash dividends should not invest in our common stock.A sale of a substantial number of shares of our common stock in the public market could cause the market price of our common stock to drop significantly,even if our business is doing well.Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that theholders of a large number of shares intend to sell shares, could reduce the market price of our common stock. As of September 30, 2016, we had 19,035,910outstanding shares of common stock. In addition, at that date 1,895,456 and 97,050 shares of common stock that are subject to outstanding options or stockunit awards, respectively, under our equity plan are eligible for sale in the public market to the extent permitted by the provisions of various vestingschedules, and Rules 144 and 701 under the Securities Act. If these additional shares of common stock are sold, or it is perceived that they will be sold, in thepublic market, the trading price of our common stock could decline.If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our stock price and tradingvolume could decline.The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business.If too few securities or industry analysts cover our company, 55Table of Contentsthe trading price for our stock would likely be negatively impacted. In the event that one or more of the analysts who cover us downgrade our stock orpublish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of ourcompany or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline. ITEM 1B.UNRESOLVED STAFF COMMENTSNone. ITEM 2.PROPERTIESOur corporate headquarters is located in Watertown, Massachusetts, where we lease approximately 49,000 square feet of office and laboratory space. The termof our current lease expires on September 30, 2022. ITEM 3.LEGAL PROCEEDINGSWe are not a party to any material legal proceedings. ITEM 4.MINE SAFETY DISCLOSURESNot applicable.PART II ITEM 5.MARKET FOR THE COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIESMarket and Stockholder InformationOur common stock has been listed on The NASDAQ Global Select Market under the symbol “ENTA” since March 21, 2013. The following table shows thehigh and low sales price for our common stock as reported by The NASDAQ Global Select Market for the quarterly periods in the years ended September 30,2016 and 2015: 2016 High Low First Quarter $40.68 $23.90 Second Quarter $34.19 $21.52 Third Quarter $32.41 $21.55 Fourth Quarter $26.81 $21.00 2015 High Low First Quarter $52.58 $39.05 Second Quarter $51.60 $30.55 Third Quarter $47.28 $30.13 Fourth Quarter $51.89 $33.51 As of December 1, 2016, there were 35 stockholders of record of our common stock.We have never declared or paid cash dividends on our common stock, and we do not expect to declare or pay any cash dividends for the foreseeable future. 56Table of ContentsPerformance Graph(1)The following graph shows a comparison from March 21, 2013 through September 30, 2016 of cumulative total return on assumed investments of $100.00 incash in each of our common stock, the NASDAQ Composite Index and the NASDAQ Biotechnology Index. Such returns are based on historical results andare not intended to suggest future performance. Data for the NASDAQ Composite Index and the NASDAQ Biotechnology Index assume reinvestment ofdividends.COMPARISON OF FORTY TWO MONTH CUMULATIVE TOTAL RETURNAmong Enanta Pharmaceuticals, Inc., the NASDAQ Composite Index,and the NASDAQ Biotechnology Index (1) This performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Securities andExchange Act of 1934, as amended, or otherwise subject to the liabilities under that Section, and shall not be deemed incorporated by reference intoany filing of Enanta Pharmaceuticals, Inc. under the Securities Act of 1933, as amended. 57Table of ContentsITEM 6.SELECTED CONSOLIDATED FINANCIAL DATAWe have derived the consolidated statements of operations data for the years ended September 30, 2016, 2015, and 2014 and the consolidated balance sheetdata as of September 30, 2016 and 2015 from our audited financial statements included elsewhere in this Annual Report on Form 10-K. The selectedstatements of operations data for the years ended September 30, 2013 and 2012 and the balance sheet data as of September 30, 2014, 2013 and 2012 arederived from our audited financial statements not included in this Annual Report on Form 10-K. Our historical results for any prior period are not necessarilyindicative of any results to be expected for any future period. Years Ended September 30, 2016 2015 2014 2013 2012 (in thousands, except per share data) Consolidated Statements of Operations Data: Revenue $88,268 $160,880 $47,741 $32,053 $41,706 Operating expenses: Research and development 40,461 23,189 18,740 16,841 15,115 General and administrative 16,966 13,543 10,016 6,183 5,302 Total operating expenses 57,427 36,732 28,756 23,024 20,417 Income from operations 30,841 124,148 18,985 9,029 21,289 Other income (expense), net 1,719 1,307 283 598 110 Net income before income tax 32,560 125,455 19,268 9,627 21,399 Income tax (expense) benefit (10,894) (46,463) 15,170 — — Net income 21,666 78,992 34,438 9,627 21,399 Accretion of redeemable convertible preferred stock to redemption value — — — (2,526) (5,367) Net income attributable to participating securities — — — (13,670) (14,663) Net income (loss) attributable to common stockholders $21,666 $78,992 $34,438 $(6,569) $1,369 Net income (loss) per share attributable to common stockholders: Basic $1.14 $4.23 $1.88 $(0.67) $1.26 Diluted $1.13 $4.09 $1.80 $(0.67) $1.13 Weighted average common shares outstanding: Basic 18,929 18,673 18,355 9,788 1,089 Diluted 19,224 19,295 19,185 9,788 2,475 As of September 30, 2016 2015 2014 2013 2012 (in thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and marketable securities $242,203 $209,443 $131,767 $112,183 $45,418 Working capital 224,267 163,937 103,229 100,187 41,574 Total assets 281,277 246,013 155,415 116,973 52,162 Capital lease obligation 531 598 — — — Warrant liability 1,251 1,276 1,584 1,620 2,001 Series 1 nonconvertible preferred stock 159 163 202 — — Redeemable convertible preferred stock — — — — 158,955 Convertible preferred stock — — — — 327 Total stockholders’ equity (deficit) 269,936 236,157 148,654 110,468 (115,353) 58Table of ContentsITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYou should read the following discussion and analysis of financial condition and results of operations together with the section entitled “SelectedConsolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Thisdiscussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as statementsregarding our plans, objectives, expectations, intentions and projections. 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” sectionof this Annual Report on Form 10-K.OverviewWe are a research and development-focused biotechnology company that uses our robust, chemistry-driven approach and drug discovery capabilities tocreate small molecule drugs primarily for the treatment of viral infections and liver diseases. Our success to date has been built on protease inhibitors wediscovered for the treatment of hepatitis C virus, or HCV, which are licensed to AbbVie and included in its HCV treatment regimens. Our new research anddevelopment programs are currently focused primarily on the following three disease areas: • non-alcoholic steatohepatitis, or NASH, a liver disease estimated to affect approximately 6 million individuals in the U.S. alone; • respiratory syncytial virus, or RSV, the most common cause of bronchiolitis and pneumonia in children under 1 year of age in the U.S., resultingin an estimated 75,000 to 125,000 hospitalizations each year in the U.S.; and • hepatitis B virus, or HBV, the most prevalent chronic hepatitis, which is estimated to affect approximately 240 million individuals worldwide.Our development and licensing collaboration with AbbVie has produced one licensed product and a second product candidate in Phase 3 development forHCV. The licensed product, paritaprevir, a protease inhibitor designed for use against HCV, is a key compound in AbbVie’s direct-acting-antiviral, or DAA,regimen VIEKIRA PAK® and its other 3-DAA and 2-DAA treatment regimens currently on the market for HCV. Our second HCV protease inhibitor,glecaprevir (ABT-493), has completed several Phase 3 registrational studies in combination with pibrentasvir, AbbVie’s second NS5A inhibitor. AbbVie hasindicated its plans to submit a New Drug Application, or NDA, for this combination in the U.S. by the end of 2016 and similar applications in the EU andJapan early in 2017. AbbVie anticipates regulatory approvals and commercialization starting in calendar 2017.We had $242.2 million in cash and marketable securities at September 30, 2016. In our fiscal 2016, we received $30.0 million in milestone payments forcommercialization regulatory approvals of paritaprevir, and earned $57.7 million in royalties on the portion of AbbVie’s net sales of its HCV regimensallocated to paritaprevir. We expect our existing financial resources and cash flows will allow us to continue to invest for the foreseeable future in our whollyowned research and development programs.Our Wholly Owned Programs • NASH and PBC: We are working on multiple compounds that selectively bind to and activate the farnesoid X receptor, or FXR. We plan todevelop these compounds, referred to as FXR agonists, for use in the treatment of NASH, and PBC, both of which are liver diseases with very fewtherapeutic 59Table of Contents options. Our lead FXR agonist, EDP-305, represents a new class of FXR agonist designed to take advantage of increased binding interactionswith the receptor. We believe this class is significantly different from other FXR agonists in clinical development. • In September 2016, we initiated a Phase 1 clinical study of EDP-305, which includes healthy subjects and subjects withpresumptive non-alcoholic fatty liver disease, or NAFLD, who are obese and may also have pre-diabetes or type 2 diabetes. • In November 2016, we published data at the AASLD meeting that demonstrated that EDP-305 is a highly selective FXR agonistand shows more potent activity in a variety of in vitro and in vivo NASH models compared to the most advanced NASH candidatein development today, obeticholic acid, or OCA. • We also intend to explore development of EDP-305 for PBC. • In addition, we are pursuing research in other classes of FXR agonists. • RSV: Our initial efforts in RSV are concentrated on non-fusion inhibitors which we believe will differentiate our compounds from fusioninhibitors currently in development for RSV because non-fusion inhibitors directly target the virus replication process and have demonstratedhigh barriers to resistance against the virus in vitro. To develop successful therapies for RSV, we believe that it may be necessary to utilize morethan one compound/mechanism and therefore we are pursuing multiple approaches and compounds that provide in vitro and in vivo evidence ofsynergistic potential. • HBV: We also have a program to discover and develop new chemical entities for the treatment of HBV. Our initial focus is on core inhibitors, amechanism with early clinical validation. We believe that it may be necessary to utilize more than one compound/mechanism for the treatmentof HBV and therefore we are pursuing multiple approaches. We continue to make significant progress in discovering, characterizing, and seekingpatent protection for new core inhibitors of HBV. • HCV: We also have a cyclophilin inhibitor, EDP-494, for which we initiated Phase 1 clinical development in the first quarter of calendar 2016.This study includes a proof-of-concept study in HCV patients, to demonstrate EDP-494’s potential benefit as a host-targeted antiviral. Furtherdevelopment of EDP-494 for HCV will depend in part on the results of this study and in part on our assessment of the potential marketopportunities in HCV and in other possible indications.We have utilized our internal chemistry and drug discovery capabilities to generate all of our development-stage programs.Licensed Product/CandidateUnder our Collaborative Development and License Agreement with AbbVie, we have developed and licensed to AbbVie: • Paritaprevir: Paritaprevir is the protease inhibitor contained in VIEKIRA PAK® and AbbVie’s other HCV treatment regimens currently marketedin the U.S., EU, Japan and other countries around the world. First approved and sold in the U.S. in December 2014 for treatment of genotype 1, orGT-1, HCV, AbbVie’s HCV regimens containing paritaprevir are now also approved for GT-4 HCV and are available in most major markets.AbbVie’s net sales of these regimens provided us $57.7 million in royalty revenue in our 2016 fiscal year, compared to $34.1 million in fiscal2015. We have also received a total of $155.0 million in milestone payments upon the initial commercialization regulatory approvals of aparitaprevir-containing regimen in major markets. • Glecaprevir (ABT-493): Our second protease inhibitor, glecaprevir, is being developed by AbbVie with its second NS5A inhibitor, pibrentasvir(ABT-530), as AbbVie’s next treatment regimen for HCV. This combination, which is currently referred to as G/P, is a once daily, all oral, fixed-dose treatment for HCV genotypes 1-6, which is referred to as being pan-genotypic. 60Table of Contents • In November 2016, AbbVie announced results from several Phase 3 studies of this investigational combination demonstrating 97.5percent of chronic HCV infected patients without cirrhosis and new to treatment across all major genotypes (GT1-6) achievedSVR12 with just 8 weeks of G/P treatment. • AbbVie also announced results of its EXPEDITION-4 study in chronic HCV patients with chronic kidney disease (CKD), in which98 percent of patients (n=102/104) across all major genotypes (GT-1-6) achieved SVR12 with 12 weeks of treatment with G/P. • The FDA has granted Breakthrough Therapy Designation for the G/P combination for the treatment of GT-1 patients with chronicHCV who failed previous therapy with direct-acting antivirals (DAAs), including previous therapy with an NS5A inhibitor and/orprotease inhibitor. • Upon commercialization regulatory approval of G/P in major markets, Enanta would be eligible for up to $80.0 million dollars inmilestone payments, as well as annually tiered, double-digit royalties on 50% of the net sales of this 2-DAA product.The following table summarizes our product development pipeline in our virology and liver disease programs: 61Table of ContentsWe are currently funding all research and development for our internal programs. We expect to incur substantially greater expenses as we continue toadvance our FXR agonist program, for which we initiated Phase 1 clinical studies of our lead candidate, EDP-305, in September 2016. In addition, we expectto increase expenses in fiscal 2017 as we complete our proof of concept study for EDP-494 and advance other compounds into substantial preclinical andclinical development.Since commencing our operations in 1995, we have devoted substantially all of our resources to the discovery and development of novel compounds for thetreatment of viral infections and liver diseases. For the periods included in this report we have funded our operations primarily through payments receivedunder our collaborations and a NIAID government contract, as well as net proceeds of approximately $59.9 million that we received from our March 2013IPO, after deducting underwriting discounts and commissions. Our revenue from our collaboration agreements has resulted in our reporting net income ineach of our past five fiscal years. Our revenue in the near term will continue to be dependent on our collaboration with AbbVie, including royalties from salesof paritaprevir-containing regimens and potential milestone payments and royalties from the development program for glecaprevir (ABT-493), our secondprotease inhibitor being developed with AbbVie. Given the schedule of potential milestone payments and the uncertainties due to the nature and timing ofclinical development, regulatory approval and market acceptance of AbbVie’s regimen containing glecaprevir, as well as uncertainty regarding the extent ofroyalty payments related to paritaprevir or glecaprevir, if any, we cannot be certain as to when or whether we will receive further milestone or royaltypayments under this collaboration or whether we will continue to report net income in future years.Financial Operations OverviewRevenueSince our inception, our revenue has been derived from two primary sources: collaboration agreements with pharmaceutical companies and one governmentresearch and development contract. We have entered into three significant collaboration agreements and contracts since 2006, the most significant of whichis our continuing collaboration agreement with AbbVie. In addition, from September 2011 through August 2015, we had a contract with NIAID, whichfunded the preclinical and early clinical development of an antibiotic product candidate for potential use in biodefense.Beginning in our fiscal year ended September 30, 2015, we generated royalty revenue from AbbVie’s net sales allocable to paritaprevir, which is part ofAbbVie’s treatment regimens for HCV approved in the U.S. in December 2014, in the EU in January 2015 and in dozens of other countries since then. AbbViereceived reimbursement approval for paritaprevir in Japan in the first quarter of fiscal 2016.The following table is a summary of revenue recognized from our collaboration agreement and our government contract for the years ended September 30,2016, 2015, and 2014: Years Ended September 30, 2016 2015 2014 (in thousands) AbbVie agreement: Royalties $57,692 $34,077 $— Milestones 30,000 125,000 40,000 NIAID contract: 576 1,803 7,741 Total revenue $88,268 $160,880 $47,741 AbbVie AgreementWe concluded our research obligations under the AbbVie agreement in June 2011 and as such, each of the five milestone payments received after June 2011has been recognized as revenue upon achievement of the milestone 62Table of Contentsby AbbVie. Under the terms of the AbbVie agreement, we earned and recognized a $30.0 million milestone payment in fiscal 2016 upon achievement ofcommercialization regulatory approval of AbbVie’s paritaprevir-containing regimen in Japan in November 2015. This was the final milestone payment forwhich we were eligible for the successful development and commercialization of paritaprevir. Under the terms of the AbbVie agreement, we are eligible toreceive additional future milestone payments from AbbVie totaling up to $80.0 million related to the successful commercialization regulatory approvals inmajor markets of the first HCV treatment regimen incorporating glecaprevir or another of our collaboration’s protease inhibitors.We also receive annually tiered, double-digit royalties per product on AbbVie’s net sales allocable to any one of our collaboration’s protease inhibitors.Under the terms of our agreement, as amended in October 2014, 30% of net sales of 3-DAA regimens containing paritaprevir and 45% of net sales of 2-DAAregimens containing paritaprevir are allocated to paritaprevir for purposes of calculating our annually tiered royalties.We expect our revenue in 2017 to be generated primarily from our collaboration agreement with AbbVie.NIAID ContractUnder our NIAID contract, which ended in August 2015, we received research and development funding of approximately $20.6 million from NIAID throughSeptember 30, 2016. We recognized revenue of $0.6 million, $1.8 million and $7.7 million under this agreement during the years ended September 30, 2016,2015, and 2014, respectively.Internal ProgramsAs our internal product candidates are currently in preclinical or early clinical development, we have not generated any revenue from product sales and donot expect to generate any revenue from product sales derived from these product candidates for at least the next several years. We expect that our revenue forthe next several years will be derived from milestone payments and royalties under our current collaboration agreement with AbbVie, as well as anyadditional collaborations that we may enter into in the future.Operating ExpensesThe following table summarizes our operating expenses for the years ended September 30, 2016, 2015, and 2014: Years Ended September 30, 2016 2015 2014 (in thousands) Research and development $40,461 $23,189 $18,740 General and administrative 16,966 13,543 10,016 Total operating expenses $57,427 $36,732 $28,756 Research and Development ExpensesResearch and development expenses consist of costs incurred to conduct basic research, such as the discovery and development of novel small molecules astherapeutics, as well as any expenses of preclinical and clinical development activities. We expense all costs of research and development as incurred. Theseexpenses consist primarily of: • personnel costs, including salaries, related benefits and stock-based compensation expense for employees engaged in scientific research anddevelopment functions; • third-party contract costs relating to research, formulation, manufacturing, preclinical study and clinical trial activities; 63Table of Contents • third-party license fees; • laboratory consumables; and • allocated facility-related costs.Project-specific expenses reflect costs directly attributable to our clinical development candidates and preclinical candidates nominated and selected forfurther development. Remaining research and development expenses are reflected in research and drug discovery, which represents early-stage drugdiscovery programs. At any given time, we typically have several active early stage research and drug discovery projects. Our internal resources, employeesand infrastructure are not directly tied to any individual research or drug discovery project and are typically deployed across multiple projects. As such, wedo not maintain information regarding costs incurred for our early-stage research and drug discovery programs on a project-specific basis. We expect that ourresearch and development expenses will continue to increase in the future as we advance our NASH, RSV and HBV programs.Our research and drug discovery programs are at early stages; therefore, the successful development of our product candidates is highly uncertain and maynot result in approved products. Completion dates and completion costs can vary significantly for each product candidate and are difficult to predict. Giventhe uncertainty associated with clinical trial enrollments and the risks inherent in the development process, we are unable to determine the duration andcompletion costs of the current or future clinical trials of our product candidates or if, or to what extent, we will generate revenue from the commercializationand sale of any of our product candidates. We anticipate that we will make determinations as to which development programs to pursue and how muchfunding to direct to each program on an ongoing basis in response to the preclinical and clinical success of each product candidate, as well as ongoingassessments of the commercial potential of each product candidate.General and Administrative ExpensesGeneral and administrative expenses consist primarily of personnel costs, which include salaries, related benefits and stock-based compensation, of ourexecutive, finance, business and corporate development and other administrative functions. General and administrative expenses also include travelexpenses, allocated facility-related costs not otherwise included in research and development expenses, director’s and officer’s liability insurance premiums,and professional fees for auditing, tax and legal services and patent expenses.We expect that general and administrative expenses will increase in the future primarily due to ongoing expansion of our operating activities in support ofour own research and development programs, as well as potential additional costs associated with operating a growing public company.Other Income (Expense), NetInterest income. Interest income consists of interest earned on our cash equivalents and short-term and long-term marketable securities balances.Interest expense. Interest expense consists of interest expense related to our capital lease obligation.Change in fair value of warrant liability and Series 1 nonconvertible preferred stock. We have issued warrants for the purchase of our Series 1nonconvertible preferred stock and we have issued Series 1 nonconvertible preferred stock, both of which are financial instruments that may require a transferof assets because of the liquidation preference features of the underlying stock. Therefore, we have classified these warrants and Series 1 nonconvertiblepreferred stock as liabilities that we remeasure to fair value at each reporting period. We record the changes in the fair value of the warrants and Series 1nonconvertible preferred stock as a component of other income (expense), net. 64Table of ContentsIncome Tax (Expense) BenefitIncome tax expense is based on our best estimate of applicable income tax rates for the entire fiscal year applied to pre-tax profit reported for the year to dateperiod. The income tax expense for the years ended September 30, 2016 and 2015 resulted from federal and state taxes attributable to our operating income.The income tax benefit for the year ended September 30, 2014 resulted from a reversal of our valuation allowance related to our deferred tax assets consistingprimarily of research tax credits and net operating loss carryforwards.Critical Accounting PoliciesOur consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. Thepreparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amount ofassets, liabilities, revenue, costs and expenses, and related disclosures. We believe that the estimates and assumptions involved in the accounting policiesdescribed below may have the greatest potential impact on our consolidated financial statements and, therefore, consider these to be our critical accountingpolicies. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions andconditions. See also Note 2 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information about thesecritical accounting policies as well as a description of our other significant accounting policies.Revenue RecognitionOur revenue has been generated primarily through collaborative research and license agreements. The terms of these agreements contain multipledeliverables which may include (i) licenses, (ii) research and development activities, and (iii) participation in joint research and development steeringcommittees. The terms of these agreements may include nonrefundable upfront license fees, payments for research and development activities, paymentsbased upon the achievement of certain milestones, and royalty payments based on product sales derived from the collaboration. The majority of revenue isderived under our agreement with AbbVie. Under this agreement, we have no ongoing deliverables and therefore, royalties and milestones received under thisarrangement are recognized when earned. In all instances, revenue is recognized only when the price is fixed or determinable, persuasive evidence of anarrangement exists, delivery has occurred or the services have been rendered, collectibility of the resulting receivable is reasonably assured, and we havefulfilled our performance obligations under the contract.We apply Accounting Standards Codification No. 605-25, Revenue Recognition Multiple-Deliverable Revenue Arrangements, or ASC 605-25 for multipleelement arrangements entered into or materially modified on or after October 1, 2011. This guidance amends the criteria for separating and allocatingconsideration in a multiple-element arrangement by modifying the fair value requirements for revenue recognition and eliminating the use of residual valuemethod. The selling prices of deliverables under the arrangement may be derived using third-party evidence, (“TPE”) or a best estimate of selling price(“BESP”), if vendor-specific objective evidence (“VSOE”), is not available. The objective of BESP is to determine the price at which we would transact a saleif the element within the license agreement was sold on a standalone basis. Establishing BESP involves management’s judgment and considers multiplefactors, including market conditions and company-specific factors including those factors contemplated in negotiating the agreements as well as internallydeveloped models that include assumptions related to market opportunity, discounted cash flows, estimated development costs, probability of success, andthe time needed to commercialize a product candidate pursuant to the license. In validating our BESP, we consider whether changes in key assumptions usedto determine the BESP will have a significant effect on the allocation of the arrangement consideration between the multiple deliverables. Deliverables undera multiple element arrangement are separated into multiple units if (i) the delivered item has value to the customer on a standalone basis and (ii) if thearrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable andsubstantially within our control. In 65Table of Contentsdetermining the separate units of accounting, we evaluate whether the license has standalone value to the collaborator based on consideration of the relevantfacts and circumstances for each arrangement. Factors considered in this determination include the research and development capabilities of the collaboratorand the availability of relevant research expertise in the marketplace. In addition, we consider whether or not (i) the collaborator can use the license for itsintended purpose without the receipt of the remaining deliverables, (ii) the value of the license is dependent on the undelivered items, and (iii) thecollaborator or other vendors can provide the undelivered items. We may exercise significant judgment in determining whether a deliverable is a separateunit of accounting. The arrangement consideration that is fixed or determinable at the inception of the arrangement is allocated to the separate units ofaccounting based on their relative selling prices. The appropriate revenue recognition model is applied to each element and revenue is accordinglyrecognized as each element is delivered.Royalty revenue is recognized based on contractual terms when reported sales are reliably measurable and collectibility is reasonably assured, provided thatthere are no performance obligations remaining.During the years ended September 30, 2016, 2015, and 2014, we also generated revenue from a government contract under which we were reimbursed forcertain allowable costs incurred for the funded project. Revenue from the government contract was recognized when the related service was performed. Therelated costs incurred by us under the government contract were included in research and development expense in the consolidated statements of operations.This contract was completed in August 2015.Amounts received prior to satisfying all revenue recognition criteria are recorded as deferred revenue in the accompanying consolidated balance sheets.Amounts not expected to be recognized as revenue within the next twelve months of the consolidated balance sheet date are classified as long-term deferredrevenue.In the event that a collaborative research and license agreement is terminated and we then have no further performance obligations, we recognize as revenueany amounts that had not previously been recorded as revenue but were classified as deferred revenue at the date of such termination.Stock-Based CompensationWe measure stock options with service-based conditions granted to employees and directors at fair value on the date of grant and recognize thecorresponding stock-based compensation expense of those awards, net of estimated forfeitures, over the requisite service period, which is generally thevesting period of the respective award. Stock options with service-based vesting conditions are recorded as an expense using the straight-line method. Wehave historically granted stock options with exercise prices equivalent to the fair value of our common stock on the date of grant. We also issue performance-based and market-based awards.The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. We have estimated our expectedvolatility based on the historical volatility of our publicly traded peer companies and we expect to continue to do so until such time as we have adequatehistorical data regarding the volatility of our traded stock price following our March 2013 IPO. The expected term of our options has been determinedutilizing the “simplified” method for awards that qualify as “plain-vanilla” options and we expect to continue to do so until such time as we have adequatehistorical data regarding our employee exercise patterns. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at thetime of grant of the award for time periods approximately equal to the expected term of the award. Our expected dividend yield is 0 and is based on the factthat we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future.These assumptions represent our best estimates, but the estimates involve inherent uncertainties and the application of our judgment. As a result, if factorschange and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different. We recognize stock-based 66Table of Contentscompensation expense for only the portion of awards that are expected to vest. In developing a forfeiture rate estimate, we have considered our historicalexperience to estimate pre-vesting forfeitures for service-based options. If our actual forfeiture rate is materially different from the estimate, our stock-basedcompensation expense could be different from what we have recorded in the current period. In the case of performance-based options, we recognize stock-based compensation expense related to these awards when the performance-based targets are deemed probable of being achieved.Market and Performance-based Stock Unit AwardsIn addition to stock options, we also have granted performance share units, or PSUs, and relative shareholder return units, or rTSRUs, to certain executives.The number of units represents the target number of shares of common stock that may be earned; however, the actual number of shares that may be earnedranges from 0% to 200% of the target number. The fair value of PSUs is based on the intrinsic value of the stock on the date of grant. The fair value of rTSRUsis based on the Monte Carlo simulation model. Assumptions and estimates utilized in the calculation of the fair value of the rTSRUs include the risk-freeinterest rate, dividend yield, expected volatility based on the historical volatility of publicly traded peer companies and remaining performance period of theaward.The PSUs vest and result in issuance, or settlement, of common shares for each recipient, based upon the recipient’s continued employment with us and ourachievement of specified research and development milestones. The requisite service period of the PSUs is generally 2 years. In the case of PSUs, werecognize stock-based compensation expense when performance-based targets are deemed probable of being achieved.The rTSRUs vest and result in the issuance of common stock based upon the recipient’s continuing employment with us and the relative ranking of the totalshareholder return, or TSR, of our common stock in relation to the TSR of the component companies in the NASDAQ Biotech Index over a two-year periodbased on a comparison of average closing stock prices in specified periods noted in the award agreement. The fair value related to the rTSRUs is recorded asstock-based compensation expense over the period from date of grant to the ending performance period regardless of whether the target relative totalshareholder returns are reached.Valuation of Warrants to Purchase Series 1 Nonconvertible Preferred Stock and Series 1 Nonconvertible Preferred StockIn October and November 2010, we issued warrants to purchase up to a total of 1,999,989 shares of Series 1 nonconvertible preferred stock, which expire onOctober 4, 2017. As these warrants are free-standing financial instruments that may require us to transfer assets upon exercise, these warrants are classified asliabilities on our consolidated balance sheet. We are required to remeasure the fair value of these preferred stock warrants at each reporting date, with anyadjustments recorded within the change in fair value of warrant liability included in other income (expense), net, in the consolidated statements ofoperations. The warrants and Series 1 nonconvertible preferred stock are fair valued using a probability-weighted discounted cash flow approach whichincludes significant assumptions such as probabilities of payout, periods in which payout is expected to occur and discount rates.Income TaxesIncome taxes are provided for tax effects of transactions reported in the consolidated financial statements and consist of income taxes currently due plusdeferred income taxes related to timing differences between the basis of certain assets and liabilities for financial statement purposes and for income taxreporting purposes. Deferred taxes are determined based on the difference between the financial reporting and tax basis of assets and liabilities using enactedtax rates in effect in the years in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision forincome taxes. A valuation allowance is provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred taxassets 67Table of Contentswill not be realized. At each balance sheet date, we assess the likelihood that deferred tax assets will be realized, and recognize a valuation allowance if it ismore likely than not that some portion of the deferred tax assets will not be realized. Assessment of the potential recovery of deferred tax assets requiresjudgment and is evaluated by estimating the future taxable income expected and considering prudent and feasible tax planning strategies.As of September 30, 2013, based on our analysis of both positive and negative factors, we determined that it was more likely than not that we would not beable to realize our deferred tax assets, and therefore we had recorded a full valuation allowance against our deferred tax assets. Our analysis included anassessment of our past profitability and our future projections of forecasted revenue and expense levels.However, during 2014, we reassessed the need for a valuation allowance against our deferred tax assets and concluded that it was more likely than not that wewould be able to realize our deferred tax assets primarily as a result of recent profitability and forecasted future profits resulting from future expectedmilestone payments and on-going royalty payments from AbbVie. Accordingly, we released our valuation allowance related to our deferred tax assets andrecorded a net income tax benefit of approximately $15.2 million during the year ended September 30, 2014. As of September 30, 2016 and 2015, wecontinue to believe it is more likely than not that we will be able to realize our deferred tax assets and therefore no valuation allowance has been recorded ineither period.We adopted ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”) as of September 30, 2016 which simplifies the presentationof deferred income taxes by eliminating the need for entities to separate deferred income tax assets and liabilities into current and noncurrent amounts in theconsolidated balance sheets.JOBS ActThe JOBS Act was signed into law on April 5, 2012 and contains provisions that, among other things, reduce certain reporting requirements for an “emerginggrowth company.” As an “emerging growth company,” we are electing not to take advantage of the extended transition period afforded by the JOBS Act forthe implementation of new or revised accounting standards, and as a result, we will comply with new or revised accounting standards on the relevant dates onwhich adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision not to takeadvantage of the extended transition period is irrevocable. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company”, we arenot required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant toSection 404, (ii) provide all of the compensation disclosures that may be required of non-emerging growth public companies under the Dodd-Frank WallStreet Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Boardregarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements(auditor discussion and analysis), and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation andperformance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptions will apply until the fifthanniversary of the completion of our initial public offering in March 2013 or until we no longer meet the requirements for being an “emerging growthcompany,” whichever occurs first. Based on the market value of our common stock at March 31, 2016 and the number of shares of our common stock held bynon-affiliates, we continued to be an “emerging growth company” for our fiscal 2016. 68Table of ContentsResults of OperationsComparison of Years Ended September 30, 2016, 2015 and 2014 Years Ended September 30, 2016 2015 2014 (in thousands) Revenue $88,268 $160,880 $47,741 Research and development 40,461 23,189 18,740 General and administrative 16,966 13,543 10,016 Other income (expense), net: Interest income 1,735 968 467 Interest expense (45) (8) (18) Change in fair value of warrant liability and Series 1 nonconvertible preferred stock, net 29 347 (166) Income tax (expense) benefit (10,894) (46,463) 15,170 Revenue. We recognized revenue of $88.3 million during the year ended September 30, 2016, as compared to $160.9 million during the year endedSeptember 30, 2015. The decrease in revenue of $72.6 million year over year was primarily due to a decrease in milestone payments received from AbbVieand was partially offset by higher royalties earned on net sales of HCV regimens allocated to paritaprevir during 2016. During the years ended September 30,2016 and 2015, we recognized revenue of $30.0 million and $125.0 million, respectively, for milestone payments received as a result of regulatory approvalsfor AbbVie’s paritaprevir-containing regimens in Japan and the U.S. and EU, respectively. We earned royalties of $57.7 million and $34.1 million during theyears ended September 30, 2016 and 2015, respectively, based on the portion of AbbVie’s net sales of its HCV treatment regimen allocable to paritaprevir.We recognized higher royalty revenue in fiscal 2016 compared to 2015 due to timing of regulatory approvals in various jurisdictions.We recognized revenue of $160.9 million during the year ended September 30, 2015, as compared to $47.7 million during the year ended September 30,2014. The increase in revenue of $113.2 million year over year was primarily due to an increase in milestone payments and royalties received from AbbVieand was partially offset by lower government contract revenue earned as a result of the conclusion of our NIAID contract that ended in August 2015. Duringthe years ended September 30, 2015 and 2014, we recognized revenue of $125.0 million and $40.0 million, respectively, for milestone payments receivedfrom AbbVie as a result of AbbVie’s commercialization and regulatory approvals and regulatory filings for a regimen that included paritaprevir. We beganrecognizing royalty revenue in fiscal 2015 for net sales of AbbVie’s HCV treatment regimen allocable to paritaprevir upon U.S. and EU regulatory approvals.Research and development expenses. Years Ended September 30, 2016 2015 2014 (in thousands) R&D programs: Virology $21,692 $10,403 $9,575 Liver disease 17,840 9,096 — Antibiotic — 1,364 5,430 Other 929 2,326 3,735 Total research and development expenses $40,461 $23,189 $18,740 Research and development expenses increased by $17.3 million for the year ended September 30, 2016 as compared to the same period in 2015 due toprogression of preclinical and clinical activities in our virology and 69Table of Contentsliver disease programs. Increases were driven by an increase in headcount to support our preclinical activities, expansion of our research facility and anincrease in external costs for clinical and preclinical activities.Research and development expenses increased by $4.5 million for the year ended September 30, 2015 as compared to the same period in 2014 due to anincrease in costs for the progression of preclinical activities in our liver disease program, partially offset by a decrease in costs associated with our antibioticprogram which ended in August 2015. Increases in costs associated with our liver disease program were driven by additional headcount, expansion of ourresearch facilities and an increase in external costs for preclinical activities.General and administrative expenses. General and administrative expenses increased by $3.4 million for the year ended September 30, 2016 as compared tothe same period in 2015 primarily due to an increase in stock-based compensation expense of $2.3 million related to an increase in headcount, additionalstock option grants to employees, and achievement of performance-based option milestones granted to management.General and administrative expenses increased by $3.5 million for the year ended September 30, 2015 as compared to the same period in 2014 primarily dueto an increase in stock-based compensation expense of $2.3 million related to additional stock option grants to employees which were granted at a higher fairvalue compared to fiscal 2014 stock option grants, as well as to an increase in insurance expense and additional expenses to support our expandingoperations.Other income (expense), net. Changes in components of other income (expense), net were as follows:Interest income. Interest income increased by $0.8 million for the year ended September 30, 2016 as compared to the same period in 2015 due to higheraverage investment balances in fiscal 2016 as compared to 2015 as a result of cumulative milestones and royalties earned from our collaboration withAbbVie, offset by expenses to support our expanding operations.Interest income increased by $0.5 million for the year ended September 30, 2015 as compared to the same period in 2014 due to higher average investmentbalances in the fiscal 2015 as compared to 2014 as a result of milestones earned in 2015 for commercialization regulatory approval of AbbVie’s paritaprevir-containing regimens.Interest expense. Interest expense represents interest related to our capital lease obligation.Change in fair value of warrant liability and Series 1 nonconvertible preferred stock. We recognized other income of less than $0.1 million and $0.3 millionfor the years ended September 30, 2016 and 2015 as a result of the remeasurement of the warrant liability and Series 1 nonconvertible preferred stock yearover year due to a decrease in fair value of the outstanding liabilities.We recognized other expense of $0.2 million for the year ended September 30, 2014 as a result of the remeasurement of the warrant liability and Series 1nonconvertible preferred stock year over year due to an increase in fair value of the outstanding liabilities.Income tax (expense) benefit. Income tax expense was $10.9 million and $46.5 million for the years ended September 30, 2016 and 2015, respectively. Theeffective tax rate for the years ended September 30, 2016 and 2015 was 33.5% and 37.0%, respectively. The decrease in income tax expense was primarilydue to lower profit before taxes as well as the reinstatement of the federal research and development tax credits in fiscal 2016 which are deductible for taxpurposes and included in the Company’s annual effective tax rate. Income tax expense for both periods was primarily attributable to the tax provision on theearnings of our operations, all of which are domestic.We recorded an income tax benefit for the year ended September 30, 2014 of $15.2 million primarily due to our release of our valuation allowance which wemaintained against our deferred tax assets. The total amount of the valuation allowance released was approximately $22.9 million. 70Table of ContentsLiquidity and Capital ResourcesFrom our inception through September 30, 2016, we have financed our operations primarily through contract payments under our collaborations, governmentresearch and development contracts and grants, and the net proceeds from our initial public offering of our equity.The following table shows a summary of our cash flows for each of the years ended September 30, 2016, 2015, and 2014: Years Ended September 30, 2016 2015 2014 (in thousands) Cash provided by (used in): Operating activities $35,809 $76,673 $20,179 Investing activities $(43,663) $(88,186) $497 Financing activities $2,705 $2,540 $1,164 Net cash provided by operating activitiesThe decrease in cash provided by operating activities of $40.9 million for the year ended September 30, 2016 as compared to the same period in 2015 wasprimarily driven by a decrease in our net income largely as a result of a reduction in cash receipts under our collaboration with AbbVie. We received $89.2million in cash from AbbVie during 2016, including royalties and a $30.0 million milestone payment, compared to $144.7 million during 2015, includingroyalties and $125.0 million in milestone payments from AbbVie. In addition, we increased cash spending on research and development, which was reflectedin our net income, during 2016 in order to progress clinical development and preclinical research in our proprietary programs. These decreases to cash used inoperating activities were partially offset by a decrease in income tax payments of $27.5 million, which is reflected in our income tax expense, based on lowerincome before income tax in 2016 as compared to 2015.The increase in cash provided by operating activities of $56.5 million for the year ended September 30, 2015 as compared to the same period in 2014 wasprimarily driven by an increase in net income due to an increase in cash receipts under our collaboration with AbbVie. We received $144.7 million in cashfrom AbbVie during 2015, including royalties and $125.0 million in milestone payments compared to $40.0 million in milestone payments during 2014. Theincrease in cash provided by operating activities was partially offset by an increase in income tax payments of $39.9 million, which is reflected in our incometax expense in 2015, based on higher income before tax in 2015.Net cash provided by (used in) investing activitiesThe decrease in cash used in investing activities of $44.5 million for the year ended September 30, 2016 as compared to the same period in 2015 is driven bytiming of purchases, sales and maturities of marketable securities. The decrease was partially offset by an increase in capital expenditure outlay in 2016 of$2.4 million compared to 2015 as a result of our expansion of our research facility.The decrease in cash provided by investing activities of $88.7 million for the year ended September 30, 2015 as compared to the same period in 2014 wasdriven by timing of purchases, sales and maturities of marketable securities.Net cash provided by financing activitiesThe increase in cash provided by financing activities of $0.2 million for the year ended September 30, 2016 as compared to the same period in 2015 wasdriven by an increase in proceeds from exercises of stock options. 71Table of ContentsThe increase in cash provided by financing activities of $1.4 million for the year ended September 30, 2015 as compared to the same period in 2014 wasdriven by an increase in income tax benefits from stock option exercises.As of September 30, 2016, we had $242.2 million in cash, cash equivalents and short-term and long-term marketable securities. We believe that our existingcash, cash equivalents and marketable securities as of September 30, 2016, will be sufficient to meet our anticipated cash requirements for the foreseeablefuture. However, our forecast that the use of our financial resources will be adequate to support our operations is a forward-looking statement that involvesrisks and uncertainties, and actual results could vary materially.Funding RequirementsOur future capital requirements are difficult to forecast and will depend on many factors, including: • whether our existing collaborations continue to generate substantial milestone payments and significant royalties, to us; • the number and characteristics of future product candidates we pursue; • opportunities to in-license or otherwise acquire new therapeutic candidates and therapies; • the scope, progress, results and costs of researching and developing any of our future product candidates on our own, and conducting preclinicalresearch and clinical trials; • the timing, receipt and amount of sales of, or royalties, on paritaprevir, glecaprevir and our future product candidates, if any; • the timing of, and the costs involved in, obtaining regulatory approvals for any future product candidates we develop independently; • the cost of commercialization activities, if any, of any future product candidates we develop independently that are approved for sale, includingmarketing, sales and distribution costs; • the cost of manufacturing our future product candidates and any products we successfully commercialize independently; • our ability to maintain existing collaborations and to establish new collaborations, licensing or other arrangements and the financial terms ofsuch agreements; and • the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patents, including litigation costs and the outcome ofsuch litigation.We do not believe that inflation had a material effect on our business, financial condition or results of operations in the last three fiscal years. If our costs wereto become subject to significant inflationary pressures, we could not offset such higher costs through revenue increases because our revenues aresubstantially outside of our control. Our inability to do so could harm our business, financial condition and results of operations.Off-Balance Sheet ArrangementsWe do not engage in any off-balance sheet financing activities. We do not have any interest in entities referred to as variable interest entities, which includespecial purpose entities and other structured finance entities.Recently Issued Accounting PronouncementsA description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is set forth in Note 2to the consolidated financial statements included in this Annual Report on Form 10-K. 72Table of ContentsContractual Obligations and CommitmentsWe lease office space in Watertown, Massachusetts under a lease that commenced on October 1, 2011 and was amended in 2015 to expand the rented spaceand extend the lease term through September 2022. In conjunction with the amendment of the lease, the Company entered into a capital lease agreement tofund certain leasehold improvements and the purchase of lab equipment. The following table summarizes our contractual obligations at September 30, 2016and the effect such obligations are expected to have on our liquidity and cash flow in future periods: Years Ended September 30, OperatingLeases CapitalLeases 2017 $2,010 $73 2018 2,062 79 2019 2,117 86 2020 2,172 93 2021 2,229 101 Thereafter 2,093 99 Total $12,683 $531 As of September 30, 2016, we had outstanding warrants for the purchase of 1,774,581 shares of our Series 1 nonconvertible preferred stock and 223,153outstanding shares of Series 1 nonconvertible preferred stock that we classified as long-term liabilities on our balance sheet, recorded at fair value of $1.4million. The fair value of both of these instruments was measured based on significant inputs not observable in the market, which represented a Level 3measurement within the fair value hierarchy. The fair value of these instruments represents 15% of liabilities measured at fair value as of September 30, 2016.If all of the outstanding warrants, which expire October 4, 2017, are exercised, the Series 1 nonconvertible preferred stock issued combined with the currentlyoutstanding shares of Series 1 nonconvertible preferred stock would require the payment of $2.0 million upon a qualifying merger or sale of this company.The table above does not include this liability because we are unable to estimate the timing of this required payment, or if it will be required at all. ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKInterest Rate SensitivityWe had cash, cash equivalents and marketable securities of $242.2 million at September 30, 2016, which consisted of cash, marketable securities, agencysecurities, commercial paper, treasury notes and corporate bonds. Interest income is sensitive to changes in the general level of interest rates; however, due tothe nature of these investments, we do not believe that we have any material exposure to changes in the fair value of our investment portfolio as a result ofchanges in interest rates. We had no debt outstanding as of September 30, 2016. ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAOur consolidated financial statements, together with the report of our independent registered public accounting firm, appear on pages F-1 through F-26 ofthis Annual Report on Form 10-K. 73Table of ContentsITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone. ITEM 9A.CONTROLS AND PROCEDURESConclusion Regarding the Effectiveness of Disclosure Controls and ProceduresWe maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under theSecurities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in theSEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer (CEO) and ChiefFinancial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls andprocedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, as the Companies are designed to do, and management necessarily was required to apply its judgment in evaluatingthe risk related to controls and procedures.In connection with the preparation of this Form 10-K, as of September 30, 2016, an evaluation was performed under the supervision and with theparticipation of our management, including the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our management concluded that our disclosure controls andprocedures were effective at a reasonable assurance level as of September 30, 2016. These conclusions were communicated to the Audit Committee.Management’s Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under theExchange Act. Our internal control system is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding thepreparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherentlimitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparationand presentation.Our management has assessed the effectiveness of our internal control over financial reporting as of September 30, 2016. In making this assessment,management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its 2013 Internal Control—Integrated Framework. Based on this assessment, our management has concluded that as of September 30, 2016 our internal control over financial reportingis effective.As an Emerging Growth Company, as defined under the terms of the Jobs Act of 2012, the Company’s independent registered accounting firm is not requiredto issue an attestation report on the internal control over financial reporting.Change in Internal Control over Financial Reporting—There were no changes in our internal control over financial reporting that occurred during our lastquarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B.OTHER INFORMATIONNone. 74Table of ContentsPART III ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEPortions of the response to this item are incorporated herein by reference from the discussion responsive thereto under the captions “Election of Directors—Nominees for Director and Current Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance”, “Executive Officers” and “CorporateGovernance—Board and Committee Matters” in the Company’s Definitive Proxy Statement relating to the 2017 Annual Meeting of Stockholders (the 2017Proxy Statement).We have adopted a Code of Business Conduct and Ethics (the code of ethics) that applies to all of our directors, officers and employees. The code of ethics isavailable on our website at www.enanta.com. In addition, if we make any substantive amendments to the code of ethics or grant any waiver, including anyimplicit waiver, from a provision of the code to any of our executive officers or directors, we will disclose the nature of such amendment or waiver as requiredby applicable law. ITEM 11.EXECUTIVE COMPENSATIONThe response to this item is incorporated herein by reference from the discussion responsive thereto under the following captions in the 2017 ProxyStatement: “Executive Compensation” and “Corporate Governance—Compensation Committee Interlocks and Insider Participation.” ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe response to this item is incorporated herein by reference in part from the discussion responsive thereto under the caption “Beneficial Ownership ofCommon Stock” in the 2017 Proxy Statement.The following table provides information about the securities authorized for issuance under the Company’s equity compensation plans as of September 30,2016:Equity Compensation Plan Information Plan Category Number of securitiesto be issuedupon exercise ofoutstanding options,warrants and rights Weightedaverageexercise price ofoutstandingoptions,warrants andrights Number of securitiesremaining available forfuture issuance underequity compensation plans(excluding securitiesreflected in column (a)) (a) (b) (c) Equity compensation plans approved by securityholders(1) 1,992,506(2) $28.75 673,520(3) Equity compensation plans not approved by securityholders Totals 1,992,506 673,520 (1)Consists of the Company’s Amended and Restated 1995 Equity Incentive Plan, as amended, the Company’s 2012 Equity Incentive Plan, as amended,and the Company’s Employee Stock Purchase Plan.(2)Consists of shares of the Company’s common stock issuable upon exercise of outstanding options issued under the Company’s Amended andRestated 1995 Equity Incentive Plan and the Company’s 2012 Equity Incentive Plan. 75Table of Contents(3)Consists of shares of the Company’s common stock reserved for future issuance under the Company’s 2012 Equity Incentive Plan and the Company’sEmployee Stock Purchase Plan. This does not include 571,077 shares that were automatically added to the Company’s 2012 Equity Incentive Plan byits terms as of October 1, 2016. ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe response to this item is incorporated herein by reference from the discussion responsive thereto under the caption “Corporate Governance—CertainRelationships and Related Transactions” and “Corporate Governance—Board and Committee Matters” in the 2017 Proxy Statement. ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICESThe response to this item is incorporated herein by reference from the discussion responsive thereto under the captions “Corporate Governance—Board andCommittee Matters” and “Audit Committee Report—Audit Fees” in the 2017 Proxy Statement.PART IV ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES(a) 1. FINANCIAL STATEMENTSThe financial statements are included under Part II, Item 8 of this Report.2. FINANCIAL STATEMENTS SCHEDULESchedules are omitted because they are not applicable, or are not required, or because the information is included in the consolidated financial statementsand notes thereto.3. EXHIBITS –The exhibits are listed below under Part IV, Item 15(b) of this Report.(b) EXHIBITS Incorporated by Reference ExhibitNumber ExhibitDescription Form Date ExhibitNumber File Number FiledHerewith3.1 Restated Certificate of Incorporation of Enanta Pharmaceuticals, Inc. 8-K 03/28/2013 3.1 001-35839 3.2 Amended and Restated Bylaws of Enanta Pharmaceuticals, Inc. (asamended and restated in August 2015) 8-K 08/18/2015 3.2 001-35839 4.1 Specimen certificate evidencing shares of common stock. S-1/A 02/05/2013 4.1 333-184779 4.2 Form of Series 1 Non-Convertible Preferred Stock Warrant S-1 11/06/2012 4.2 333-184779 10.1# Form of Indemnification Agreement for directors and officers. S-1/A 02/05/2013 10.7 333-184779 10.2# Amended and Restated Employment Agreement between the Companyand Jay R. Luly, Ph.D., dated as of March 4, 2013. S-1/A 03/05/2013 10.5 333-184779 76Table of Contents Incorporated by Reference ExhibitNumber ExhibitDescription Form Date ExhibitNumber File Number FiledHerewith10.3# Form of Amended and Restated Employment Agreement for ExecutiveOfficers other than Chief Executive Officer. S-1/A 03/05/2013 10.17 333-184779 10.4† Collaborative Development and License Agreement between theCompany and Abbott Laboratories, dated November 27, 2006; asamended by a First Amendment to Collaborative Development andLicense Agreement dated January 27, 2009 and a Second Amendmentto Collaborative Development and License Agreement datedDecember 9, 2009 (assigned to AbbVie Inc. as of January 1, 2013). 10-Q 02/09/2016 10.1 001-35839 10.5† Third Amendment to Collaborative Development and LicenseAgreement between the Company and AbbVie dated October 20,2014. 10-K 12/11/2014 10.5 001-35839 10.6 Fourth Amendment to Collaborative Development and LicenseAgreement between the Company and AbbVie dated as of March 3,2015. 10-Q 05/08/2015 10.1 001-35839 10.7 Lease Agreement between Company and ARE-500 Arsenal StreetLLC, dated as of April 15, 2011. S-1 11/06/2012 10.6 333-184779 10.8 First Amendment to Lease Agreement made as of March 5, 2015between the Company and ARE-500 Arsenal Street LLC. 10-Q 05/08/2015 10.2 001-35839 10.9 Third Amended and Restated Registration Rights Agreement, dated asof August 23, 2012. S-1/A 11/06/2012 10.4 333-184779 10.10# Amended and Restated 1995 Equity Incentive Plan. S-1/A 03/05/2013 10.8 333-184779 10.11# Form of Incentive Stock Option Certificate under Amended andRestated 1995 Equity Incentive Plan. S-1/A 03/05/2013 10.9 333-184779 10.12# Form of Non-Statutory Stock Option Certificate under Amended andRestated 1995 Equity Incentive Plan. S-1/A 03/05/2013 10.10 333-184779 10.13# Form of Non-Statutory Stock Option Certificate for directors underAmended and Restated 1995 Equity Incentive Plan. S-1/A 03/05/2013 10.11 333-184779 10.14# 2012 Equity Incentive Plan (As adjusted to reflect the application ofthe 1-for-4.31 reverse stock split of the Company’s common stockeffected on March 1, 2013). 10-K 12/18/2013 10.16 001-35839 10.15# Form of Incentive Stock Option Agreement under 2012 EquityIncentive Plan. S-1/A 03/05/2013 10.13 333-184779 77Table of Contents Incorporated by Reference ExhibitNumber ExhibitDescription Form Date ExhibitNumber File Number FiledHerewith10.16# Form of Non-Statutory Stock Option Agreement under 2012 Equity IncentivePlan. S-1/A 03/05/2013 10.14 333-184779 10.17# Form of Non-Statutory Stock Option Certificate for directors under 2012 EquityIncentive Plan. S-1/A 03/05/2013 10.15 333-184779 10.18# Form of Performance Share Unit Certificate under 2012 Equity Incentive Plan. 10-Q 08/10/2015 10.1 001-35839 10.19# Form of Relative Total Stockholder Return Unit Certificate under 2012 EquityIncentive Plan. 10-Q 08/10/2015 10.2 001-35839 10.20# Employee Stock Purchase Plan. S-1/A 02/05/2013 10.16 333-184779 21.1 Subsidiaries of the Company. X23.1 Consent of PricewaterhouseCoopers LLP, Independent Registered PublicAccounting Firm. X31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934. X31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)of the Securities Exchange Act of 1934. X32.1 Certification of the Chief Executive Officer and Chief Financial Officerpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002. X101 The following materials from the Annual Report of Enanta Pharmaceuticals, Inc.on Form 10-K for the year ended September 30, 2016, formatted in XBRL(eXtensible Business Reporting Language): (i) Consolidated Balance Sheets asof September 30, 2016 and September 30, 2015 of Enanta Pharmaceuticals, Inc.,(ii) Consolidated Statements of Operations for the years ended September 30,2016, 2015 and 2014 of Enanta Pharmaceuticals, Inc., (iii) ConsolidatedStatements of Comprehensive Income for the years ended September 30, 2016,2015 and 2014 of Enanta Pharmaceuticals, Inc., (iv) Consolidated Statements ofStockholders’ Equity (Deficit) for the years ended September 30, 2016, 2015and 2014 of Enanta Pharmaceuticals, Inc., (v) Consolidated Statements of CashFlows for the years ended September 30, 2016, 2015 and 2014 of EnantaPharmaceuticals, Inc., and (vi) Notes to Consolidated Financial Statements ofEnanta Pharmaceuticals, Inc. X # Management contract or compensatory plan, contract or agreement.† Confidential treatment granted as to portions of this Exhibit. The confidential portions of this Exhibit have been omitted and are marked by asterisks.†† This Exhibit has been filed separately with the commission pursuant to an application for confidentiality treatment. The confidential portions of thisExhibit have been omitted and are marked by asterisks. 78Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized, this 9th day of December, 2016. ENANTA PHARMACEUTICALS, INC.By: /s/ Jay R. Luly, Ph.D. Jay R. Luly, Ph.D. Chief Executive OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theCompany in the capacities and on the dates indicated. Signature Title Date/s/ Jay R. Luly, Ph.D. Jay R. Luly, Ph.D. President and Chief ExecutiveOfficer and Director(Principal Executive Officer) December 9, 2016/s/ Paul J. Mellett Paul J. Mellett Chief Financial Officer(Principal Financial andAccounting Officer) December 9, 2016/s/ Ernst-Günter Afting, M.D., Ph.D. Ernst-Günter Afting, M.D., Ph.D. Director December 9, 2016/s/ Stephen Buckley, Jr. Stephen Buckley, Jr. Director December 9, 2016/s/ Bruce L.A. Carter, Ph.D. Bruce L.A. Carter, Ph.D. Director December 9, 2016/s/ George S. Golumbeski, Ph.D. George S. Golumbeski, Ph.D. Director December 9, 2016/s/ Lesley Russell, MB. Ch.B., MRCP Lesley Russell, MB. Ch.B., MRCP Director December 9, 2016/s/ Terry Vance Terry Vance Director December 9, 2016 79Table of ContentsENANTA PHARMACEUTICALS, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Comprehensive Income F-5 Consolidated Statements of Stockholders’ Equity (Deficit) F-6 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-8 F-1Table of ContentsITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders ofEnanta Pharmaceuticals, Inc.In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, stockholders’equity (deficit) and cash flows present fairly, in all material respects, the financial position of Enanta Pharmaceuticals, Inc. and its subsidiary at September 30,2016 and 2015 and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2016 in conformity withaccounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance withthe standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.As discussed in Note 13 to the consolidated financial statements, the Company changed the manner in which it classifies deferred taxes in 2016 due to theadoption of Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred Taxes./s/ PricewaterhouseCoopers LLPBoston, MassachusettsDecember 9, 2016 F-2Table of ContentsENANTA PHARMACEUTICALS, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share amounts) September 30, 2016 2015 Assets Current assets: Cash and cash equivalents $16,577 $21,726 Short-term marketable securities 193,507 123,479 Accounts receivable 12,841 15,289 Unbilled receivables — 433 Deferred tax assets — 1,447 Prepaid expenses and other current assets 9,231 8,267 Total current assets 232,156 170,641 Property and equipment, net 8,004 5,886 Long-term marketable securities 32,119 64,238 Deferred tax assets 8,390 4,640 Restricted cash 608 608 Total assets $281,277 $246,013 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $3,377 $1,543 Accrued expenses and other current liabilities 4,512 3,962 Income taxes payable — 1,199 Total current liabilities 7,889 6,704 Warrant liability 1,251 1,276 Series 1 nonconvertible preferred stock 159 163 Other long-term liabilities 2,042 1,713 Total liabilities 11,341 9,856 Commitments and contingencies (Note 12) Stockholders’ equity: Common stock; $0.01 par value, 100,000,000 shares authorized; 19,035,910 and 18,716,834 shares issued and outstandingat September 30, 2016 and September 30, 2015, respectively 190 187 Additional paid-in capital 242,081 229,957 Accumulated other comprehensive income 19 33 Retained earnings 27,646 5,980 Total stockholders’ equity 269,936 236,157 Total liabilities and stockholders’ equity $281,277 $246,013 The accompanying notes are an integral part of these consolidated financial statements. F-3Table of ContentsENANTA PHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts) Years Ended September 30, 2016 2015 2014 Revenue Royalties $57,692 $34,077 $— Milestones 30,000 125,000 40,000 Other 576 1,803 7,741 Total revenue $88,268 $160,880 $47,741 Operating expenses: Research and development 40,461 23,189 18,740 General and administrative 16,966 13,543 10,016 Total operating expenses 57,427 36,732 28,756 Income from operations 30,841 124,148 18,985 Other income (expense): Interest income 1,735 968 467 Interest expense (45) (8) (18) Change in fair value of warrant liability and Series 1 nonconvertible preferred stock, net 29 347 (166) Total other income (expense), net 1,719 1,307 283 Income before income taxes 32,560 125,455 19,268 Income tax (expense) benefit (10,894) (46,463) 15,170 Net income $21,666 $78,992 $34,438 Net income per common share: Basic $1.14 $4.23 $1.88 Diluted $1.13 $4.09 $1.80 Weighted average common shares outstanding: Basic 18,929 18,673 18,355 Diluted 19,224 19,295 19,185 The accompanying notes are an integral part of these consolidated financial statements. F-4Table of ContentsENANTA PHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands) Years Ended September 30, 2016 2015 2014 Net income $21,666 $78,992 $34,438 Other comprehensive income (loss): Net unrealized gains (losses) on marketable securities, net of tax of ($9), $20, and $0 (14) 133 (98) Total other comprehensive income (loss) (14) 133 (98) Comprehensive income $21,652 $79,125 $34,340 The accompanying notes are an integral part of these consolidated financial statements. F-5Table of ContentsENANTA PHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)(in thousands, except share amounts) Common Stock AdditionalPaid-InCapital Treasury Stock AccumulatedOtherComprehensiveIncome (Loss) RetainedEarnings(AccumulatedDeficit) TotalStockholders’Equity Shares Amount Shares Amount Balances at September 30, 2013 18,138,597 $181 $217,741 (208,816) $(2) $(2) $(107,450) $110,468 Exercise of stock options 664,793 7 1,047 — — — — 1,054 Stock-based compensation expense — — 2,682 — — — — 2,682 Income tax benefit from stock optionexercises — — 110 — — — — 110 Other comprehensive loss — — — — — (98) — (98) Net income — — — — — — 34,438 34,438 Balances at September 30, 2014 18,803,390 $188 $221,580 (208,816) $(2) $(100) $(73,012) $148,654 Exercise of stock options 122,260 1 725 — — — — 726 Stock-based compensation expense — — 5,838 — — — — 5,838 Income tax benefit from stock optionexercises — — 1,814 — — — — 1,814 Other comprehensive income — — — — — 133 — 133 Retirement of treasury stock (208,816) (2) — 208,816 2 — — — Net income — — — — — — 78,992 78,992 Balances at September 30, 2015 18,716,834 $187 $229,957 — — $33 $5,980 $236,157 Exercise of stock options 319,076 3 1,023 — — — — 1,026 Stock-based compensation expense — — 9,354 — — — — 9,354 Income tax benefit from stock optionexercises — — 1,747 — — — — 1,747 Other comprehensive loss — — — — — (14) — (14) Net income — — — — — — 21,666 21,666 Balances at September 30, 2016 19,035,910 $190 $242,081 — — $19 $27,646 $269,936 The accompanying notes are an integral part of these consolidated financial statements. F-6Table of ContentsENANTA PHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Years Ended September 30, 2016 2015 2014 Cash flows from operating activities Net income $21,666 $78,992 $34,438 Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation expense 9,354 5,838 2,682 Depreciation and amortization expense 1,661 639 352 Change in fair value of warrant liability and Series 1 nonconvertible preferred stock (29) (347) 166 Premium on marketable securities (518) (3,042) (2,002) Amortization of premium on marketable securities 1,511 2,244 2,120 Deferred income taxes (2,294) 11,028 (15,211) Income tax benefit from the exercise of stock options (1,747) (1,814) (110) Other non-cash items 34 (35) 2 Change in operating assets and liabilities: Accounts receivable 2,448 (13,565) (916) Unbilled receivables 433 2,337 (1,986) Prepaid expenses and other current assets (964) (6,680) 568 Accounts payable 1,451 (543) 399 Accrued expenses 1,858 (227) (183) Income taxes payable 548 1,199 — Other long-term liabilities 397 649 (140) Net cash provided by operating activities 35,809 76,673 20,179 Cash flows from investing activities Purchases of property and equipment (4,738) (2,336) (1,028) Purchases of marketable securities (192,429) (196,304) (98,405) Sale of marketable securities — 2,210 8,421 Maturities of marketable securities 153,504 108,407 91,506 Other investing activities — (163) 3 Net cash provided by (used in) investing activities (43,663) (88,186) 497 Cash flows from financing activities Proceeds from exercise of stock options 1,026 726 1,054 Payments of capital lease obligations (68) — — Income tax benefit from the exercise of stock options 1,747 1,814 110 Net cash provided by financing activities 2,705 2,540 1,164 Net increase (decrease) in cash and cash equivalents (5,149) (8,973) 21,840 Cash and cash equivalents at beginning of period 21,726 30,699 8,859 Cash and cash equivalents at end of period $16,577 $21,726 $30,699 Supplemental disclosure of cash flow information: Cash paid for income taxes $12,616 $40,072 $148 Supplemental disclosure of non-cash financing activities: Exercise of Series 1 warrants into Series 1 nonconvertible preferred stock $— $— $206 Non-cash items: Fixed assets financed through capital lease $— $598 $— Fixed assets financed by landlord $— $239 $— Purchases of fixed assets included in accounts payable and accrued expenses $637 $1,562 $— The accompanying notes are an integral part of these consolidated financial statements. F-7Table of ContentsENANTA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in thousands, except share and per share data)1. Nature of the BusinessEnanta Pharmaceuticals, Inc. (the “Company”), incorporated in Delaware in 1995, is a research and development-focused biotechnology company that usesits robust chemistry-driven approach and drug discovery capabilities to create small molecule drugs primarily for the treatment of viral infections and liverdiseases. The Company’s research and development is currently focused on four disease targets: hepatitis C virus (“HCV”); hepatitis B virus (“HBV”); non-alcoholic steatohepatitis (“NASH”); and respiratory syncytial virus (“RSV”).The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, the uncertainties of research anddevelopment, competition from technological innovations of others, dependence on collaborative arrangements, protection of proprietary technology,dependence on key personnel, compliance with government regulations and the need to obtain additional financing. Product candidates currently underdevelopment will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatoryapproval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure, and extensivecompliance reporting capabilities.2. Summary of Significant Accounting PoliciesBasis of PresentationThe accompanying consolidated financial statements include those of the Company and its subsidiary, Enanta Pharmaceuticals Security Corporation, afterelimination of all intercompany accounts and transactions. The accompanying consolidated financial statements have been prepared in conformity withaccounting principles generally accepted in the United States of America (“GAAP”).Use of EstimatesThe preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and thereported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financialstatements include, but are not limited to, management’s judgments of separate units of accounting and best estimate of selling price of those units ofaccounting within its revenue arrangements; valuation of warrants, Series 1 nonconvertible preferred stock and stock-based awards; and the accounting forincome taxes, including uncertain tax positions and the valuation of net deferred tax assets. Estimates are periodically reviewed in light of changes incircumstances, facts and experience. Actual results could differ from the Company’s estimates.Cash Equivalents and Marketable SecuritiesThe Company considers all short-term, highly liquid investments with original maturities of ninety days or less at acquisition date to be cash equivalents.Marketable securities with original maturities of greater than 90 days and remaining maturities of less than one year from the balance sheet date are classifiedas short-term marketable securities. Marketable securities with remaining maturities of greater than one year from the balance sheet date are classified as long-term marketable securities.The Company classifies all of its marketable securities as available-for-sale. All marketable securities are held with one investment manager. The Companycontinually evaluates the credit ratings of its investment portfolio F-8Table of Contentsand underlying securities. The Company invests in accordance with its investment policy and invests at the date of purchase in securities with a rating of A3or higher and A—or higher according to Moody’s and S&P, respectively. The Company reports available-for-sale investments at fair value as of each balancesheet date and records any unrealized gains or losses as a component of stockholders’ equity. The cost of securities sold is determined on a specificidentification basis, and realized gains and losses are included in other income (expense), net within the consolidated statements of operations. If anyadjustment to fair value reflects a decline in the value of the investment, the Company considers available evidence to evaluate the extent to which thedecline is “other than temporary” and reduces the investment to fair value through a charge to the consolidated statements of operations. There were no suchadjustments necessary during the years ended September 30, 2016, 2015 and 2014.Restricted CashAs of September 30, 2016 and 2015, the Company had an outstanding letter of credit collateralized by a money market account of $608 to the benefit of thelandlord of the Company’s current building lease. This amount was classified as long-term restricted cash as of September 30, 2016 and 2015.Concentration of Credit Risk and of Significant Customers and SuppliersFinancial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities,accounts receivable and unbilled receivables. The Company has all cash and investment balances at one accredited financial institution, in amounts thatexceed federally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated withcommercial banking relationships.The Company has historically generated all of its revenue from its collaborative research and license agreements as well as a U.S. government contract (seeNote 7). As of September 30, 2016, accounts receivable consisted of amounts due from the Company’s principal collaborator (see Note 7).The Company is completely dependent on third-party manufacturers for product supply for preclinical and clinical research activities in its non-partneredprograms. The Company relies and expects to continue to rely exclusively on several manufacturers to supply it with its requirements for the activepharmaceutical ingredients related to these programs. These research programs would be adversely affected by a significant interruption in the supply of itsactive pharmaceutical ingredients.Fair Value MeasurementsCertain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid totransfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participantson the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservableinputs. A fair value hierarchy is based on three levels of inputs which are used to measure fair value, of which the first two levels are considered observableand the last is considered unobservable: • Level 1—Quoted prices in active markets for identical assets or liabilities. • Level 2—Observable inputs (other than Level 1 quoted prices) such as quoted prices in active markets for similar assets or liabilities, quotedprices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated byobservable market data. • Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assetsor liabilities, including pricing models, discounted cash flow methodologies and similar techniques. F-9Table of ContentsThe Company’s instruments that are carried at fair value are cash equivalents, marketable securities and the warrant and Series 1 nonconvertible preferredstock liabilities. The carrying values of accounts receivable and unbilled receivables, accounts payable and accrued expenses approximate their fair valuedue to the short-term nature of these assets and liabilities.Property and EquipmentProperty and equipment are stated at cost less accumulated depreciation or amortization. Depreciation and amortization expense is recognized using thestraight-line method over the following estimated useful lives: Laboratory and office equipment 5 yearsLeasehold improvements Shorter of life of lease or estimated useful lifePurchased software 3 yearsComputer equipment 3 yearsFurniture 7 yearsExpenditures for repairs and maintenance of assets are charged to expense as incurred. Costs of major additions and betterments are capitalized anddepreciated on a straight-line basis over their useful lives. Upon retirement or sale, the cost and related accumulated depreciation or amortization of assetsdisposed are removed from the accounts and any resulting gain or loss is included in income from operations in the consolidated statements of operations.Impairment of Long-Lived AssetsThe Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicatethat the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment reviewinclude significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes orplanned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company comparesforecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment losswould be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. Theimpairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows. Todate, the Company has not recorded any impairment losses on long-lived assets.Revenue RecognitionThe Company’s revenue has been generated primarily through collaborative research and license agreements. The terms of these agreements contain multipledeliverables, which may include (i) licenses, (ii) research and development activities, and (iii) participation in joint research and development steeringcommittees. The terms of these agreements may include nonrefundable upfront license fees, payments for research and development activities, paymentsbased upon the achievement of certain milestones, and royalty payments based on product sales derived from the collaboration. In all instances, revenue isrecognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, delivery has occurred or the services have beenrendered, collectibility of the resulting receivable is reasonably assured, and the Company has fulfilled its performance obligations under the contract.On October 1, 2011, the Company adopted Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”). Thisguidance, which applies to multiple-element arrangements entered into or materially modified on or after October 1, 2011, amends the criteria for separatingand allocating consideration in a multiple-element arrangement by modifying the fair value requirements for revenue F-10Table of Contentsrecognition and eliminating the use of the residual value method. The selling prices of deliverables under the arrangement may be derived using third-partyevidence (“TPE”) or a best estimate of selling price (“BESP”), if vendor-specific objective evidence (“VSOE”) is not available. The objective of BESP is todetermine the price at which the Company would transact a sale if the element within the license agreement was sold on a standalone basis. EstablishingBESP involves management’s judgment and considers multiple factors, including market conditions and company-specific factors including those factorscontemplated in negotiating the agreements as well as internally developed models that include assumptions related to market opportunity, discounted cashflows, estimated development costs, probability of success, and the time needed to commercialize a product candidate pursuant to the license. In validatingthe Company’s BESP, the Company considers whether changes in key assumptions used to determine the BESP will have a significant effect on theallocation of the arrangement consideration between the multiple deliverables. Deliverables under a multiple-element arrangement are separated intomultiple units if (i) the delivered item has value to the customer on a standalone basis, and (ii) if the arrangement includes a general right of return relative tothe delivered item, delivery or performance of the undelivered item is considered probable and substantially within the control of the Company. Thearrangement consideration that is fixed or determinable at the inception of the arrangement is allocated to the separate units of accounting based on theirrelative selling prices derived using TPE or BESP. The appropriate revenue recognition model is applied to each element, and revenue is accordinglyrecognized as each element is delivered. The Company may exercise significant judgment in determining whether a deliverable is a separate unit ofaccounting. The Company elected to adopt ASU 2009-13 prospectively as of October 1, 2011.In determining the separate units of accounting, the Company evaluates whether the license has standalone value to the collaborator based on considerationof the relevant facts and circumstances for each arrangement. Factors considered in this determination include the research and development capabilities ofthe collaborator and the availability of relevant research expertise in the marketplace. In addition, the Company considers whether or not (i) the collaboratorcan use the license for its intended purpose without the receipt of the remaining deliverables, (ii) the value of the license is dependent on the undelivereditems, and (iii) the collaborator or other vendors can provide the undelivered items.For all periods presented, whenever the Company determines that an element is delivered over a period of time, revenue is recognized using either aproportional performance model or a straight-line model over the period of performance, which is typically the research and development term. Full-timeequivalents (“FTEs”) are typically used as the measure of performance. At each reporting period, the Company reassesses its cumulative measure ofperformance and makes appropriate adjustments, if necessary. The Company recognizes revenue using the proportional performance model whenever theCompany can make reasonably reliable estimates of the level of effort required to complete its performance obligations under an arrangement. Revenuerecognized under the proportional performance model at each reporting period is determined by multiplying the total expected payments under the contract(excluding royalties and payments contingent upon achievement of milestones) by the ratio of the level of effort incurred to date to the estimated total levelof effort required to complete the performance obligations under the arrangement. Revenue is limited to the lesser of the cumulative amount of paymentsreceived or the cumulative amount of revenue earned, as determined using the proportional performance model as of each reporting period. Alternatively, ifthe Company cannot make reasonably reliable estimates of the level of effort required to complete its performance obligations under an arrangement, thenrevenue under the arrangement is recognized on a straight-line basis over the period expected to complete the Company’s performance obligations. If andwhen a contingent milestone payment is earned, the additional consideration to be received is allocated to the separate units of accounting in thearrangement based on their relative selling prices at the inception of the arrangement. Revenue is limited to the lesser of the cumulative amount of paymentsreceived or the cumulative amount of revenue earned, as determined on a straight-line basis as of the period end date. If the Company cannot reasonablyestimate when its performance obligation period ends, then revenue is deferred until the Company can reasonably estimate when the performance obligationperiod ends. F-11Table of ContentsRoyalty revenue is recognized based on contractual terms when reported sales are reliably measurable and collectibility is reasonably assured, provided thatthere are no performance obligations remaining.During the years ended September 30, 2016, 2015 and 2014, the Company also generated revenue from a government contract, under which the Companywas reimbursed for certain allowable costs for the funded project. Revenue from the government contract was recognized when the related service wasperformed. The related costs incurred by the Company under the government contract were included in research and development expenses in theconsolidated statements of operations.Amounts received prior to satisfying all revenue recognition criteria are recorded as deferred revenue in the accompanying consolidated balance sheets.Amounts not expected to be recognized as revenue within the next twelve months of the consolidated balance sheet date are classified as long-term deferredrevenue.In the event that a collaborative research and license agreement is terminated and the Company then has no further performance obligations, the Companyrecognizes as revenue any amounts that had not previously been recorded as revenue but were classified as deferred revenue at the date of such termination.Research and Development CostsResearch and development costs are expensed as incurred. Included in research and development costs are wages, stock-based compensation and benefits ofemployees, third-party license fees and other operational costs related to the Company’s research and development activities, including facility-relatedexpenses and external costs of outside contractors engaged to conduct both preclinical and clinical studies and manufacture quantities of product forpreclinical and clinical studies. The Company also includes in research and development expense the costs to complete the Company’s obligations underresearch collaborations.Patent CostsAll patent-related costs incurred in connection with filing and prosecuting patent applications are recorded as general and administrative expenses asincurred, as recoverability of such expenditures is uncertain.Stock-Based CompensationThe Company measures all stock options and other stock-based awards granted to employees at fair value on the date of grant. The Company uses the Black-Scholes option-pricing model in the valuation of its stock options. The fair value of performance-based awards is based on intrinsic value of the stock on thedate of grant. The Company uses the Monte-Carlo simulation in order to calculate the fair value of the market-based awards. The fair value of options isrecognized as stock-based compensation expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of therespective award. The straight-line method of expense recognition is applied to all awards with service-based and market-based conditions. The Companyrecords stock-based compensation expense related to performance-based awards when the performance-based targets are probable of being achieved. TheCompany classifies stock-based compensation expense in the consolidated statements of operations in the same manner in which the award recipient’spayroll costs are classified.Income TaxesThe Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for theexpected future tax consequences of events that have been recognized in the financial statements or in the Company’s tax returns. Deferred taxes aredetermined based on the difference between the financial reporting and tax basis of assets and liabilities using enacted tax rates in effect in the years in whichthe differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the F-12Table of Contentsprovision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent itbelieves based upon the weight of available evidence, that it is more likely than not that all or a portion of deferred tax assets will not be realized, a valuationallowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxableprofits expected and considering prudent and feasible tax planning strategies.The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to determine theamount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon externalexamination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine theamount of benefit to be recognized in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognizedtax benefits, that are considered appropriate as well as the related net interest and penalties.As discussed in Note 13, the Company adopted ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”) as of September 30,2016, which simplifies the presentation of deferred income taxes by eliminating the need for entities to separate deferred income tax assets and liabilities intocurrent and noncurrent amounts in the consolidated balance sheets.Net Income per ShareBasic net income per common share is computed by dividing the net income by the weighted average number of shares of common stock outstanding for theperiod. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares outstanding for theperiod, including potential dilutive common shares assuming the dilutive effect of outstanding stock options, unvested restricted stock units and outstandingwarrants. Market-based awards are included in diluted earnings per common share to the extent they would have vested if the period end date was the marketcriteria measurement date.Segment DataThe Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. The Company is abiotechnology company focused on discovering and developing small molecule drugs for the treatment of viral infections and liver diseases. Revenue isgenerated exclusively from transactions occurring with partners located in the United States and all assets are held in the United States.Comprehensive IncomeComprehensive income includes net income as well as other changes in stockholders’ equity that result from transactions and economic events other thanthose with stockholders. The Company’s only element of other comprehensive income is unrealized gains and losses on available-for-sale marketablesecurities.Recently Issued Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), whichsupersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognizerevenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods orservices. The FASB has continued to issue accounting standards updates to clarify and provide implementation guidance related to Revenue from Contractswith Customers, including ASU 2016-08, Revenue from Contract with Customers: Principal versus Agent Considerations, ASU 2016-10, Revenue fromContracts with Customers: Identifying Performance Obligations and Licensing, and ASU 2016-12, Revenue from F-13Table of ContentsContracts with Customers: Narrow-Scope Improvements and Practical Expedients. These amendments address a number of areas, including the entity’sidentification of its performance obligations in a contract, collectibility, non-cash consideration, presentation of sales tax and an entity’s evaluation of thenature of its promise to grant a license of intellectual property and whether or not that revenue is recognized over time or at a point in time. These newstandards will be effective for the Company beginning October 1, 2018. The Company is currently evaluating the potential impact that Topic 606 may haveon its financial position and results of operations.In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which will replace the existing guidance in ASC 840, “Leases.” The updatedstandard aims to increase transparency and comparability among organizations by requiring lessees to recognize leased assets and leased liabilities on theconsolidated balance sheets and requiring disclosure of key information about leasing arrangements. This amendment is effective for the Company in thefiscal year beginning October 1, 2019, but early adoption is permissible. The Company is currently evaluating the potential impact that ASU 2016-02 mayhave on its financial position and results of operations.In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which intends tosimplify several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equityor liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications onthe statement of cash flows. This amendment is effective for the Company in the fiscal year beginning October 1, 2017, but early adoption is permissible. TheCompany is currently evaluating the potential impact that ASU 2016-09 may have on its financial position and results of operations.In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (“ASU 2016-13”) that introduces a new methodology for accountingfor credit losses on financial instruments, including available-for-sale debt securities. The guidance establishes a new “expected loss model” that requiresentities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Any expected credit losses are tobe reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. Early adoption is permitted for annual periodsbeginning after December 15, 2018, and interim periods therein. The Company is currently evaluating the potential impact that ASU 2016-13 may have onits financial position and results of operations.In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”) that changes thepresentation of restricted cash and cash equivalents on the statement of cash flows. Restricted cash and restricted cash equivalents will be included with cashand cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This amendment iseffective for the Company in the fiscal year beginning October 1, 2018, but early adoption is permissible. The Company is currently evaluating the potentialimpact that ASU 2016-18 may have on its financial position and statement of cash flows.Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future dateare not expected to have a material impact on the Company’s consolidated financial statements upon adoption. F-14Table of Contents3. Fair Value of Financial Assets and LiabilitiesThe following tables present information about the Company’s financial assets and liabilities that were subject to fair value measurement on a recurring basisas of September 30, 2016 and 2015 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value: Fair Value Measurements at September 30, 2016 Using: Level 1 Level 2 Level 3 Total Assets: U.S. Treasury notes $69,608 $— $— $69,608 Cash equivalents 15,295 — — 15,295 Corporate bonds — 76,073 — 76,073 Commercial paper — 49,900 — 49,900 U.S. Agency bonds — 30,045 — 30,045 $84,903 $156,018 $— $240,921 Liabilities: Warrant liability $— $— $1,251 $1,251 Series 1 nonconvertible preferred stock — — 159 159 $— $— $1,410 $1,410 Fair Value Measurements at September 30, 2015 Using: Level 1 Level 2 Level 3 Total Assets: Cash equivalents $21,327 $— $— $21,327 Corporate bonds — 151,020 — 151,020 U.S. Agency bonds — 36,697 — 36,697 $21,327 $187,717 $— $209,044 Liabilities: Warrant liability $— $— $1,276 $1,276 Series 1 nonconvertible preferred stock — — 163 163 $— $— $1,439 $1,439 Cash equivalents at September 30, 2016 and 2015 consist of money market funds.During the years ended September 30, 2016, 2015, and 2014, there were no transfers between Level 1, Level 2 and Level 3.As of September 30, 2016 and 2015, the warrant liability was comprised of the value of the warrants for the purchase of Series 1 nonconvertible preferredstock measured at fair value. As of September 30, 2016 and 2015, the outstanding Series 1 nonconvertible preferred stock was also measured at fair value. Thefair values of these instruments were based on significant inputs not observable in the market, which represented a Level 3 measurement within the fair valuehierarchy. The Company utilized a probability-weighted valuation model which takes into consideration various outcomes that may require the Company totransfer assets upon exercise. Changes in the fair values of the warrant liability and Series 1 nonconvertible preferred stock are recognized in other income(expense), net, in the consolidated statements of operations. F-15Table of ContentsThe recurring Level 3 fair value measurements of the Company’s warrant liability and Series 1 nonconvertible preferred stock using probability-weighteddiscounted cash flow include the following significant unobservable inputs: Range (Weighted Average)September 30, Unobservable Input 2016 2015Warrant liability and Series 1nonconvertible preferred stock Probabilities of payout Periods in which payout is expected to occur Discount rate 0% - 60% 2017 - 2018 4.50% 5% - 60% 2016 - 2017 4.25% The following table provides a rollforward of the aggregate fair values of the Company’s warrants for the purchase of Series 1 nonconvertible preferred stockand the outstanding Series 1 nonconvertible preferred stock for which fair value is determined by Level 3 inputs: WarrantLiability Series 1NonconvertiblePreferredStock Balance, September 30, 2013 $1,620 $— Warrants exercised (206) — Series 1 nonconvertible preferred stock issued — 206 Increase (decrease) in fair value 170 (4) Balance, September 30, 2014 $1,584 $202 Decrease in fair value (308) (39) Balance, September 30, 2015 $1,276 $163 Decrease in fair value (25) (4) Balance, September 30, 2016 $1,251 $159 4. Marketable SecuritiesAs of September 30, 2016 and 2015, the fair value of available-for-sale marketable securities, by type of security, was as follows: September 30, 2016 Amortized Cost Gross UnrealizedGains Gross UnrealizedLosses Fair Value Corporate bonds $76,077 $27 $(31) $76,073 U.S. Treasury notes 69,579 38 (9) 69,608 Commercial paper 49,900 — — 49,900 U.S. Agency bonds 30,040 15 (10) 30,045 $225,596 $80 $(50) $225,626 September 30, 2015 Amortized Cost Gross UnrealizedGains Gross UnrealizedLosses Fair Value Corporate bonds $151,012 $77 $(69) $151,020 U.S. Agency bonds 36,652 45 — 36,697 $187,664 $122 $(69) $187,717 F-16Table of ContentsAs of September 30, 2016 and 2015, marketable securities consisted of investments that mature within one year, with the exception of certain corporatebonds, U.S. Treasury notes and U.S. Agency bonds, which have maturities between one and three years and an aggregate fair value of $32,119 and $64,238,respectively.5. Property and EquipmentProperty and equipment consisted of the following as of September 30, 2016 and 2015: September 30, 2016 2015 Laboratory and office equipment $7,440 $5,907 Leasehold improvements 3,715 1,290 Purchased software 705 443 Furniture 551 496 Construction in progress 504 1,889 Computer equipment 187 137 13,102 10,162 Less: Accumulated depreciation and amortization (5,098) (4,276) $8,004 $5,886 Depreciation and amortization expense for property and equipment, including assets acquired under capital leases, was $1,661, $639 and $352 for the yearsended September 30, 2016, 2015, and 2014, respectively.6. Accrued Expenses, Other Current Liabilities and Other Long-Term LiabilitiesAccrued expenses, other current liabilities and other long-term liabilities consisted of the following as of September 30, 2016 and 2015: September 30, 2016 2015 Accrued expenses and other current liabilities: Accrued payroll and related expenses $2,384 $1,622 Accrued preclinical and clinical expenses 899 237 Accrued vendor manufacturing 441 18 Accrued professional fees 393 338 Capital lease obligation 73 69 Accrued fixed assets 2 1,307 Accrued other 320 371 $4,512 $3,962 Other long-term liabilities: Uncertain tax positions $745 $448 Accrued rent expense 696 628 Capital lease obligation 458 529 Asset retirement obligation 143 108 $2,042 $1,713 7. Collaboration AgreementsAbbVie CollaborationOn November 27, 2006, the Company entered into a Collaborative Development and License Agreement (the “AbbVie Agreement”) with AbbottLaboratories to identify, develop and commercialize HCV NS3 and NS3/4A F-17Table of Contentsprotease inhibitor compounds, including paritaprevir and glecaprevir (ABT-493). The agreement was assigned by Abbott to AbbVie Inc. on January 1, 2013in connection with Abbott’s transfer of its research-based pharmaceuticals business to AbbVie.Under the terms of the AbbVie Agreement, as amended, AbbVie paid the Company upfront license payments and FTE reimbursements to fund researchactivities. The Company is also eligible to receive milestone payments for the successful development by AbbVie of one or more HCV compounds, as well asannually tiered, per-product royalties on the portion of AbbVie’s net sales of its HCV treatment regimens allocated to the protease inhibitor product.The Company determined that the deliverables under the AbbVie Agreement included (i) the non-exclusive, royalty-free, worldwide research license and theexclusive, royalty-bearing development and commercialization license, (ii) the research services, and (iii) a commitment to participate on a steeringcommittee, all of which were to be delivered over a three-year period. The Company concluded that the license did not have standalone value as it wasdependent, in part, upon the Company’s continuing involvement in the HCV protease inhibitor research and its involvement in the joint steering committee.Additionally, the undelivered items, including the Company’s participation in the joint steering committee, which was considered participatory due to itsdecision making responsibilities, and the research services, did not have VSOE or VOE of fair value. Therefore, the license, the research services, and the jointsteering committee participation were treated as a single unit of accounting. Accordingly, all amounts received were deferred, and revenue was recognizedusing the proportional performance model over the period during which the Company performed research services in connection with the AbbVie Agreement,as amended.Subsequent to the research and evaluation period, which ended in June 2011, all decisions related to the development, commercialization and marketinghave been made by AbbVie. The Company has the right to continue to attend the joint steering committee meetings to monitor the development andmarketing plans; however, the Company has no decision-making rights. As such, the joint steering committee commitment became protective in nature as ofJune 16, 2011.During the years ended September 30, 2016, 2015, and 2014, the Company received $30,000, $125,000 and $40,000, respectively, in milestone paymentsunder the AbbVie Agreement as a result of AbbVie’s commercialization and regulatory approvals and regulatory filings for a regimen that includedparitaprevir. From commencement of the collaboration through September 30, 2016, the Company received a total of $394,000 under the AbbVie Agreementconsisting of an upfront license payment, research funding, milestone payments, royalties and preferred stock financing. As of September 30, 2016, theCompany is eligible to receive additional milestone payments of up to $80,000 upon AbbVie’s achievement of similar commercialization regulatoryapproval milestones in the U.S. and other major world markets for commercialization regulatory approvals of glecaprevir. The Company is also eligible toreceive annually tiered, per-product royalties ranging from the low double digits up to twenty percent, or on a blended basis from the low double digits up tothe high teens, on the portion of AbbVie’s net sales of its HCV treatment regimens allocated to glecaprevir. Under the terms of the agreement, as amended inOctober 2014, 30% of net sales of each 3-DAA regimen containing paritaprevir, and 45% of net sales of each 2-DAA regimen containing paritaprevir, will beallocated to paritaprevir. In the case of glecaprevir, 50% of AbbVie’s net sales of this 2-DAA regimen would be allocated to glecaprevir. The Company beganearning and receiving royalty payments on net sales of regimens containing paritaprevir during the year ended September 30, 2015.Since the Company completed all its performance obligations under the AbbVie Agreement by the end of fiscal 2011, any milestone payments received sincethen have been and will be recognized as revenue when achieved by AbbVie.Royalties owed to the Company under the agreement can be reduced by AbbVie in certain circumstances, including (i) if AbbVie exercises its right to licenseor otherwise acquire rights to intellectual property controlled F-18Table of Contentsby a third party where a product could not be legally developed or commercialized in a country without the third-party intellectual property right, (ii) where aproduct developed under the collaboration agreement is sold in a country and not covered by a valid patent claim in such country, and (iii) where sales of ageneric product are equal to at least a specified percentage of AbbVie’s market share of a product in a country.AbbVie’s obligation to pay royalties on a product developed under the agreement expires on a country-by-country basis upon the later of (i) the date ofexpiration of the last of the licensed patents with a valid claim covering the product in the applicable country, or (ii) ten years after the first commercial saleof the product in the applicable country.Subject to certain exceptions, a party’s rights and obligations under the agreement continue until (i) such time as AbbVie is no longer developing a productcandidate or (ii) if, as of the time AbbVie is no longer developing any product candidates, AbbVie is commercializing any other protease inhibitor product,such time as all royalty terms for all covered products have ended. Accordingly, the final expiration date of the agreement is currently indeterminable.Either party may terminate the agreement for cause in the event of a material breach, subject to prior notice and the opportunity to cure, or in the event of theother party’s bankruptcy. Additionally, AbbVie may terminate the agreement for any reason upon specified prior notice.If the Company terminates the agreement for cause or AbbVie terminates without cause, any licenses and other rights granted to AbbVie will terminate andAbbVie will be deemed to have granted the Company (i) a non-exclusive, perpetual, fully-paid, worldwide, royalty-free license, with the right to sublicense,under AbbVie’s intellectual property used in any product candidate, and (ii) an exclusive (even as to AbbVie), perpetual, fully-paid, worldwide, royalty-freelicense, with the right to sublicense, under AbbVie’s interest in any joint intellectual property rights to develop product candidates resulting from coveredcompounds and to commercialize any products derived from such compounds. Upon the Company’s request, AbbVie will also transfer to the Company allright, title and interest in any related product trademarks, regulatory filings and clinical trials.If AbbVie terminates the agreement for the Company’s uncured breach, the milestone and royalty payments payable by AbbVie may be reduced, the licensesgranted to AbbVie will remain in place, the Company will be deemed to have granted AbbVie an exclusive license under the Company’s interest in jointintellectual property, AbbVie will continue to have the right to commercialize any covered products, and all rights and licenses granted to the Company byAbbVie will terminate.NIAID ContractOn September 30, 2011, the Company entered into a contract with the National Institute of Allergy and Infectious Diseases (“NIAID”), a division of theNational Institutes of Health (“NIH”), providing development funding to the Company for the preclinical and clinical development of a bridged bicyclicantibiotic. The contract was completed in August 2015 upon the Company’s delivery of the study report for the Phase 1 clinical study.The Company recognized revenue under this contract as development services were performed in accordance with the funding agreement. During the yearsended September 30, 2016, 2015, and 2014, the Company recognized revenue of $576, $1,803 and $7,741, respectively, under this contract. The Companyreceived aggregate payments of $20,637 under the NIAID contract from its commencement through January 31, 2016.8. Stockholders’ EquityOn March 26, 2013, the Company completed an initial public offering of its common stock, which resulted in the sale of 4,600,000 shares. The Companyreceived net proceeds from the IPO of $59,892 based upon the price of F-19Table of Contents$14.00 per share and after deducting underwriting discounts and commissions paid by the Company. Upon the closing of the initial public offering, alloutstanding shares of the Company’s redeemable convertible preferred stock and convertible preferred stock were converted into 11,656,875 shares ofcommon stock.Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders areentitled to receive such dividends as may be declared by the board of directors, if any.The Company retired all 208,816 shares of treasury stock effective September 30, 2015, which resulted in a decrease in the same number of issued shares ofcommon stock.9. Series 1 Nonconvertible Preferred Stock and WarrantsThe Company’s Certificate of Incorporation authorizes the issuance of up to 1,999,989 shares of Series 1 nonconvertible preferred stock at a par value of$0.01 per share. Holders of Series 1 nonconvertible preferred stock are not entitled to receive dividends. In the event of any liquidation, deemed liquidation,dissolution or winding up of the Company, the Series 1 nonconvertible preferred stockholders are entitled to receive in preference to all other stockholders,an amount equal to $1.00 per share, adjusted for any stock dividends, stock splits or reclassifications. Series 1 nonconvertible preferred stockholders will notbe entitled to vote unless required by the Company pursuant to the laws of the State of Delaware. The Company may redeem the Series 1 nonconvertiblepreferred stock with the approval of the holders of a majority of the outstanding shares of Series 1 nonconvertible preferred stock at a redemption price of$1.00 per share. The Company must redeem the stock within 60 days of such election. Shares that are redeemed will be retired or canceled and not reissued bythe Company.In October and November 2010, a total of 1,999,989 warrants to purchase Series 1 nonconvertible preferred stock were issued. These warrants expire onOctober 4, 2017. As these warrants are free-standing financial instruments that may require the Company to transfer assets upon exercise, up to a maximum of$2,000, these warrants are classified as liabilities on the Company’s consolidated balance sheet.The following table summarizes the Company’s outstanding warrants: Series 1NonconvertiblePreferredStock WarrantsExercisable WeightedAverageExercisePrice Outstanding, as of September 30, 2013 1,999,989 $0.01 Granted — — Expired — — Exercised (225,408) $0.01 Outstanding, as of September 30, 2014 1,774,581 $0.01 Granted — — Expired — — Exercised — — Outstanding, as of September 30, 2015 1,774,581 $0.01 Granted — — Expired — — Exercised — — Outstanding, as of September 30, 2016 1,774,581 $0.01 F-20Table of ContentsFor the years ended September 30, 2016, 2015, and 2014, the remeasurement of the warrants and Series 1 nonconvertible preferred stock resulted in income(expense) recorded in the consolidated statements of operations of $29, $347, and $(166), respectively. As of September 30, 2016 and 2015, the total fairvalue of the Series 1 nonconvertible preferred stock was $159 and $163, respectively. As of September 30, 2016 and 2015, the total fair value of the Series 1nonconvertible preferred stock warrants was $1,251 and $1,276, respectively.10. Stock-Based AwardsThe Company’s 2012 Equity Incentive Plan (the “2012 Plan”) permits the Company to sell or issue awards of common stock or restricted common stock or togrant awards of incentive stock options or nonqualified stock options for the purchase of common stock, restricted stock units, performance units, stockappreciation rights or other cash incentive awards, to employees, members of the board of directors and consultants of the Company. The number of shares ofcommon stock that may be issued under the 2012 Plan is subject to increase by the number of shares forfeited under any options terminated and not exercisedunder the 2012 Plan or a predecessor plan, known as the 1995 Equity Incentive Plan, as well as by the number of shares added on the first day of each fiscalyear, which is the lowest amount among the following: (i) 3% of the Company’s outstanding shares of common stock as of that date, (ii) 2,088,167 shares ofcommon stock, or (iii) an amount determined by the Compensation Committee of the Board of Directors. On October 1, 2015, the number of shares ofcommon stock that might be issued under the 2012 Plan was increased by 561,505 shares. As of September 30, 2016, 487,906 shares remained available forfuture award.The 2012 Plan replaces and is the successor to the 1995 Equity Incentive Plan (the “1995 Plan”). The 1995 Plan provided for the Company to sell or issueawards of common stock or restricted common stock, or to grant awards of incentive stock options or nonqualified stock options for the purchase of commonstock, to employees, members of the board of directors and consultants of the Company. Sales, issuances or grants of shares entitle the holder to purchasecommon stock from the Company, for a specified exercise price, during a period specified by the applicable equity award agreement. Upon the closing of theCompany’s initial public offering, all remaining shares reserved for issuance under the 1995 Plan were transferred to the 2012 Plan and no further awards wereor will be made under the 1995 Plan.Under the Company’s Employee Stock Purchase Plan (“ESPP”) a total of 185,614 shares of common stock are reserved for issuance. As of September 30,2016, the Company had not commenced any offering under the ESPP and no plan shares have been issued.The Company applies the fair value recognition provisions for all stock-based awards granted or modified. In the case of service-based awards, thecompensation cost is recorded over the requisite service period of the award on the straight-line method based on the grant-date fair value. The requisiteservice period for service-based option awards is generally four years. Options granted under the 2012 Plan to employees generally vest between one and fouryears and expire after ten years.Stock Option ValuationThe fair value of each stock option award is estimated on the date of grant using the Black-Scholes option-pricing model. The Company estimates expectedvolatility based on the historical volatility of publicly traded peer companies. The Company expects to continue to do so until such time as adequatehistorical data regarding the volatility of the Company’s traded stock price following our March 2013 IPO is available. The expected term of the Company’soptions has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The Company expects to continue to utilizethis method until such time as we have adequate historical data regarding our employee exercise patterns. The risk-free interest rate is determined byreference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award.The expected dividend yield is 0 based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in theforeseeable F-21Table of Contentsfuture. The relevant data used to determine the value of the stock option awards are as follows, presented on a weighted average basis: Years Ended September 30, 2016 2015 2014 Risk-free interest rate 1.77% 1.85% 1.89% Expected term (in years) 6.10 6.03 6.06 Expected volatility 70% 74% 75% Expected dividends 0% 0% 0% The Company recognizes stock-based compensation expense for only the portion of awards that are expected to vest. In developing a forfeiture rate estimate,the Company has considered its historical experience to estimate pre-vesting forfeitures for service-based awards. The impact of a forfeiture rate adjustmentwill be recognized in full in the period of adjustment, and if the actual forfeiture rate is materially different from the Company’s estimate, the Company maybe required to record adjustments to its stock-based compensation expense in future periods.As required by the 1995 Plan and the 2012 Plan, the exercise price for awards granted is not to be less than the fair value of common shares as estimated bythe Company as of the date of grant.The following table summarizes stock option activity, including aggregate intrinsic value for the year ended September 30, 2016: SharesIssuableUnderOptions WeightedAverageExercisePrice WeightedAverageRemainingContractualTermin years AggregateIntrinsicValue Outstanding as of September 30, 2015 1,752,010 $23.76 7.2 $25,093 Granted 509,680 30.31 Exercised (319,076) 3.22 Forfeited (47,158) 33.04 Outstanding, September 30, 2016 1,895,456 $28.75 7.6 $7,369 Options vested and expected to vest as of September 30, 2016 1,772,221 $29.65 7.6 $5,958 Options exercisable as of September 30, 2016 957,141 $25.52 6.9 $5,727 The aggregate intrinsic value of options is calculated as the difference between the exercise price of the options and the fair value of the Company’s commonstock. The following table summarizes additional exercise and grant date information: Years Ended September 30, 2016 2015 2014 Aggregate intrinsic value of stock options exercised $7,705 $4,827 $3,219 Proceeds from stock options exercised $1,026 $726 $1,054 Weighted average grant date fair value of options granted (per share) $19.12 $27.77 $19.98 Performance-Based OptionsIn March 2013, the Company granted to certain executives 167,052 options that vest upon the achievement of certain performance-based targets. Theaggregate grant date fair value of these options was $2,479. During the F-22Table of Contentsyears ended September 30, 2016 and 2014, certain performance-based targets were achieved and the Company recorded stock-based compensation expenseof $620 and $206, respectively, related to achievement of those targets. No stock-based compensation expense related to these options was recognizedduring the year ended September 30, 2015, as none of the performance-based targets was deemed to have become probable of being achieved in that period.Market and Performance-Based Stock Unit AwardsThe Company awards both performance share units, or PSUs, and relative total shareholder return units, or rTSRUs, to its executive officers. The number ofunits represents the target number of shares of common stock that may be earned; however, the actual number of shares that may be earned ranges from 0% to200% of the target number.The PSUs will vest and result in issuance, or settlement, of common shares for each recipient, based upon the recipient’s continued employment with theCompany and the Company’s achievement of specified research and development milestones. The requisite service period of the PSUs is generally 2 years.During the years ended September 30, 2016 and 2015, the Company recorded no compensation expense related to the PSU awards as none of theperformance-based targets was probable of being achieved. There were no performance share units granted during the year ended September 30, 2014.The rTSRUs will vest and result in the issuance of common stock based upon the recipient’s continuing employment with the Company and the relativeranking of the total shareholder return, or TSR, of the Company’s common stock in relation to the TSR of the component companies in the NASDAQ BiotechIndex over a two-year period based on a comparison of average closing stock prices in specified periods noted in the award agreement. The number of market-based rTSRUs awarded represents the target number of shares of common stock that may be earned; however, the actual number of shares that may be earnedranges from 0% to 200% of the target number. The Company used a Monte Carlo simulation model to estimate that the grant-date fair value of the rTSRUs.Assumptions and estimates utilized in the calculation of the fair value of the rTSRUs include the risk-free interest rate, dividend yield, expected volatilitybased on the historical volatility of publicly traded peer companies and the remaining performance period of the award. The table below sets forth theweighted average grant date fair value assumptions used to value the rTSRUs: Years EndedSeptember 30, 2016 2015 Risk-free interest rate 0.94% 0.61% Dividend yield 0% 0% Expected volatility 65% 56% Remaining performance period (years) 1.93 1.86 Estimated fair value per share of rTSRUs granted $35.70 $26.51 The following table summarizes restricted stock unit activity for the year ended September 30, 2016 based on a target achievement of 100%: PerformanceShare Units WeightedAverage GrantDate FairValue Relative TotalShareholderReturn Units WeightedAverageGrant DateFair Value Unvested at September 30, 2015 20,900 $35.90 20,900 $26.51 Granted 27,625 $32.04 27,625 $35.70 Vested — $— — $— Cancelled — $— — $— Unvested at September 30, 2016 48,525 $33.70 48,525 $31.74 F-23Table of ContentsStock-Based Compensation ExpenseThe Company recorded stock-based compensation expense for the years ended September 30, 2016, 2015, and 2014 in the following expense categories: Years Ended September 30, 2016 2015 2014 Research and development $2,882 $1,644 $762 General and administrative 6,472 4,194 1,920 $9,354 $5,838 $2,682 As of September 30, 2016, the Company had an aggregate of $22,261 of unrecognized stock-based compensation cost, which is expected to be recognizedover a weighted average period of 2.2 years.11. Net Income Per ShareBasic and diluted net income per common share was calculated as follows for the years ended September 30, 2016, 2015, and 2014: Years Ended September 30, 2016 2015 2014 Basic net income per common share: Numerator: Net income $21,666 $78,992 $34,438 Denominator: Weighted average common shares outstanding—basic 18,929 18,673 18,355 Net income per common share—basic $1.14 $4.23 $1.88 Diluted net income per common share: Numerator: Net income $21,666 $78,992 $34,438 Denominator: Weighted average common shares outstanding—basic 18,929 18,673 18,355 Dilutive effect of common stock equivalents 295 622 830 Weighted average common shares outstanding—diluted 19,224 19,295 19,185 Net income per common share—diluted $1.13 $4.09 $1.80 Antidilutive common stock equivalents excluded from above 1,475 605 330 The impact of certain common stock equivalents were excluded from the computation of diluted net income per common share attributable to commonstockholders for the years ended September 30, 2016, 2015, and 2014, because those options had an anti-dilutive impact due to the assumed proceeds pershare using the treasury stock method being greater than the average fair value of the Company’s common shares for those periods. F-24Table of ContentsFor the years ended September 30, 2016, 2015, and 2014, the following weighted average shares were excluded from the calculation of diluted net incomeper common share as these awards contain performance and market conditions that would not have been achieved at the reporting date had the measurementperiod ended on that date: Years Ended September 30, 2016 2015 2014 Unvested restricted stock units 84,672 25,424 — Unvested performance-based options 140,210 153,139 157,027 12. Commitments and ContingenciesLeasesThe Company had an office and laboratory lease that was effective from fiscal 2011 to 2018. During the year ended September 30, 2015, the Companyamended the lease to expand the rented space and extend the lease term through September 2022. Payment escalations specified in the lease agreement, asamended, are accrued such that rent expense is recognized on a straight-line basis over the term of occupancy. For the years ended September 30, 2016, 2015,and 2014, the Company recognized rent expense of $2,025, $1,326, and $948, respectively, in the consolidated statements of operations.Future minimum lease payments as of September 30, 2016 are as follows: Years Ended September 30, OperatingLeases CapitalLeases 2017 $2,010 $73 2018 2,062 79 2019 2,117 86 2020 2,172 93 2021 2,229 101 Thereafter 2,093 99 Total $12,683 $531 In connection with the current lease, the Company has an outstanding letter of credit in the amount of $608 as of September 30, 2016 and 2015,collateralized by a money market account. As of September 30, 2016 and 2015 the Company classified the money market account as restricted cash.The amended lease also included a $598 tenant improvement allowance from the landlord, which was accounted for as a capital lease obligation.Intellectual Property LicensesThe Company has a non-exclusive intellectual property license agreement with a licensor of research technology. Under the 2012 agreement, the Companywas required to pay the third party licensor an upfront license fee and additional fees up to the third anniversary of the agreement. In addition, the Companyis required to pay (1) annual maintenance fees for each year that the agreement remains in effect, commencing on the first anniversary of the agreement, inorder to maintain the right to use the license, and (2) a one-time fee in each circumstance in which the Company provides the licensed intellectual property toone of its collaborators with the prior consent of the licensor. During the years ended September 30, 2016, 2015, and 2014, the Company paid $120, $200and $250, respectively, under the agreement.During the year ended September 30, 2013, the Company amended an existing license agreement to extend rights to patents previously licensed for one of itsprograms for use in its HCV research. Under the license, the Company is obligated to pay milestones totaling up to $5,000 plus low single-digit royalties, forthe development F-25Table of Contentsand regulatory approval of each HCV product outside of the Company’s collaboration with AbbVie and any other collaboration it may enter into in thefuture with a partner that has already licensed these patents. During the year ended September 30, 2016, the Company paid a $500 milestone payment underthis amended agreement as a result of the Company’s filing to commence clinical development of its cyclophilin inhibitor candidate which was recorded as aresearch and development expense. There were no such payments made during the years ended September 30, 2015 and 2014.Litigation and Contingencies Related to Use of Intellectual PropertyFrom time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Companycurrently is not a party to any threatened or pending litigation. However, third parties might allege that the Company or its collaborators are infringing theirpatent rights or that the Company is otherwise violating their intellectual property rights. Such third parties may resort to litigation against the Company orits collaborators, which the Company has agreed to indemnify. With respect to some of these patents, the Company expects that it will be required to obtainlicenses and could be required to pay license fees or royalties, or both. These licenses may not be available on acceptable terms, or at all. A costly license, orinability to obtain a necessary license, would have a material adverse effect on the Company’s financial condition, results of operations or cash flows. TheCompany accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.Indemnification AgreementsIn the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners,and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements, from services to be provided bythe Company, or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreementswith members of its board of directors that will require the Company, among other things, to indemnify them against certain liabilities that may arise byreason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make underthese indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnifications.In addition, the Company maintains officers and directors insurance coverage. The Company does not believe that the outcome of any claims underindemnification arrangements will have a material effect on its financial position, results of operations or cash flows, and it has not accrued any liabilitiesrelated to such obligations in its financial statements as of September 30, 2016 and 2015.13. Income TaxesIncome before income taxes for all periods presented is from domestic operations, which are the Company’s only operations. During the years endedSeptember 30, 2016, 2015, and 2014, the Company recorded an income tax (expense) benefit as follows: Years Ended September 30, 2016 2015 2014 Current income tax (expense) benefit: Federal $(12,233) $(35,040) $— State (956) (2,172) (151) Deferred income tax (expense) benefit: Federal 2,136 (7,371) 13,048 State 159 (1,880) 2,273 $(10,894) $(46,463) $15,170 F-26Table of ContentsFor the years ended September 30, 2016 and 2015, the Company recorded an income tax provision of $(10,894) and $(46,463), respectively. During fiscal2014, the Company reassessed the need for a valuation allowance against its deferred tax assets. The Company concluded from the reassessment that it wasmore likely than not that the Company would be able to realize its deferred tax assets primarily as a result of recent profitability and forecasted future profitsresulting from future expected milestone payments and on-going royalty payments from its AbbVie collaboration. Accordingly, the Company released itsvaluation allowance of $22,892 in fiscal 2014.The effective tax rate for the year ended September 30, 2016 was 33.5% and differs from the federal statutory rate of 35.0% primarily due to reinstatement ofthe federal research and development tax credits which are deductible for tax purposes and included in the Company’s annual effective tax rate.The effective tax rate for the year ended September 30, 2015 was 37.0% and differs from the federal statutory rate of 35.0% primarily due to state incometaxes, changes in estimates related to research and development tax credits for fiscal years prior to 2015, and certain expenditures which are permanently notdeductible for tax purposes.The effective tax rate benefit for the year ended September 30, 2014 was (78.7%) and differs from the federal statutory rate of 35.0% primarily due to a changein estimate as to the Company’s ability to realize the benefits of its net operating loss carry-forwards and research and development tax credits resulting in areduction of the Company’s valuation allowance against deferred tax assets in the amount of $22,892, as well as changes in estimates related to the fiscal2014 research and development tax credits, and certain expenditures which are permanently not deductible for tax purposes.A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows: Years Ended September 30, 2016 2015 2014 Federal statutory income tax rate 35.0% 35.0% 35.0% State taxes, net of federal benefit 2.7 2.6 5.5 Federal research and development tax credit (3.8) (0.1) (0.5) Change in deferred tax asset valuation allowance — — (118.8) Change in statutory rate — 0.3 (2.1) Other (0.4) (0.8) 2.2 Effective income tax rate 33.5% 37.0% (78.7%) In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which simplifies the presentationof deferred income taxes by eliminating the need for entities to separate deferred income tax assets and liabilities into current and noncurrent amounts in theconsolidated balance sheets. The Company adopted this guidance as of September 30, 2016. In accordance with ASU 2015-17, the Company reclassified$1.7 million of deferred tax assets classified as current as of September 30, 2016 to noncurrent. As the Company adopted this guidance on a prospective basis,the Company did not retrospectively reclassify the prior year current deferred tax asset balance to long-term in the consolidated balance sheet. F-27Table of ContentsNet deferred tax assets as of September 30, 2016 and 2015 consisted of the following: September 30, 2016 2015 Deferred tax assets: Capitalized research and development expenses $2,052 $2,903 Share-based compensation 4,919 2,129 Other temporary differences 1,498 1,243 Total deferred tax assets 8,469 6,275 Valuation allowance — — Net deferred tax assets 8,469 6,275 Deferred tax liabilities: Depreciation (68) (168) Unrealized gain (loss) (11) (20) Total deferred tax liabilities (79) (188) Net deferred income tax assets (liabilities) $8,390 $6,087 During the year ended September 30, 2016, the Company utilized all remaining federal and state net operating loss carryforwards and all federal and stateresearch and development tax credits generated during fiscal 2015. During the year ended September 30, 2015, the Company utilized $0 and $8,433 offederal and state net operating loss carryforwards, respectively generated during fiscal 2014. During the year ended September 30, 2015, the Company alsoutilized $4,481 and $2,214 of federal and state research and development tax credit and other credit carryforwards, respectively, generated during 2014.The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subjectto examination by federal and state jurisdictions, where applicable. There are currently no pending income tax examinations. The Company’s tax years arestill open under statute from 2012 to the present. Earlier years may be examined to the extent that tax credit or net operating loss carryforwards are used infuture periods.Uncertain tax positions represent tax positions for which reserves have been established. The Company’s policy is to record interest and penalties related touncertain tax positions as part of its income tax provision. A reconciliation of the beginning and ending amount of uncertain tax positions is summarized asfollows: September 30, 2016 2015 Beginning Balance $448 $— Additions based on tax positions for the current period 294 324 Additions based on tax positions for prior periods 16 124 Reductions for tax positions of prior periods (13) — Ending Balance $745 $448 14. 401(k) PlanThe Company has a 401(k) plan. This plan covers substantially all employees who meet minimum age and service requirements. During the years endedSeptember 30, 2016, 2015, and 2014, the Company recognized $513, $382 and $180, respectively, of expense related to its contributions to this plan. F-28Table of Contents15. Selected Quarterly Financial Data (unaudited)Quarterly financial information for fiscal 2016 and 2015 is presented in the following table: 2016 Quarter Ended December 31, 2015 March 31, 2016 June 30, 2016 September 30, 2016 Revenue(1) $48,445 $13,004 $13,978 $12,841 Operating expenses 12,851 13,569 15,067 15,940 Other income (expense), net 329 472 447 471 Income tax (expense) benefit (9,734) (1,552) (434) 826 Net income (loss) 26,189 (1,645) (1,076) (1,802) Net income (loss) per common share—basic $1.39 $(0.09) $(0.06) $(0.09) Net income (loss) per common share—diluted $1.37 $(0.09) $(0.06) $(0.09) 2015 Quarter Ended December 31, 2014 March 31, 2015 June 30, 2015 September 30, 2015 Revenue(2) $77,498 $57,367 $11,599 $14,416 Operating expenses 7,288 8,806 9,896 10,742 Other income (expense), net 301 210 287 509 Income tax (expense) benefit (28,502) (20,018) 428 1,629 Net income 42,009 28,753 2,418 5,812 Net income per common share—basic $2.26 $1.54 $0.13 $0.30 Net income per common share—diluted $2.18 $1.49 $0.13 $0.29 (1)During the first quarter of 2016, the Company recognized $30.0 million in milestone revenue from AbbVie upon achievement of commercializationregulatory approval of AbbVie’s paritaprevir-containing regimen in Japan.(2)During the first quarter of 2015, the Company recognized $75.0 million in milestone revenue from AbbVie upon achievement of commercializationregulatory approval of AbbVie’s paritaprevir-containing regimen in the U.S. During the second quarter of 2015, the Company recognized $50.0million in milestone revenue from AbbVie upon achievement of commercialization regulatory approval of AbbVie’s paritaprevir-containing regimenin Europe. F-29Exhibit 21.1Enanta Pharmaceuticals, Inc.Subsidiaries of the Company NAME PARENT STATE OR COUNTRY OF INCORPORATIONEnanta Pharmaceuticals Security Corporation Enanta Pharmaceuticals, Inc. MassachusettsExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-189217, 333-192935, 333-202257 and No. 333-209542) of Enanta Pharmaceuticals, Inc. of our report dated December 9, 2016 relating to the financial statements, which appears in this Form 10-K./s/ PricewaterhouseCoopers LLPBoston, MassachusettsDecember 9, 2016Exhibit 31.1Certification Pursuant to Section 240.13a-14 or 240.15d-14of the Securities Exchange Act of 1934, as amendedI, Jay R. Luly, certify that: 1.I have reviewed this annual report on Form 10-K of Enanta Pharmaceuticals, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial 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 inExchange 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)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, 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 theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: December 9, 2016 /s/ Jay R. Luly, Ph.D.Jay R. Luly, Ph.D.Chief Executive OfficerExhibit 31.2Certification Pursuant to Section 240.13a-14 or 240.15d-14of the Securities Exchange Act of 1934, as amendedI, Paul J. Mellett, certify that: 1.I have reviewed this annual report on Form 10-K of Enanta Pharmaceuticals, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial 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 inExchange 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)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, 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 theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: December 9, 2016 /s/ Paul J. MellettPaul J. MellettChief Financial OfficerExhibit 32.1Certification of Periodic Financial ReportPursuant to 18 U.S.C. Section 1350as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Each of the undersigned officers of Enanta Pharmaceuticals, Inc. (the “Company”) certifies, to his knowledge and solely for the purposes of 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of the Company for the yearended September 30, 2016 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that informationcontained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Enanta.Dated: December 9, 2016 /s/ Jay R. Luly, Ph.D.Jay R. Luly, Ph.D.Chief Executive OfficerDated: December 9, 2016 /s/ Paul J. MellettPaul J. MellettChief Financial Officer

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