Evelo Biosciences, Inc.
2019 Annual Report
April 27, 2020
Dear Stockholders,
Our vision and strategy. Our vision has consistently been to develop a new profile of medicines that are broadly
applicable, effective, safe, convenient to take and affordable. This profile is enabled by the newly uncovered biology of
the small intestinal axis, SINTAX™. SINTAX is the network of connections between the small intestine and the rest of the
body. Quite remarkably, it allows orally delivered substances to work systemically - throughout the body - by their local
action on cells in the small intestine. This biology opens up two important areas of medicine: early intervention and global
treatment. Our aim is to create biotech drugs that can be used to treat hundreds of millions of patients globally at all
stages of disease. The COVID-19 pandemic highlights more than ever the global need we have for a new and improved
profile of medicines.
The validity of our platform and our lead product are supported by a growing body of clinical and preclinical data. We are
on track for potential launch of our first anti-inflammatory product in the next few years. And behind this first product we
have a broad pipeline and opportunity that comes from this platform.
Given our continued fast progress we thought it helpful to summarize our overall status and plans as we move into later
stage clinical development and the next phase of our growth.
Evelo platform: validated preclinical. Our clinical and preclinical results tell us that SINTAX is real and functional in
humans, and that it can be harnessed as a potent modulator of systemic inflammation.
The last 100 years have seen a handful of turning points in the treatment of diseases involving immunity and inflammation:
corticosteroids, tissue necrosis factor and immune checkpoint inhibitors. Medicines targeting SINTAX may be another of
those turning points.
Evelo’s product candidates are monoclonal microbials, pharmaceutical preparations of single strains of gut mucosa-
associated bacteria that are selected for their ability to modulate SINTAX. The therapeutic effects of these orally delivered
medicines come from their action on a range of receptors on immune and epithelial cells in the lining of the small intestine.
These cells, in turn, modulate immune cells circulating throughout the body. Monoclonal microbials are microbes, but do
not target the microbiome. They do not colonize or persist in the gut and do not modify the colonic microbiome. They are
locally acting in the gut (the outside of the body) with observed systemic activity inside of the body.
It turns out that the small intestine is a motherboard of the immune system. Preclinical models have shown striking activity
of monoclonal microbials, matching or even exceeding that of injectable biologics and the best of existing oral medicines.
This can be done with both anti-inflammatory and pro-inflammatory monoclonal microbials. It is astonishing that all of
this is achieved with no observed systemic exposure via a previously unknown mechanism of inflammation resolution.
EDP1815: our lead anti-inflammatory clinical program. What we showed preclinically is now emerging as a clinical reality.
This is best illustrated by EDP1815, Evelo’s lead anti-inflammatory candidate product. It has recently been investigated in
several cohorts in an on-going phase 1b study in patients with psoriasis. The striking effects of targeting SINTAX seen in
preclinical models has been observed in humans.
The primary endpoints of the EDP1815 phase 1b study are safety and tolerability. EDP1815 has a placebo-like profile,
consistent with the lack of systemic absorption. There has been no persistence of EDP1815 beyond the 28-day daily dosing
period and no modification of the colonic microbiome by 16S RNA sequencing of patient stool samples.
Two cohorts of patients with mild-to-moderate psoriasis were treated with a low and high dose of EDP1815 daily for 28
days. The lower dose was estimated by allometric scaling of the just-maximally effective dose in mouse inflammation
models. The high dose was 5X higher. There were 12 and 18 patients respectively in these cohorts. The cohorts were
recruited independently and sequentially with internal placebo control with 2:1 randomization of active:placebo.
Clinical symptoms and biomarkers of systemic inflammation were the pharmacodynamic secondary and tertiary
endpoints.
At both doses there was a clear clinical response measured by PASI and lesional severity score. Even with a short duration
of treatment and small numbers of subjects, a clear and reproducible treatment effect was seen.
Biomarkers of systemic inflammation were determined by stimulation ex vivo with lipopolysaccharide (LPS) of whole blood
samples taken at baseline and after 28 days of dosing. LPS is a potent activator of the myeloid compartment of innate
immunity and inflammation, especially on human cells. Reduction of the production of inflammatory cytokine and
chemokines in these cultures is a measure of the state of systemic inflammatory activation.
In both cohorts of psoriasis patients there was a reduction in inflammatory biomarkers. This mirrors the ex vivo analysis
of preclinical models where a pronounced effect is the coordinated down-regulation of multiple inflammatory pathways.
In patients there was a down-regulation of the production of interleukin-8 (IL-8) and interleukin-6 (IL-6) and tissue necrosis
factor-alpha (TNFa) in the LPS stimulation assay.
The next stage in the development of EDP1815 is a phase 2 study in psoriasis patients. This study will aim to optimize the
clinical and biomarkers signals seen in phase 1b with an extended duration of dosing and dose optimization.
EDP1815 as a potential therapy for COVID-19. The clinical data that we have generated with EDP1815 support the
potential of EDP1815 in the treatment of COVID-19. We are actively exploring the possibility of one or more phase 2 / 3
clinical studies investigating the potential of EDP1815 to intervene early in the disease to shut down cytokine storms and
prevent progression of serious COVID-19.
Tissue damage following infection with COVID19 appears to be due to an emergent, excess, host immune response.
Approximately 7 days after SARS-CoV-2 infection the host immune system starts to become a driver of disease symptoms
and in some individuals there is an exaggerated inflammatory response. This leads to lung and sometimes multi-organ
damage. The development of these severe complications e.g. Diffuse Alveolar Damage (DAD) can be independent of high-
titre viral replication. The immune and inflammatory response in affected lungs includes production of high levels of IL-6,
TNFα, interleukin-1beta, influx of neutrophils and cytotoxic T cells.
A component of the treatment of COVID-19 should be the prevention of the exaggerated host inflammatory response
responsible for COVID-19 related complications without immunosuppressing individuals, so as to retain the host anti-viral
response. Early intervention in the disease process should prevent and /or reduce COVID-Related Complications (CRC)
leading to lower morbidity and mortality and reduced demands on healthcare systems.
The tolerability profile of EDP1815 makes it potentially well-suited for early intervention in this host-mediated disease
process. Emerging data suggests that early interruption of the exaggerated host inflammatory response may prevent
progression to serious complications. EDP1815 potentially is one of very few therapeutic options which could meet this
profile.
Importantly, EDP1815 manufacturing can be effectively scaled to allow for an affordable global treatment.
EDP1503: our lead oncology clinical program. EDP1503 continues to move forward in a clinical study in combination with
KEYTRUDA® (pembrolizumab), in a clinical collaboration with Merck & Co. The aim of the studies is to find improved
therapies for otherwise poorly treated forms of cancer such as microsatellite stable colorectal carcinoma and relapsed
triple negative breast cancer and several other tumor types in which patients relapse after prior response to other therapy.
We expect to report data from this set of clinical studies in 2020.
The next phase of our growth. Since founding Evelo we had a clear long-range plan. The first phase is complete: using
our platform to advance rapidly a diversified portfolio of products into phase 1b/2a clinical development and to
demonstrate safety and clinical signals.
Based on the findings of our first wave clinical studies we are moving into the next phase of our plan: advancing our
products into later stage clinical development and expanding into additional clinical indications. As we look beyond 2020,
we continue to invest in research on a next generation of product candidates and in our platform, including manufacturing
and formulation development. We expect this will allow us to optimize for later stage drug development and
commercialization. We also see future opportunities in metabolic and neurologic diseases and beyond.
COVID-19 is unexpected and places all of us in a particularly challenging macroenvironment. However, the big picture has
not changed. We continue to focus on transforming medicine through harnessing SINTAX to develop better and earlier
treatments for hundreds of millions of people worldwide. In additional to treatments for inflammatory diseases, cancers,
neuroinflammation and metabolism, we also now hope to help treat COVID-19 and certain other viral infections. Our team
at Evelo gives us the confidence that we will weather the storm and continue to make progress towards launching our
first medicines in the next few years. We thank them for being who they are.
As always, we wanted to conclude by thanking the patients who work with us and thanking you, our stockholders, for your
support and your belief in our vision, in us and in our science and our potential products.
Simba Gill
Chief Executive Officer and
President
Mark Bodmer
Chief Scientific Officer and
President of Research and Development
This letter contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All
statements contained in this letter that do not relate to matters of historical fact should be considered forward-looking statements,
including statements regarding our objectives and anticipated clinical milestones for 2020 and 2021, the promise and potential impact
of any of our monoclonal microbials or preclinical or clinical trial data.
These forward-looking statements are based on management's current expectations. These statements are neither promises nor
guarantees, but involve known and unknown risks, uncertainties and other important factors that may cause our actual results,
performance or achievements to be materially different from any future results, performance or achievements expressed or implied by
the forward-looking statements, including, but not limited to, the following: we have incurred significant losses, are not currently
profitable and may never become profitable; our need for additional funding; our limited operating history; our unproven approach to
therapeutic intervention; the lengthy, expensive, and uncertain process of clinical drug development, including potential delays in
regulatory approval; our reliance on third parties and collaborators to expand our microbial library, conduct our clinical trials,
manufacture our product candidates, and develop and commercialize our product candidates, if approved; our lack of experience in
manufacturing, selling, marketing, and distributing our product candidates; failure to compete successfully against other drug
companies; protection of our proprietary technology and the confidentiality of our trade secrets; potential lawsuits for, or claims of,
infringement of third-party intellectual property or challenges to the ownership of our intellectual property; our patents being found
invalid or unenforceable; risks associated with international operations; our ability to retain key personnel and to manage our growth;
the potential volatility of our common stock; our management and principal stockholders have the ability to control or significantly
influence our business; costs and resources of operating as a public company; unfavorable or no analyst research or reports; and
securities class action litigation against us.
These and other important factors discussed under the caption "Risk Factors" in our annual report on Form 10-K for the year ended
December 31, 2019 and our other reports filed with the SEC could cause actual results to differ materially from those indicated by the
forward-looking statements made in this letter. Any such forward-looking statements represent management's estimates as of the
date of this letter. While we may elect to update such forward-looking statements at some point in the future, except as required by
law, we disclaim any obligation to do so, even if subsequent events cause our views to change. These forward-looking statements
should not be relied upon as representing our views as of any date subsequent to the date of this letter.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
For the Fiscal Year Ended December 31, 2019
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
OF 1934
For the transition period from to
Commission File Number: 001-38473
Evelo Biosciences, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
2834
(Primary Standard Industrial
Classification Code Number)
46-5594527
(I.R.S. Employer
Identification No.)
620 Memorial Drive,
Cambridge, Massachusetts 02139
(617) 577-0300
(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, par value $0.001 per share
Trading Symbol(s)
EVLO
Name of each exchange on which registered
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act. Yes ☐ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes x No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes x No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in
Rule 12b-2 of the Exchange Act.:
Large accelerated filer
Non-accelerated filer
☐
☐
Accelerated filer
Smaller reporting company
Emerging growth company
x
x
x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No x
The aggregate market value of the registrant's common stock held by non-affiliates was approximately $122.5 million based on the closing price of the
registrant’s common stock on June 28, 2019, the last business day of the registrant's most recently completed second fiscal quarter. The calculation excludes
shares of the registrant’s common stock held by current executive officers, directors and stockholders that the registrant has concluded are affiliates of the
registrant. This determination of affiliate status is not a determination for other purposes.
As of February 7, 2020, there were 32,218,710 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 2020 annual meeting of stockholders, which the registrant intends to file pursuant to
Regulation 14A with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year ended December 31, 2019, are
incorporated by reference into Part III of this Annual Report on Form 10-K.
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TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
PART I
PART II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuers Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
SIGNATURES
i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All statements other than statements of historical fact are “forward-looking statements” for purposes of this Annual Report
on Form 10-K. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “could,”
“estimate,” “expects,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative or
plural of those terms, and similar expressions.
Forward-looking statements include, but are not limited to, statements about:
our status as a development-stage company and our expectation to incur losses in the future;
our estimates regarding our expenses, future revenues, anticipated future capital requirements and our need to raise
additional funds;
our ability to build a pipeline of product candidates and develop and commercialize drugs;
our unproven approach to therapeutic intervention;
our ability to enroll patients and volunteers in clinical trials, timely and successfully complete those trials and receive
necessary regulatory approvals;
the timing, progress and receipt of data from our ongoing and planned clinical trials of EDP1815, EDP1503 and EDP1867
and the potential use of those candidates to treat various indications;
our ability to establish our own manufacturing facilities and to receive or manufacture sufficient quantities of our product
candidates;
our expectations regarding the potential safety, efficacy or clinical utility of our product candidates;
our ability to protect and enforce our intellectual property rights;
federal, state, and foreign regulatory requirements, including the U.S. Food and Drug Administration (the "FDA") regulation
of our product candidates;
the timing of clinical trials and the likelihood of regulatory filings and approvals;
our ability to obtain and retain key executives and attract and retain qualified personnel;
our ability to successfully manage our growth; and
developments relating to our competitors and our industry.
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Factors that may cause actual results to differ materially from current expectations include, among other things, those set
forth in Part I, Item 1A. “Risk Factors,” below and for the reasons described elsewhere in this Annual Report on Form 10-K. Any
forward-looking statement in this Annual Report on Form 10-K reflects our current view with respect to future events and is subject
to these and other risks, uncertainties and assumptions. Given these uncertainties, you should not rely on these forward-looking
statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements
are reasonable, our information may be incomplete or limited and we cannot guarantee future results. Except as required by law,
we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes
available in the future.
This Annual Report on Form 10-K also contains estimates, projections and other information concerning our industry, our
business and the markets for certain drugs and consumer products, including data regarding the estimated size of those markets,
their projected growth rates and the incidence of certain medical conditions. Information that is based on estimates, forecasts,
projections or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially
from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained these industry, business,
market and other data from reports, research surveys, studies and similar data prepared by third parties, industry, medical and
general publications, government data and similar sources and we have not independently verified the data from third party sources.
In some cases, we do not expressly refer to the sources from which these data are derived.
In this Annual Report on Form 10-K, unless otherwise stated or as the context otherwise requires, references to “Evelo,”
“the Company,” “we,” “us,” “our” and similar references refer to Evelo Biosciences Inc. and its wholly owned subsidiaries. This
Annual Report on Form 10-K also contains references to our trademarks and to trademarks belonging to other entities. Solely for
convenience, trademarks and trade names referred to, including logos, artwork and other visual displays, may appear without the
® or TM symbols, but such references are not intended to indicate, in any way, that their respective owners will not assert, to the
ii
fullest extent under applicable law, their rights thereto. We do not intend our use or display of other companies’ trade names or
trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
iii
Item 1. Business
Overview
PART I
Evelo Biosciences is discovering and developing oral biologics that are intended to act on cells in the small intestine to
produce systemic therapeutic effects. These cells play a central role in governing the immune, metabolic and neurological systems
throughout the body. We refer to this relationship as the small intestinal axis, or SINTAX™. The importance of SINTAX as a
therapeutic target has only recently become appreciated and we have built a platform to discover and develop novel oral biologics
which target SINTAX. These therapeutics have the potential to be effective, safe and affordable medicines and to transform the
treatment of major diseases, driving profound benefits to patients and society.
Our first product candidates are monoclonal microbials: orally delivered pharmaceutical compositions derived from naturally
occurring, specific single strains of microbes. Monoclonal microbials engage immune cells in the small intestine and drive changes
in systemic biology without systemic exposure and without colonizing the gut. We have observed in preclinical studies that specific
monoclonal microbials can downregulate or upregulate immune responses throughout the body by acting on SINTAX.
We believe that monoclonal microbials have the potential to address patient needs at all stages of disease due to their potentially
superior characteristics over current therapies:
•
Each of our monoclonal microbial clinical candidates acts through multiple clinically relevant and validated biological
pathways in preclinical models. By acting on multiple pathways simultaneously, we believe monoclonal microbials could
impact disease in ways that are not possible with current single-target or dual-target therapies.
• We believe our monoclonal microbials are likely to be well-tolerated given that they are derived from naturally occurring,
specific single strains of human microbes that engage immune cells in the small intestine and drive changes in systemic
biology without systemic exposure and without colonizing the gut. Our initial clinical data supports this potential and if
we are able to validate this profile in future clinical trials, we believe monoclonal microbials have the potential to be used
at all stages of disease and in many more patients than current immunomodulatory drugs.
•
Our discovery and development of monoclonal microbials has the potential to be more efficient than other therapeutic
classes such as cell therapy, monoclonal antibodies and small molecules. We believe that monoclonal microbials do not
require the lengthy target validation and compound discovery requirements of conventional drug discovery.
In August 2019 and November 2019, we reported positive interim clinical data from two cohorts in the ongoing Phase 1b
trial of EDP1815, an investigational monoclonal microbial for the treatment of inflammatory diseases. Each cohort consisted of
individuals with mild to moderate psoriasis who received either a low dose or high dose of EDP1815 or placebo. EDP1815 was
well-tolerated in both cohorts, with no overall difference reported from placebo. A reduction in mean lesion severity score ("LSS")
and Psoriasis Area and Severity Index ("PASI") score was observed at the end of the 28-day dosing period in both cohorts of
individuals dosed with EDP1815. In the high dose cohort alone, individuals dosed with EDP1815 showed a continued reduction
in both mean LSS (of 24% vs. placebo of 7%) and PASI score (of 21% vs. placebo of 3%) at 42 days, two weeks after completion
of dosing, which we believe may be indicative of sustained clinical activity and dose response. Based on the strength of these
data, we plan to advance EDP1815 into a Phase 2 clinical trial in the second quarter of 2020.
We are also developing an investigational monoclonal microbial, EDP1503, in oncology. We initiated our clinical trial of
EDP1503 in combination with KEYTRUDA® (pembrolizumab) in multiple oncology indications in December 2018. In November
2019, we announced that the microsatellite stable colorectal cancer cohort has been fully recruited. No complete or partial clinical
responses have been evident, however, several individuals in this cohort have shown extended stable disease. Changes in cellular
infiltration biomarkers were also observed in tumor biopsies taken from these individuals during the EDP1503 monotherapy
period, which we believe are consistent with preclinical observations for EDP1503. We continue to monitor individuals in this
cohort and we expect to report additional clinical data during the first half of 2020.
We continue to nominate potential clinical candidates from our discovery program for development, alongside our broad
research efforts to uncover the full potential of targeting SINTAX. For example, we expect to initiate a Phase 1b clinical trial
evaluating EDP1867, a non-replicating monoclonal microbial clinical candidate designed to address inflammatory diseases, in
individuals with asthma in the second half of 2020. EDP1632, a monoclonal microbial candidate for neuro-inflammatory
diseases, is also advancing through preclinical development. We have also nominated our first clinical candidate utilizing a
reduced form of monoclonal microbials, EDP2939.
We believe monoclonal microbials and our platform targeting SINTAX have broad potential utility beyond our initial
therapeutic focus areas of inflammatory diseases and oncology. We plan to explore opportunities in which our platform has the
potential to transform the treatment of diseases, in areas like neuroinflammation and metabolism.
1
Our ongoing and planned clinical trials for our current product candidates are illustrated below.
Notes:
(1) We intend to evaluate EDP1815 in additional indications pending the results of interim data from the planned EDP1815
Phase 2 clinical trial. Potential indications include psoriatic arthritis, axial spondyloarthritis and rheumatoid arthritis.
(2) The Phase 1/2 study of EDP1503 in combination with KEYTRUDA is being conducted in a clinical collaboration with
MSD International GmbH, an affiliate of Merck & Co, Inc, ("Merck").
Our Strategy
Our goal is to create and develop a new class of therapies that has the potential to transform the treatment of a broad range
of diseases by targeting SINTAX.
Key elements of our strategy:
•
•
•
•
•
Explore the full potential of SINTAX to create an expansive and diversified product portfolio. We believe
targeting SINTAX has applicability across a broad range of disease areas and we are committed to pursuing opportunities
in which our platform has the potential to transform their treatment. Our initial focus is on inflammatory diseases and
oncology. We intend to expand into other disease areas, such as autoimmune diseases, respiratory diseases, neuro-
inflammation and degeneration, liver diseases, type I diabetes, food allergy, neurobehavior, cardiovascular disease and
diseases of metabolism.
Develop best-in-class therapies to improve outcomes across various stages of disease. We intend to develop best-in-
class orally delivered therapies and explore the potential of monoclonal microbials across the full spectrum of disease
severity, not only in patients with severe or advanced disease. We intend to pursue what we believe to be the inherent
advantages of monoclonal microbials to enable use in all stages of disease.
Advance and scale our monoclonal microbials platform. We plan to continue to invest in our platform, which integrates
microbiology, immunology and computational biology capabilities. We intend to expand the diversity of our monoclonal
microbial library and enhance our proprietary in vitro and in vivo models to optimize selection of our future product
candidates. Our manufacturing processes are designed to ensure the quality and scalability of our product candidates. We
plan to continue to invest in novel methods for process development, manufacturing and formulation for our monoclonal
microbials. In the future, we intend to invest in clinical and commercial scale manufacturing. We plan to leverage the
efficiency of our integrated capabilities to accelerate the clinical development of product candidates.
Strengthen and expand our intellectual property to protect our platform and product candidates. We have exclusive
rights to our technologies including issued composition of matter and method of use patents in the United States for our
product candidates. We intend to pursue patent protection for our scientific innovations and to maintain a strong and broad
estate of patents and trade secrets in the United States and other geographies.
Collaborate to realize the potential of SINTAX and monoclonal microbials. We intend to continue to seek collaborations
with academic groups, biotech and pharmaceutical companies to realize the value of our broad platform and extend the
range of our development activities and disease areas in a timely and cost-effective manner. We plan to commercialize
products in multiple geographies both on our own and with collaborators.
2
The Immune System and the Use of Immunotherapy in Disease
Immunology and Current Immunotherapy
The immune system consists of many different cell types that act together as a coordinated system constantly scanning for,
identifying and responding to both human and microbial signals. Immune cells, including different types of T-cells, circulate
throughout the body via the lymphatic system searching for signs of disease or infection. When this immune surveillance is
functioning correctly, immune cells recognize and destroy both pathogens and cancer cells. However, when the immune system
responds excessively, diseases such as psoriasis, rheumatoid arthritis, asthma, inflammatory bowel disease and multiple sclerosis
can result. Conversely, an inadequate immune system response may allow various types of cancer and infections to progress
unchecked.
Advances in our understanding of how the immune system affects a broad spectrum of disease has resulted in the development
of immunotherapies, which are medicines that reduce, suppress, elicit or amplify specific immune responses. Antibody-based
immunotherapies for inflammatory diseases and oncology have fundamentally changed the treatment landscape for patients. For
example, anti-TNFα antibodies are widely used to treat moderate to severe stages of many inflammatory diseases. In 2018, two
of the five top selling drugs worldwide were anti-TNFα antibodies, with HUMIRA alone generating worldwide annual net sales
of $19.9 billion. In oncology, checkpoint inhibitor antibodies, including those targeting the programmed cell death protein/ligand
1, or PD-1/PD-L1 pathways, block the tumor’s ability to suppress the immune response. They have improved the treatment of
many cancers and are expected as a class to reach peak annual net sales of $30 billion by 2025. While existing immunotherapies
have been successful in treating inflammatory diseases and oncology, there remains a substantial unmet need for a majority of
patients.
Emergence of a Broad New Opportunity in Immunotherapy
Until recently, immunotherapeutic approaches have largely ignored one of the body’s naturally-evolved routine
immunological processes and its associated immune organ—the gut, and specifically the small intestine. Immunomodulation
through the small intestine has the potential to address certain limitations of current immunotherapies by acting on multiple naturally
evolved and clinically relevant pathways. We believe this novel approach presents advantages, including potentially minimizing
adverse events, enhancing patient convenience and targeting multiple immune pathways simultaneously. We believe that a novel
class of therapeutics with these attributes has the potential to be transformative in treating a broad range of immune-mediated
diseases. Furthermore, we believe this approach could also expand the use of immunotherapies for the treatment of patients with
earlier stages of disease.
SINTAX is Central to Human Biology and Immunology
The small intestine is the largest part of the immune system. Specific types of immune cells, such as dendritic cells and
macrophages, are resident in the tissue of the small intestine. They sample specific contents in the interior of the small intestine,
which is called the lumen. These immune cells then migrate to lymph nodes where they condition other important immune cells,
including T-cells. These conditioned T-cells then travel throughout the body via the lymphatic system to impact disease. We believe
SINTAX provides an opportunity for immunomodulation throughout the body after oral delivery of products that remain physically
restricted to the lumen and lymphoid tissues of the gut. Immunomodulation via SINTAX may represent an underappreciated
opportunity to drive therapeutically relevant immune responses throughout the body.
SINTAX and Microbes
Microbes in the human gut are single-cell organisms that have co-evolved with the human immune system. Many human
immune cells are programmed to sense and respond to microbes that they contact in the small intestine. Research in mucosal
immunology has revealed that microbial interactions in the small intestine can drive activity in SINTAX.
Multiple mechanisms for direct interactions between microbes and immune cells in the small intestine have been
demonstrated. We believe that dendritic cells and macrophages in the lymphoid tissues of the small intestine are key target cells
of immunomodulatory microbes. The small intestine has a large surface area and thin and diffuse mucus layer, which allows for
close contact between microbes and immune cells. Dendritic cells are a specialized type of immune cell that survey the body’s
tissues, detecting and presenting antigens to T-cells. Macrophages can take on many functional forms depending on the conditioning
of their environment in the body and are important for both anti-inflammatory and anti-tumor immunity. Immune cells, such as
dendritic cells and macrophages, can extend protrusions through junctions between epithelial cells in the lining of the small
intestine. These protrusions come into direct contact with and sample the microbial contents of the small intestine lumen. These
immune cells then migrate to mesenteric lymph nodes where they come into contact with T-cells. Dendritic cells and macrophages
that have been primed by exposure to microbes in the gut, condition T-cells within the mesenteric lymph node and push them
towards an inflammatory or immunoregulatory phenotype depending on the specific strain of the microbe. Conditioned T-
cells continue to move through the body via the lymphatic system to other parts of the body where they may act in local tissue to
modulate an immune response.
3
Figure 1: The small intestine and microbes. The small intestine is connected to many other parts of the body via the lymphatic system in green. The
cross-section of the small intestine depicts (1) sampling of microbes in the small intestine by dendritic cells and macrophages, (2) conditioning of T-cells
by dendritic cells and macrophages in the lymph node, and (3) migration of conditioned T-cells to other areas of the body.
Several of our academic collaborators have explored the functional consequences of the interactions between immune cells
and single strains of microbes in the gut. Veena Taneja, Ph.D. and Joseph Murray M.D. of Mayo Clinic showed that an orally
administered strain of Prevotella histicola modulated immune function in mouse models of rheumatoid arthritis and multiple
sclerosis. In the field of immuno-oncology, Thomas Gajewski, M.D., Ph.D. and his group at the University of Chicago conducted
an experiment in which a single strain of orally administered Bifidobacterium had equivalent activity to an anti-PD-L1 antibody
and additive activity in combination in a mouse model of melanoma. We believe these and other examples from the academic
literature support our theory that single strains of microbes can act on SINTAX to suppress or activate immune responses throughout
the body. Our Phase 1 clinical data to date also support this theory.
Monoclonal Microbials as a Potential New Class of Oral Biologic Medicines
Our company was founded to discover and develop therapies that act on SINTAX. We aim to develop therapies based on
our observations on the central role of the small intestine in modulating immune activity throughout the body and the equally
important role of microbes as key modulators of SINTAX.
We have developed the tools to isolate, select, and develop specific microbes that have historically been difficult to identify,
isolate and culture. This extends from microbial isolation to monoclonal microbial manufacturing. We have developed proprietary
insights and tools that enhance our ability to produce pharmaceutical compositions of monoclonal microbials at scale. This allows
us to deliver potentially therapeutic doses of our appropriately formulated strain.
We are developing monoclonal microbials and a reduced form of monoclonal microbials to engage cells in the small intestine
and drive changes in systemic biology by either downregulating or upregulating immune responses for the treatment of disease.
Monoclonal microbials and a reduced form of monoclonal microbials are orally delivered pharmaceutical compositions of specific
strains of microbes derived from a single clone of naturally occurring microbes.
We believe key features and advantages of our monoclonal microbial product candidates are:
•
•
•
Single strain. Our product candidates are pharmaceutical compositions of single strains of microbes that we have selected
for their specific immunomodulatory properties. We extensively characterize the ability of our product candidates to elicit
a desired immunomodulatory effect.
Orally administered formulation. We intend to deliver our initial product candidates orally in formulations designed for
targeted release of the monoclonal microbials to specific regions within the small intestine. Patients typically prefer oral
administration to intravenous infusion, subcutaneous injection, and topical administration, which we believe will facilitate
the adoption of our product candidates, if approved.
Limited systemic exposure. In preclinical studies, we observed that monoclonal microbials had limited systemic exposure,
that they cleared from the gut within 24 to 48 hours and that colonization was not required for beneficial activity. We
4
believe that these factors suggest that monoclonal microbials may have limited systemic off-target side-effects. Our Phase
1b clinical data support this potential.
•
Action on multiple clinically relevant and validated pathways. Our preclinical data have shown that monoclonal microbials
may act simultaneously on multiple clinically relevant and validated biological pathways. The diseases we intend to treat
are multifactorial, and we believe that our potential therapies will be advantageous over single-target treatments.
Given these expected features, we believe that monoclonal microbial therapies may have a number of advantages in
comparison to other immunotherapies such as antibodies, cell therapies and small molecules.
Monoclonal Microbial Platform
We have developed an integrated platform designed to identify individual strains of microbes capable of modulating the
immune system by acting on SINTAX when administered at pharmacologically active doses and appropriately formulated. We
use the process development and formulation capabilities of our platform to develop selected microbes as product candidates.
Our proprietary monoclonal microbial platform is comprised of the following four key areas:
Candidate discovery. We have assembled a proprietary library of diverse strains of microbes. The continuing accrual of
strains in our library is from human mucosal and small intestinal sources in order to benefit from the co-evolution of microbes
and the human immune system. We also add to our library through selective licensing agreements and collaborations with academic
partners. The proprietary tools within our platform are designed to identify and characterize selected microbes using in vitro, in
vivo and ex vivo assays. Proprietary in vitro assays simulate the interactions between microbes and human immune cells, allowing
us to evaluate the immunological activity of each microbial strain in relevant experimental systems. Our in vitro assays can screen
hundreds of microbes, producing more than 150 data points per strain, including levels of pro-inflammatory and anti-inflammatory
cytokines and chemokines. This assists our comprehensive selection process to identify candidates for testing in relevant animal
models.
Product form. The activity of our monoclonal microbials observed in preclinical studies has been driven by engagement
with and modification of immune cells in the small intestine. This activity has not been reliant on engraftment (or colonization)
as we have observed that our monoclonal microbials passed through the gut and did not distribute around the body or engraft in
the gut. Furthermore, this preclinical activity was observed to be independent of the ability of our monoclonal microbials to
replicate. From this observation, we believe that monoclonal microbial activity is likely driven by recognition of structural motifs
by immune cells in the small intestine. Our candidate selection process may include an additional manufacturing step for our
monoclonal microbial candidates to develop them as non-replicating product candidates, such as EDP1867. We are also researching
the potential of reduced forms of our monoclonal microbials to target SINTAX. Preclinical studies suggest that this approach may
further improve potency and activity and we are currently advancing EDP2939, our first product candidate based on a reduced
form of monoclonal microbials, through preclinical development.
Formulation. Our first clinical product candidates are formulated as capsules containing lyophilized powder for targeted
release in the small intestine. We intend to continuously invest in formulation to improve the delivery of our product candidates
and enhance their ability to target and act on SINTAX.
Process development and manufacturing. Process development and manufacturing are critical for the translation of
monoclonal microbials into therapies. Our expertise and investments in pilot scale manufacturing have allowed us to mitigate
challenges inherent to monoclonal microbial manufacturing at clinical scale. Major challenges include limited understanding and
characterization of applicable microbes; strict anaerobic growth conditions required by certain microbes, many of which have
never before been fermented; and temperature and oxygen sensitivities that affect downstream processing. We believe that our
approach to these challenges may enable us to accelerate the process from strain identification to clinical supply.
5
Process development is integrated into our research activities, combining discovery and downstream development. We
believe we have achieved control of quality, identity, purity, and potency throughout the process of strain selection, fermentation,
formulation, and pharmacology, with high yield. Importantly, we believe our manufacturing processes enable us to produce a drug
substance that is pharmacologically active in the form of a lyophilized powder, which is suitable for production in accordance
with the FDA good manufacturing practice ("cGMP") regulations. For each of our clinical product candidates, we have observed
therapeutic activity in lyophilized powder form in relevant preclinical mouse models.
We have been able to manufacture monoclonal microbials in a relatively short timeframe compared to other biologic therapies,
which we believe may accelerate our speed into the clinic. Additionally, we believe that we may be able to cost-effectively
manufacture monoclonal microbials.
Product Development Strategy and Portfolio
We are advancing monoclonal microbials to potentially treat a spectrum of immune-mediated diseases with an initial focus
on inflammatory diseases and oncology. We expect our initial clinical trials for our product candidates to provide information on
safety, tolerability, pharmacodynamic responses and biomarkers of immune response in multiple indications with different
pathologies and sites of disease. This may allow for expansion into a broad range of clinical indications, which could enable us
to capture the breadth of clinical value.
Beyond our first wave of product candidates in inflammatory diseases and oncology, we are continuing to invest in the
discovery of new candidates to build a deep pipeline across a wide range of diseases and tissue types to leverage the broad potential
of our platform. We also intend to opportunistically collaborate to expand indications and accelerate development of programs
where collaborators can contribute further disease-specific expertise to our platform.
Our ongoing and planned clinical trials for our current product candidates are illustrated below.
Notes:
(1) We intend to evaluate EDP1815 in additional indications pending the results of interim data from the planned EDP1815
Phase 2 clinical trial. Potential indications include psoriatic arthritis, axial spondyloarthritis and rheumatoid arthritis.
(2) The Phase 1/2 study of EDP1503 in combination with KEYTRUDA is being conducted in a clinical collaboration with
Merck.
Inflammatory Diseases Portfolio
We have three candidates in development for inflammatory diseases. EDP1815 is a monoclonal microbial currently in Phase
1b development and is expected to enter a Phase 2 trial in the second quarter of 2020. In December 2018, we nominated EDP1867,
a non-replicating monoclonal microbial candidate for inflammatory diseases, which we expect to advance into a Phase 1b asthma
study in the second half of 2020. In December 2019, we nominated EDP2939 as a candidate for inflammatory disease. EDP2939
is our first product candidate based on a reduced form of monoclonal microbials. In February 2020, we discontinued development
of EDP1066.
6
EDP1815
EDP1815 is a monoclonal microbial candidate for inflammatory diseases. In November 2018 we initiated our ongoing
Phase 1b placebo-controlled dose-escalating safety and tolerability study of EDP1815 in 24 healthy volunteers and up to 108
individuals with mild to moderate psoriasis or atopic dermatitis. The primary endpoint of this trial is safety and tolerability.
Prospectively defined secondary and exploratory endpoints include clinical measures of disease, cellular histological
biomarkers and blood immune cell biomarkers taken from biopsies and blood samples, respectively, at the start and end of the
28-day dosing period. Safety and tolerability, and secondary clinical endpoints are also measured at day 42, two weeks after
completion of dosing.
In August 2019, we reported positive interim data from this Phase 1b trial from an initial cohort of 12 individuals with mild
to moderate psoriasis dosed once per day for 28 days with 550mg (low dose) of the enteric capsule formulation of EDP1815 or
placebo. EDP1815 was well tolerated in this cohort with no overall difference reported from placebo.
At the end of the 28-day dosing period, individuals dosed with EDP1815 showed a reduction in mean LSS at 28 days of 2
points (p<0.05), compared to a mean increase of 0.25 points in individuals who received placebo. LSS reductions over the dosing
period of individuals dosed with EDP1815 ranged from 0-67 percent. LSS, a secondary endpoint, is a component of the PASI
score and measures redness, thickness, and scaling of an individual psoriatic lesion and is a sensitive clinical measure for individuals
with mild to moderate disease. Trends consistent with the LSS reductions were observed in the reduction of the PASI scores in
individuals treated with EDP1815 compared to individuals treated with placebo.
In November 2019, we reported additional positive interim clinical data from this ongoing Phase 1b trial in a cohort of 18
individuals with mild to moderate psoriasis who were randomized 2:1 to receive a daily dose of 2.76g (high dose) of the enteric
capsule formulation of EDP1815 or placebo for 28 days.
EDP1815 continued to be well tolerated in this cohort, with no overall difference reported from placebo. At the end of the
28-day dosing period, the high dose cohort showed a mean reduction in LSS consistent with previously reported data from the
low dose cohort.
Two weeks following the completion of the dosing period, at day 42, the high dose cohort showed continued reductions from
baseline in both mean LSS and PASI, which may be indicative of sustained clinical activity and dose response.
A summary of the LSS and PASI results are shown in the tables below.
Mean (+/-SE) Percentage Change in LSS vs. Start of Dosing Period (1)
Placebo (2)
EDP1815 (high dose)
EDP1815 (low dose)
n
10
12
8
At end of 28-day
dosing period
0.6% (9.0%)
-15.1% (6.4%)
-22.8% (9.9%)
Mean (+/-SE) Percentage Change in PASI vs. Start of Dosing Period (1)
Placebo (2)
EDP1815 (high dose)
EDP1815 (low dose)
Notes:
n
10
12
8
At end of 28-day
dosing period
-1.0% (13.2%)
-16.0% (8.1%)
-16.0% (8.3%)
At day 42
-7.2% (6.2%)
-24.1% (7.1%)
-9.0% (12.7%)
At day 42
-3.3% (14.8%)
-20.7% (8.2%)
-9.7% (11.3%)
(1) This study was not powered to detect statistically significant differences in clinical effect between treatment groups.
(2) Represents the combination of placebo arms from the low dose (n=4) and high dose (n=6) cohorts.
A range of histological and molecular biomarkers were measured in the low dose and high dose cohort, with trends in line
with the clinical activity of EDP1815 observed in the low dose cohort.
We expect to report additional data from the Phase 1b trial in a cohort of up to 24 individuals with psoriasis to be dosed with
the new formulation of EDP1815. Data from this cohort will be available in the second quarter of 2020. We also expect to report
data from a cohort of up to 24 subjects with mild to moderate atopic dermatitis dosed with the new formulation of EDP1815 in
the second quarter of 2020.
7
Based on feedback from the FDA and the U.K. Medicines and Healthcare products Regulatory Agency (the "MHRA") we
plan to advance EDP1815 into a Phase 2 dose ranging study, evaluating three doses of a new formulation of EDP1815 versus
placebo in approximately 180 individuals. The primary endpoint of the study will be the mean reduction in PASI score at 16 weeks.
Other clinical measures of psoriasis will also be evaluated. We expect to initiate the Phase 2 clinical trial in the second quarter of
2020, and to announce interim data by the end of 2020. Clinical data from this study may enable us to advance directly into Phase
3 registrational studies in 2021, subject to end of Phase 2 discussions with regulatory agencies.
We intend to evaluate EDP1815 in further inflammatory disease indications, depending on the results from a planned interim
data analysis from the Phase 2 trial. Potential indications include psoriatic arthritis, axial spondyloarthritis and rheumatoid arthritis.
We also expect to continue to conduct immuno-pharmacology clinical trials in healthy volunteers with EDP1815.
EDP1867
EDP1867 is a non-replicating monoclonal microbial candidate for inflammatory diseases. EDP1867 was selected from a
broad screen of single strains of microbes in in vitro cellular assays and in vivo models of inflammation.
In preclinical studies EDP1867 was shown to resolve TH2-dependent inflammation which underlies atopic diseases and a
large spectrum of asthma. We expect to initiate a Phase 1b clinical trial in individuals with asthma in the second half of 2020.
EDP1066
EDP1066 is a monoclonal microbial candidate for inflammatory diseases. In April 2018 we initiated a Phase 1b placebo-
controlled dose-escalating safety and tolerability study of EDP1066 in 36 healthy volunteers and up to 96 subjects with mild to
moderate psoriasis or atopic dermatitis which is now complete. EDP1066 was well tolerated with no overall difference reported
from placebo in both mild to moderate atopic dermatitis and mild to moderate psoriasis.
We observed changes in biomarkers of inflammation, an exploratory endpoint, consistent with a pharmacodynamic effect
in a cohort of individuals with mild-to-moderate atopic dermatitis treated with a high dose of the new formulation of EDP1066
which were greater than those previously observed in a cohort of individuals with mild-to-moderate psoriasis treated with a high
dose of the original formulation of EDP1066. No effects were observed in either cohort in the secondary endpoints of clinical
measures of disease. Based on this data, we have decided to discontinue development of EDP1066.
Inflammation Preclinical Data
Each of our inflammatory disease monoclonal microbial candidates have demonstrated the ability to simultaneously impact
multiple pathways and associated cytokines in preclinical assays, suggesting that they may have broader applicability than
individual cytokine-directed therapies. In addition, anti-inflammatory cytokines such as IL-10 and IL-27 can inhibit the production
of pro-inflammatory cytokines. Certain of our product candidates induced increased production of IL-10 and IL-27 in preclinical
assays.
Inflammation Development Strategy
We selected mild-to-moderate psoriasis and atopic dermatitis as indications for first-in-human studies based upon our
preclinical data, need in large patient populations, the ease of access to patient tissue for biomarker analysis and the speed of
clinical data readout. Patients with mild-to-moderate disease represent between 80% and 90% of the patient population, which is
estimated to represent more than 25 million people in the United States. We believe these patients are underserved by current
treatments, including steroids, which either inadequately control inflammation or are not safe for long-term use. The majority of
novel therapies, including next generation biologics targeting IL-17, IL-23 or IL4RA, two anti-inflammatory cytokines and a
cytokine receptor, are only approved for patients with moderate-to-severe disease. Even in the moderate to severe setting, a large
proportion of eligible patients do not receive biologics, instead opting for topicals or oral systemic therapies. These factors suggest
a need for a novel therapeutic option that is well tolerated, effective and convenient.
If our product candidates demonstrate safety and tolerability and limited adverse events in clinical trials, they could open
up a larger market than the one currently treated by biologics. If proof-of-concept in mild-to-moderate patients is established, we
also intend to broaden our studies to treat patients with moderate-to-severe inflammation, potentially expanding this market
opportunity further.
In preclinical mouse models, our inflammatory disease product candidates reduced systemic inflammation with equal or
better activity than current standard of care therapies. We believe that this observation may translate to broad activity across a
variety of inflammatory diseases. We have produced preclinical data in distinct mouse models that are representative of different
biologies, suggesting that single monoclonal microbials may impact multiple immune pathways.
T-cells of the Th1 or Th17 type are implicated in psoriasis, joint inflammatory diseases and neuroinflammation, while T-
cells of the Th2 type are more important for atopies and allergic diseases. With current cytokine-directed therapies, agents are
targeted towards a specific cytokine to influence one or more of these pathways. For instance, Th1-driven inflammation can be
8
controlled by TNFa or IL-6 inhibition, Th17-driven inflammation can be controlled by IL-17 or IL-23 inhibition, and Th-2 driven
inflammation can be controlled by IL-4 or IL-13 inhibition.
Oncology Portfolio
We have advanced monoclonal microbial candidate, EDP1503, into two clinical trials in individuals with multiple cancer
types.
EDP1503
In December 2018, we initiated our ongoing Phase 1/2 open-label study of EDP1503 in combination with KEYTRUDA
(pembrolizumab), Merck's anti-PD-1 therapy, in three cohorts of individuals: microsatellite stable colorectal cancer; triple-negative
breast cancer; and individuals with multiple tumor types who have relapsed on prior PD-1/L1 inhibitor treatment. We plan to enroll
up to 120 subjects in this study which is designed to evaluate the safety and tolerability, immune response markers and overall
response rates achieved with EDP1503 in combination with KEYTRUDA.
In November 2019, we announced that the microsatellite stable colorectal cancer cohort has been fully recruited. Several
individuals in this cohort have shown extended stable disease although no formal clinical responses have been evident. Cellular
infiltration biomarker changes were also observed in tumor biopsies taken from these individuals during the EDP1503 monotherapy
period, which we believe are consistent with preclinical observations for EDP1503. We continue to monitor individuals in this
cohort.
Given newly approved treatments for triple-negative breast cancer, we anticipate that the majority of individuals with triple
negative breast cancer to be recruited will have relapsed following prior PD-1/L1 therapy, similar to those in the PD-1 relapsed
cohort. We expect to report further clinical data from this trial in the first half of 2020.
In January 2019, the University of Chicago initiated a Phase 2a investigator-sponsored clinical study of EDP1503 in
combination with KEYTRUDA in individuals with melanoma. The University of Chicago plans to enroll up to 70 individuals
who are PD-1-naïve and PD-1-relapsed melanoma in this study which is designed to evaluate the safety, tolerability and overall
response rates achieved with EDP1503 in combination with KEYTRUDA. Additionally, the University of Chicago will evaluate
immune response markers from biopsies taken during the study. We are not issuing guidance related to this investigator-sponsored
trial.
Oncology Preclinical Data
Preclinical data suggests that EDP1503 is active through different immune mechanisms beyond those targeted by checkpoint
inhibitors, such as PD-1/PD-L1, or cytotoxic T-lymphocyte associated protein 4 inhibitors. Research suggests that checkpoint
inhibition prevents the downregulation of the immune system induced by tumors. In preclinical models, we observed that EDP1503
stimulated upregulation of the immune response to tumors. Oral administration of EDP1503 in preclinical mouse models appeared
to delay tumor progression to a similar extent as checkpoint inhibitors using different immune mechanisms. In mouse models,
EDP1503 had additive effects when combined with a checkpoint inhibitor.
We believe that our existing and potential monoclonal microbial product candidates have the potential to broaden the base
of cancer immunotherapy. EDP1503 preclinical data suggests a variety of effects in mouse tumor models, including upregulation
of CD8+ T-cell infiltration, increased intratumoral pro-inflammatory chemokines, upregulation of MHC Class I expression and
augmentation of NK cell infiltration. We believe that the ability of a monoclonal microbial to induce these effects across multiple
pathways makes it an attractive combination candidate for checkpoint inhibitors relative to other immunotherapies in development
that target a single pathway.
Manufacturing
We have developed proprietary methods for the manufacture of pharmacologically active monoclonal microbials and reduced
forms of monoclonal microbials that are scalable and transferable to cGMP manufacturing facilities. Monoclonal microbials are
isolated, proliferated and purified in a manner analogous to the manufacture of pharmaceutical drugs. Monoclonal microbials and
reduced forms of monoclonal microbials maintain their therapeutic effect through the manufacturing process, which produces
drug substance in a powder form that makes our candidates suitable for oral administration, for instance in the form of a capsule,
tablet or powder. Additionally, we believe we have established robust analytical methods to assess the identity, strength and purity
of monoclonal microbials. We expect that these controlled manufacturing processes and analytical methods will allow us to produce
and release cGMP batches of material with consistent quality.
Our internal manufacturing capabilities include production of non-GMP materials for in vitro and in vivo preclinical
assessment of product candidates. We currently use third-party manufacturers for the production of materials for clinical studies.
Our internal personnel have cGMP manufacturing experience to ensure efficient technology transfer and oversee the development
and manufacturing activities conducted by third-party manufacturers. Our agreements with third-party manufacturers include
confidentiality and intellectual property provisions to protect our proprietary rights to our monoclonal microbial candidates.
9
We expect our third-party manufacturers to meet manufacturing requirements and drug supply required by our clinical
studies. In some instances, we have reserved resources from third-party manufacturers for the development and manufacture of
our monoclonal microbial candidates for near-term clinical programs. We believe that these relationships are integral to ensuring
reliable, high-quality drug supply for clinical development.
While we do not have a current need for commercial manufacturing capacity, we intend to evaluate both building internal
capabilities and contracting with third-party manufacturers at the appropriate time.
Process development and manufacturing are critical for the development of monoclonal microbials and reduced forms of
monoclonal microbials. We believe our internal expertise and external partnerships have allowed us to address unique challenges
associated with monoclonal microbial manufacturing. Some of these major challenges include limited prior know-how in the field
for novel microbes, strict anaerobic growth conditions required by many commensal microbes and temperature and oxygen
sensitivities that affect downstream processing.
Our proprietary methods for the manufacture of pharmacologically active monoclonal microbials address these three
challenges. Many human commensals are strict anaerobes with no development precedent. Process development of commensal
microbes requires strong technical expertise in microbiology and anaerobic fermentation. We are pioneering strict anaerobic
bioprocessing technologies that can allow for rapid development of reproducible manufacturing processes. We continue to optimize
processes across a wide range of parameters including media, temperature, pH, and harvest conditions.
Our monoclonal microbial manufacturing processes consist of drug substance and drug product manufacturing. We have
established expertise across all aspects of drug substance manufacturing operations including cell banking, fermentation, cell
separation and lyophilization. We have also advanced knowledge related to drug product manufacturing and our drug product has
demonstrated stability under long-term storage conditions. We will continue to advance novel formulation technologies for
enhanced delivery and activity in future trials.
Sales and Marketing
Given the current developmental stage of our product candidates and platform, we have not yet established a commercial
organization. We intend to commercialize our products globally and in multiple disease areas. We intend to do this both through
selectively building our own sales and marketing team and partnering or collaborating with third parties.
Intellectual Property
We strive to protect the proprietary technology that we believe is important to our business, including seeking and maintaining
patents intended to cover both our broad platform and individual product candidates. We seek to obtain domestic and international
patent protection, and endeavor to promptly file patent applications for new commercially valuable inventions. We also rely on
trade secrets to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection.
We plan to continue to expand our intellectual property estate by filing patent applications directed to pharmaceutical
compositions, methods of treatment, methods of manufacture, and methods for patient selection created or identified from our
ongoing development of our product candidates, as well as discoveries based on our proprietary platforms. Our success will depend
on our ability to obtain and maintain patent and other proprietary protection for commercially important technology, inventions
and know-how related to our business, defend and enforce any patents that we may obtain, preserve the confidentiality of our
trade secrets and operate without infringing the valid and enforceable patents and proprietary rights of third parties. We also rely
on know-how and continuing technological innovation to develop and maintain our proprietary position and, in the future, may
rely on or leverage in-licensing opportunities.
The patent positions of biopharmaceutical companies like us are generally uncertain and involve complex legal, scientific
and factual questions. In addition, the coverage claimed in a patent may be challenged in courts after issuance. Moreover, many
jurisdictions permit third parties to challenge issued patents in administrative proceedings, which may result in narrowing or even
cancellation of patent claims. We cannot predict whether the patent applications we are currently pursuing will issue as patents in
any particular jurisdiction or at all, whether the claims of any patent applications, should they issue, will cover our product
candidates, or whether the claims of any issued patents will provide sufficient protection from competitors or otherwise provide
any competitive advantage, or, if challenged, in courts or administrative proceedings, be determined to be invalid or unenforceable.
Because patent applications in the United States and certain other jurisdictions are maintained in secrecy for 18 months or potentially
even longer, and because publication of discoveries in the scientific or patent literature often lags behind actual discoveries and
patent application filings, we cannot be certain of the priority of inventions covered by pending patent applications. Accordingly,
we may not have been the first to invent the subject matter disclosed in some of our patent applications or the first to file patent
applications covering such subject matter, and we may have to participate in interference proceedings or derivation proceedings
declared by the United States Patent and Trademark Office (the "USPTO") to determine priority of invention.
10
Patent Portfolio
Our patent portfolio includes patent applications in varying stages of prosecution in the United States and selected jurisdictions
outside of the United States. As of February 12, 2020, our patent portfolio consisted of nine issued patents and 41 patent families,
which include composition, method of use, and manufacturing process claims. Additionally, a Notice of Allowance has been
received for one application in the United States. Of the patents in our portfolio, three are owned by us, five are exclusively
licensed from the Mayo Clinic Foundation for Medical Education and Research, an affiliate of Mayo Clinic, (the "Mayo Clinic")
and one is exclusively licensed from the University of Chicago. Of the patent families in our portfolio, 39 are owned by us, one
is exclusively licensed to us from the University of Chicago and one is exclusively licensed to us from the Mayo Clinic. The patent
portfolio includes patents and applications covering the following:
•
•
An oral oncology platform exclusively licensed from the University of Chicago, consisting of one issued patent and 24
pending applications. Patents in this family are expected to expire in 2036.
Formulation platforms in which applications that issue as a patent are expected to expire in 2038 to 2040.
• Modality platforms in which applications that issue as a patent are expected to expire in 2038 to 2040.
•
Inflammation portfolio:
•
•
•
EDP1815, consisting of five issued patents in-licensed from the Mayo Clinic, covering compositions and methods
of use (the patents and application from the Mayo Clinic expected to expire in 2030) and four patent families we own
directed to compositions, methods of use and manufacturing processes. Any applications claiming priority to these
applications we own that issue as patents are expected to expire in 2038 to 2040;
EDP1867, consisting of two patent families we own directed to compositions and methods of use. Any applications
claiming priority to these applications that issue as patents are expected to expire in 2039 and 2041; and
EDP2939, consisting of one patent family we own directed to compositions and methods of use. Any applications
claiming priority to these applications that issue as patents are expected to expire in 2038.
•
Oncology portfolio:
•
EDP1503 includes protection under the oral oncology platform exclusively licensed from the University of Chicago
covering methods of use. Applications in this family that issue as patents are expected to expire in 2036. Patent
protection for EDP1503 is also being pursued in two patent families we own directed to compositions and methods
of use. Any applications we own claiming priority to these applications that issue as patents are expected to expire
in 2038 to 2040.
Patent Term
The base term of a U.S. patent is 20 years from the filing date of the earliest-filed non-provisional patent application from
which the patent claims priority. The term of a U.S. patent can be lengthened by patent term adjustment, which compensates the
owner of the patent for administrative delays at the USPTO. In some cases, the term of a U.S. patent is shortened by terminal
disclaimer that reduces its term to that of an earlier-expiring patent.
The term of a U.S. patent may be eligible for patent term extension under the Drug Price Competition and Patent Term
Restoration Act of 1984, referred to as the Hatch-Waxman Act, to account for at least some of the time the drug is under development
and regulatory review after the patent is granted. With regard to a drug for which FDA approval is the first permitted marketing
of the active ingredient, the Hatch-Waxman Act allows for extension of the term of one U.S. patent that includes at least one claim
covering the composition of matter of such an FDA-approved drug, an FDA-approved method of treatment using the drug and/
or a method of manufacturing the FDA-approved drug. The extended patent term cannot exceed the shorter of five years beyond
the non-extended expiration of the patent or fourteen years from the date of the FDA approval of the drug, and a patent cannot be
extended more than once or for more than a single product. During the period of extension, if granted, the scope of exclusivity is
limited to the approved product for approved uses. Some foreign jurisdictions, including Europe and Japan, have analogous patent
term extension provisions, which allow for extension of the term of a patent that covers a drug approved by the applicable foreign
regulatory agency. In the future, if and when our product candidates receive FDA approval, we expect to apply, if appropriate, for
patent term extension on patents covering those product candidates, their methods of use and/or methods of manufacture.
Trade Secrets
In addition to patents, we rely on trade secrets and know-how to develop and maintain our competitive position. We typically
rely on trade secrets to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent
protection. We protect trade secrets and know-how by establishing confidentiality agreements and intellectual property assignment
agreements with our employees, consultants, scientific advisors, contractors and collaborators. These agreements provide that all
confidential information developed or made known during the course of an individual or entities’ relationship with us must be
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kept confidential during and after the relationship. These agreements also provide that all inventions resulting from work performed
for us or relating to our business and conceived or completed during the period of employment or assignment, as applicable, shall
be our exclusive property. In addition, we take other appropriate precautions, such as physical and technological security measures,
to guard against misappropriation of our proprietary information by third parties.
License and Manufacturing Agreements
We are a party to several license agreements under which we license patents, patent applications and other intellectual
property. The licensed intellectual property includes composition of matter and methods of using monoclonal microbials. In some
cases, licenses cover physical material in the form of microbial strains. Certain diligence and financial obligations are tied to these
agreements. Additionally, we are a party to manufacturing agreements for committed resources and exclusivity. We consider the
following agreements to be material to our business.
University of Chicago License Agreement
In March 2016, we entered into an exclusive license agreement with the University of Chicago. This agreement gives us an
exclusive, worldwide, sublicensable license to patent rights related to administration of microbes to treat cancer. Under this
agreement, we may make, have made, use, import, have sold, offer to sell, and sell microbial products to treat cancer in combination
with checkpoint inhibitors. Many microbial genera are covered by these patent rights, including Bifidobacterium, which
encompasses our lead oncology candidate, EDP1503. In addition, we have a non-exclusive, worldwide license to use technical
information disclosed to us by the University of Chicago for the development and commercialization of microbial products to
treat cancer in combination with checkpoint inhibitors. Under this agreement, we must use commercially reasonable efforts to
develop and market licensed products. Commercially reasonable efforts can be demonstrated by achieving specific milestones by
specific dates.
Pursuant to the terms of the license agreement, we paid the University of Chicago an upfront fee of an amount less than $0.5
million and are required to make low five-digit license maintenance fees on an annual basis, creditable against royalties owed in
that given year. In addition, we may owe the University of Chicago future milestone payments totaling an aggregate of approximately
$60.9 million upon achievement of specific milestones, the vast majority of which are associated with specific regulatory and
commercial milestones.
The University of Chicago is entitled to receive low single-digit percentage royalties on annual net sales of products that
fall under the licensed patent rights on a country-by-country and product-by-product basis. The royalty percentage depends on
the amount of annual net sales and whether the product is covered by valid patent claims, un-published technical information, or
published technical information. Our valid claims royalty obligations to the University of Chicago will expire upon the later of
(a) expiration of the last-to-expire valid claim covering the product, or (b) the expiration of regulatory exclusivity of a product
covered by the patent rights. Technical information royalty obligations will expire upon the earlier of (a) fifteen years from first
commercial sale of the applicable product, or (b) when a substantially similar product comes onto the market.
Under the license agreement, we have the right to sublicense licensed rights to third parties, provided that the sublicense
agreement is consistent with the terms of the original license and that we hold any sublicensees compliant. Should we enter a
sublicense under these patent rights, we are required to pay the University of Chicago a percentage of our sublicense revenue. The
University of Chicago is entitled to percentages of sublicense revenue in the low- to mid-teens depending on the stage of development
of licensed products at the time the sublicense is entered.
The University of Chicago maintains control of patent prosecution, defense and maintenance on their patent rights. We are
responsible for reimbursing the University of Chicago for patent costs incurred. If we cease payment for patent prosecution, our
patent rights will terminate and revert to the University of Chicago. We have the first right, but not obligation, to control any post
grant proceedings and to take action in the prosecution or prevention of any infringement by a third party to patent rights.
The license granted by the University of Chicago is subject to any retained rights of the U.S. government in the patent rights
and to retained rights of the University of Chicago to use the patent rights for non-commercial research purposes. The license
agreement will expire on a country-by-country and product-by-product basis on the later of (a) expiration date of the last to expire
licensed patents, or (b) a set number of years in the mid-teens from first commercial sale of a licensed product. Prior to the expiration
date, we may terminate the license with written notification to the University of Chicago. Prior to the expiration date, the University
of Chicago may terminate the agreement in whole or in part if we fail to make payments within thirty days of receiving a written
notice of missed payment, if we breach any material obligation of the agreement and do not cure such breach within thirty days,
if we become bankrupt or insolvent, or if we are dissolved or liquidated. The University of Chicago may also terminate the license
if we fail to show commercially reasonable efforts in meeting diligence milestones.
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License Agreement with the Mayo Clinic
In August 2017, we entered into an agreement with the Mayo Clinic to license intellectual property and microbial strains.
This agreement gives us an exclusive, worldwide, sublicensable license to patent rights related to compositions of matter and
methods of using microbes from a specific species to treat autoimmune and inflammatory diseases. In addition to patent rights,
this agreement also includes an exclusive, worldwide, sublicensable license to an immuno-modulatory microbial strain isolated
from a human small intestinal sample by the Mayo Clinic. Under the licensed patent rights and/or using the licensed microbial
strain, we may make, have made, use, offer for sale, sell, and import products containing microbes of a specific species to treat
autoimmune and inflammatory diseases. In addition, we have a non-exclusive, worldwide license to use know-how disclosed to
us by the Mayo Clinic related to the development and commercialization of products containing microbes of a specific species to
treat autoimmune and inflammatory diseases. The licensed patents include five issued U.S. patents. Issued claims cover
compositions containing microbes from a specified species and methods of using these compositions to treat autoimmune and
inflammatory diseases. EDP1815, one of our lead candidates in the inflammation program, contains the microbial strain licensed
from the Mayo Clinic and is covered by these patent rights. Under this agreement, we must use commercially reasonable efforts
to bring licensed products to the market.
In consideration for the licenses, we paid the Mayo Clinic an upfront payment of $0.2 million. Beginning on the second
anniversary of the effective date, we owe the Mayo Clinic escalating annual license maintenance fees in the low- to mid-five digits.
Annual license maintenance fees count towards milestones and royalties owed in a given year. The Mayo Clinic is entitled to
future clinical, approval and sales milestones. In addition, we have agreed to pay the Mayo Clinic future milestone payments
totaling a maximum of $1.0 million upon achievement of specific development milestones and $56 million upon achievement of
specific regulatory and commercial milestones.
The Mayo Clinic is entitled to receive low single-digit percentage royalties on annual net sales of products that fall under
the licensed patent rights or contain the licensed microbial strain on a country-by-country and product-by-product basis. The
royalty percentage depends on the amount of annual net sales and whether the product is covered by valid patent claims or contains
the licensed microbial strain. Royalties on products containing the licensed microbial strain will only be due in countries where
licensed products are not covered by valid claims. Our valid claims royalty obligations to the Mayo Clinic will terminate on
expiration of the last to expire valid claim covering the product. Royalty obligations on products containing the licensed microbial
strain will expire 15 years from the first commercial sale of the licensed product.
Under the license agreement, we have the right to sublicense licensed patent rights and the licensed microbial strain to third
parties through multiple tiers, provided that the sublicense agreement is on substantially the same terms as the original license and
that we are responsible for the performance of sublicensees. We must obtain the Mayo Clinic’s permission to grant any fully paid-
up, royalty-free or exclusive sublicenses. We have no financial obligations to the Mayo Clinic related to sublicenses.
The Mayo Clinic has the responsibility to prepare, file, prosecute or abandon its patent rights. We may provide prior comment
and advice to the Mayo Clinic and we are responsible for reimbursing the Mayo Clinic for past and future patent costs. If we cease
payment for patent preparation, filing or prosecution, our patent rights will terminate and revert to the Mayo Clinic. We have the
first right, but not obligation, to control any post grant proceedings and to take action in the prosecution or prevention of any
infringement by a third party to patent rights.
The license granted by Mayo Clinic is subject to any retained rights of the US government in the patent rights and to retained
rights of Mayo Clinic to use the patent rights and licensed microbial strain for non-commercial research purposes, which excludes
human use. The license to patent rights will expire on a country-by-country and product-by-product basis upon the expiration date
of the last to expire licensed patents. The license to Mayo Clinic’s microbial strain will expire 15 years from first commercial sale
of a product containing the licensed microbial strain. Prior to the expiration date, Mayo Clinic may terminate the license if we fail
to make payments within thirty days of receiving a written notice of missed payment, if we breach any material obligation of the
agreement and do not cure such breach within thirty days, if we become bankrupt or insolvent, or if we or any sublicensee directly
or indirectly brings suit against Mayo Clinic. Upon early termination of our license, any sublicensee that is not in material breach
of the agreement will have the right to retain its sublicense to the patent rights and microbial strain. We do not have the right to
terminate the agreement prior to the expiration date.
Biose Committed Resource and Exclusivity Agreement
Effective February 2018, we entered into an exclusivity and commitment agreement with Biose Industrie ("Biose"). Under
this agreement, Biose reserves sufficient manufacturing resources for the manufacture of our drug substance according to a specified
schedule of manufacturing runs over a three-year period. We are required to pay Biose fees in the high five digits to low six digits
for each run depending on the type of run being conducted. If we do not use committed manufacturing resources, we are required
to pay Biose for these resources unless Biose is able to re-sell unused runs.
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In addition to manufacturing resources, this agreement includes exclusivity provisions, which ensure that we are Biose’s
exclusive customer for the manufacture of certain microbial biotherapeutic products. We are required to pay annual fees in the
mid six digits to Biose in consideration for these exclusivity provisions.
The term of the agreement is three years from the effective date. We may terminate the agreement at any time with prior
notice within a specified period to Biose, or if there is a change of control of Biose that may adversely affect our interest. In the
event that we terminate at will, we are obligated to pay Biose a mid-range percentage of the committed manufacturing resource
fees for a specified period less than one year following the effective date of termination. In addition, both parties may terminate
if the other party materially breaches the agreement and does not cure such breach within a specified period or if either party
becomes bankrupt or insolvent, or is dissolved or liquidated.
Sacco Collaboration Agreement
In July 2019, we entered into a collaboration agreement with Sacco S.r.l. ("Sacco"), an affiliate of one of our contract
manufacturing organizations. Pursuant to the agreement, Sacco has agreed that it and its affiliates will, on an exclusive and
worldwide basis for and on behalf of us, manufacture and supply single strain, non-genetically modified microbes intended for
oral delivery or oral use in pharmaceutical products for a period of five years. Sacco and its affiliates may not manufacture and
supply single strain, non-genetically modified microbes for oral delivery or oral use in pharmaceutical products for itself or other
parties, with the exception of pre-existing products for pre-existing customers. Under the terms of the agreement, we have agreed
to pay annual fees in the mid six digits to Sacco during the exclusivity period.
The agreement will remain in effect during the exclusivity period and may be terminated by (i) us upon written notice to
Sacco if an independent third-party representative concludes following an audit that Sacco or its affiliates are not in compliance
with the exclusivity provisions of the agreement, (ii) Sacco upon written notice to us if the manufacturing relationship has been
inactive for a period of six consecutive months and there are no services scheduled to be performed or products scheduled to be
supplied within the next six months, or (iii) either party in the event of a material breach of the agreement by the other party that
remains uncured for 20 business days or the insolvency of the other party.
Collaboration
Merck-MSD International GmbH
In November 2018, we entered into a clinical trial collaboration agreement with Merck under which we will sponsor and
conduct a clinical trial evaluating EDP1503 in combination with KEYTRUDA, Merck's anti-PD-1 therapy, in patients with
advanced metastatic colorectal carcinoma, triple-negative breast cancer, and checkpoint inhibitor relapsed tumors. Under the
agreement, we retain sole ownership of all rights to EDP1503, and there are no material financial terms or commitments required
of either party.
Competition
The biotechnology and pharmaceutical industries are characterized by rapid growth and a dynamic landscape of proprietary
therapeutic candidates. While we believe that our monoclonal microbial platform and candidates, coupled with our resources and
industry expertise, give us a competitive advantage in the field, we face competition from a variety of institutions, including larger
pharmaceutical companies with more resources. Specialty biotechnology companies, academic research institutions, governmental
agencies, as well as public and private institutions are also potential sources of competitive products and technologies.
In both inflammatory diseases and oncology, we anticipate intensifying competition as new therapies are approved and
advanced technologies become available. Many of our competitors, either alone or with strategic partners, have considerably
greater financial, technical, and human resources than we do. Competitors may also have more experience developing, obtaining
approval for, and marketing novel treatments in the indications we are pursuing. These factors could give our competitors an
advantage over us in recruiting and retaining qualified personnel, completing clinical development, and commercializing their
products. Competitors that are able to obtain FDA or other regulatory approval for their products more rapidly than we can for
our products may also establish a stronger market position, diminishing our commercial opportunity. Key considerations that
would impact our capacity to effectively compete include the efficacy, safety, ease of use, as well as pricing and reimbursement
of our products.
In autoimmune or inflammatory diseases, we may be challenged by a wide range of competitors. In later, more severe stages
of disease, the majority of competition will stem from companies marketing or developing injectable biologics and novel small
molecule therapies, such as AbbVie Inc., Johnson & Johnson, Pfizer Inc, Novartis International A.G., Regeneron Pharmaceuticals,
Inc. Sanofi S.A., Bristol-Myers Squibb, and Amgen Inc. Potentially competing mechanisms of action include TNF, IL-4, IL-17,
IL-23,JAK, and PDE4 inhibitors. Novel delivery of biologics, particularly via oral administration, and the entry of biosimilars
will also add to competition within the therapeutic area.
Significant competition exists in the immuno-oncology field, where we are developing our first product candidates in
oncology. Although our monoclonal microbial approach is unique from most other existing or investigational therapies in immuno-
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oncology, we will need to compete with all currently or imminently available therapies within the indications where our development
is focused. Although there is a wide range of potentially competitive mechanisms, possible synergies between these and monoclonal
microbials will also be evaluated.
The main classes of immunotherapy that are available or are being evaluated by our competitors include:
Checkpoint inhibitors: Agenus Inc., AstraZeneca plc, Bristol-Myers Squibb, F. Hoffmann-La Roche A.G., Merck, Pfizer
Inc., Regeneron Pharmaceuticals Inc.; and
Cell therapy: Bristol-Myers Squibb, Gilead Sciences, Inc., and Novartis International A.G.
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Government Regulation
Government Regulation in the United States
The FDA and other regulatory authorities at federal, state and local levels, as well as in foreign countries, extensively regulate,
among other things, the research, development, testing, manufacture, quality control, import, export, safety, effectiveness, labeling,
packaging, storage, distribution, record keeping, approval, advertising, promotion, marketing, post-approval monitoring and post-
approval reporting of drugs and biologics such as those we are developing. We, along with our contract manufacturers, will be
required to navigate the various preclinical, clinical and commercial approval requirements of the governing regulatory agencies
of the countries in which we wish to conduct studies or seek approval for our product candidates. The process of obtaining regulatory
approvals and ensuring subsequent compliance with appropriate federal, state, local and foreign statutes and regulations requires
the expenditure of substantial time and financial resources.
In the United States, the FDA regulates drug and biologic products under the Federal Food, Drug and Cosmetic Act, its
implementing regulations and other laws, including, in the case of biologics, the Public Health Service Act. Our product candidates
are subject to regulation by the FDA as biologics. Biologics require the submission of a biologics license application ("BLA") and
licensure, which constitutes approval, by the FDA before being marketed in the United States. None of our product candidates
has been approved by the FDA for marketing in the United States, and we currently have no BLAs pending. If we fail to comply
with applicable FDA or other requirements at any time during product development, clinical testing, the approval process or after
approval, we may become subject to administrative or judicial sanctions. These sanctions could include the FDA’s refusal to
approve pending applications, suspension or revocation of approved applications, warning letters, product recalls, product seizures,
total or partial suspensions of manufacturing or distribution, injunctions, fines, civil penalties or criminal prosecution. Any FDA
enforcement action could have a material adverse effect on us.
The process required by the FDA before our biologic product candidates may be marketed in the United States generally
involves the following:
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completion of preclinical laboratory tests and animal studies performed in accordance with the FDA’s good laboratory
practice ("GLP") requirements;
submission to the FDA of an investigational new drug application ("IND") which must become effective before clinical
trials in the United States may begin;
performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the product
candidate for each proposed indication, conducted in accordance with the FDA’s good clinical practice ("GCP")
requirements;
submission to the FDA of a BLA;
satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced
to assess compliance with cGMP regulations; and
FDA review and approval of the BLA prior to any commercial marketing, sale or shipment of the product.
The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any
approvals for our product candidates will be granted on a timely basis, if at all.
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Preclinical and Clinical Trials
Once a product candidate is identified for development, it enters the preclinical testing stage. Preclinical studies include
laboratory evaluations of drug chemistry, formulation and stability, as well as studies to evaluate toxicity in animals, which must
be conducted in accordance with GLP requirements. The results of the preclinical studies, together with manufacturing information
and analytical data, are submitted to the FDA as part of an IND. The IND automatically becomes effective 30 days after receipt
by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the clinical trial,
including concerns that human research subjects will be exposed to unreasonable health risks, and imposes a clinical hold. In such
a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Submission of an
IND may result in the FDA not allowing clinical trials to commence or not allowing clinical trials to commence on the terms
originally specified in the IND. A separate submission to an existing IND must also be made for each successive clinical trial
conducted during product development, and the FDA must grant permission, either explicitly or implicitly by not objecting, before
each clinical trial can begin.
Clinical trials involve the administration of the product candidate to human subjects under the supervision of qualified
investigators. Clinical trials are conducted under protocols detailing, among other things, the objectives of the clinical trial and
the parameters and criteria to be used in monitoring safety and evaluating effectiveness. Each protocol must be submitted to the
FDA as part of the IND. An independent institutional review board ("IRB") for each investigator site proposing to participate in
a clinical trial must also review and approve the clinical trial before it can begin at that site, and the IRB must monitor the clinical
trial until it is completed. The FDA, the IRB, or the sponsor may suspend or discontinue a clinical trial at any time on various
grounds, including a finding that the subjects are being exposed to an unacceptable health risk. Clinical testing also must satisfy
extensive GCP requirements, including requirements for informed consent.
For purposes of BLA approval, clinical trials are typically conducted in three sequential phases, which may overlap or be
combined.
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Phase 1-Phase 1 clinical trials involve initial introduction of the investigational product into healthy human subjects or
patients with the target disease or condition. These studies are typically designed to test the safety, dosage tolerance,
absorption, metabolism and distribution of the investigational product in humans, the side effects associated with increasing
doses, and, if possible, to gain early evidence of effectiveness.
Phase 2-Phase 2 clinical trials typically involve administration of the investigational product to a limited patient population
with a specified disease or condition to evaluate the preliminary efficacy, optimal dosages and dosing schedule and to
identify possible adverse side effects and safety risks.
Phase 3-Phase 3 clinical trials typically involve administration of the investigational product to an expanded patient
population to further evaluate dosage, to provide statistically significant evidence of clinical efficacy and to further test
for safety, generally at multiple geographically dispersed clinical trial sites. These clinical trials are intended to establish
the overall risk/benefit ratio of the investigational product and to provide an adequate basis for product approval and
physician labeling.
In some cases, the FDA may condition approval of a BLA on the sponsor’s agreement to conduct additional clinical trials
to further assess the biologic’s safety and effectiveness after BLA approval. Such post-approval clinical trials are typically referred
to as Phase 4 clinical trials.
Although most clinical research performed in the United States in support of a BLA must be authorized in advance by the
FDA, under the IND regulations and procedures described above, there are certain circumstances under which clinical trials can
be conducted without submission of an IND. For example, a sponsor who wishes to conduct a clinical trial outside the United
States may, but need not, obtain FDA authorization to conduct the clinical trial under an IND.
Progress reports detailing the results of the clinical trials, among other information, must be submitted at least annually to
the FDA and written IND safety reports must be submitted to the FDA and the investigators for serious and unexpected suspected
adverse events, findings from other studies or animal or in vitro testing that suggest a significant risk for human subjects and any
clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator
brochure.
Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional
information about the chemistry and physical characteristics of the biologic and finalize a process for manufacturing the biologic
in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently
producing quality batches of the product candidate and manufacturers must develop, among other things, methods for testing the
identity, strength, quality and purity of the final biological product. Additionally, appropriate packaging must be selected and tested
and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration
over its shelf life.
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BLA Submission and FDA Review
Assuming successful completion of all required testing in accordance with all applicable regulatory requirements, the results
of preclinical studies and clinical trials, together with other detailed information, including extensive manufacturing information
and information on the composition of the biologic, are submitted to the FDA in the form of a BLA requesting approval to market
the biologic for one or more specified indications. The BLA must include all relevant data available from preclinical and clinical
studies, including negative or ambiguous results as well as positive findings, together with detailed information relating to the
product’s chemistry, manufacturing, controls, and proposed labeling, among other things. Data can come from company-sponsored
clinical studies intended to test the safety and effectiveness of a use of the product, or from a number of alternative sources,
including studies initiated by investigators. The submission of a BLA requires payment of a substantial user fee unless a waiver
is granted, and the sponsor of an approved BLA is also subject to an annual program fee. Each BLA submitted to the FDA is
reviewed for administrative completeness and reviewability within 60 days of the FDA’s receipt of the application. If the BLA is
found to be complete, the FDA will file the BLA, triggering a full substantive review of the application. The FDA may refuse to
file any BLA that it deems incomplete or not properly reviewable at the time of submission.
Once a BLA has been accepted for filing, by law the FDA has 180 days to review the application and respond to the applicant.
Under the Prescription Drug User Fee Act, the FDA has a goal of reviewing BLAs within ten months of the 60-day filing date for
standard review or six months for priority review, but the overall timeframe is often extended by FDA requests for additional
information or clarification. The FDA reviews a BLA to determine, among other things, whether the biological product is safe,
pure and potent and whether the facility or facilities in which it is manufactured meet standards designed to assure the product’s
continued safety, purity and potency. The FDA may refer the application to an advisory committee for review, evaluation and
recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory
committee, but it generally follows such recommendations.
Before approving a BLA, the FDA will inspect the facility or the facilities at which the biologic product is manufactured,
and will not license the product unless cGMP compliance is satisfactory. The FDA may also inspect the sites at which the clinical
trials were conducted to assess their compliance with GCP requirements, and will not license the biologic unless compliance with
such requirements is satisfactory.
The FDA may deny approval of a BLA if the applicable statutory and regulatory criteria are not satisfied, or it may require
additional preclinical or clinical data. Even if such data are submitted, the FDA may ultimately decide that the BLA does not
satisfy the criteria for approval. Data from clinical trials are not always conclusive and the FDA may interpret data differently
than sponsors. Once the FDA approves a BLA, such approval defines the indicated uses for which the biologic may be marketed.
The FDA may also require implementation of a Risk Evaluation and Mitigation Strategy, or REMS, which can include a medication
guide, communication plan, or elements to assure safe use, such as restricted distribution methods, physician training, patient
registries and other risk minimization tools. The FDA also may condition approval on, among other things, changes to proposed
labeling claims or the development of adequate controls and specifications. Once approved, the FDA may withdraw the product
approval if compliance with pre- and post-marketing regulatory standards is not maintained or if problems occur after the product
reaches the market. The FDA may require one or more Phase 4 post-market studies and surveillance to further assess and monitor
the product’s safety and effectiveness after commercialization, and may limit further marketing based on the results of these post-
marketing studies. After approval, certain changes to the approved biologic, such as adding new indications, manufacturing changes
or additional labeling claims, are subject to further FDA review and approval. Depending on the nature of the change proposed,
a BLA supplement must be filed and approved before the change may be implemented.
Expedited Development and Review Programs
The FDA maintains several programs intended to facilitate and expedite development and review of new drugs and biologics
to address unmet medical needs in the treatment of serious or life-threatening diseases or conditions. These programs include Fast
Track designation, Breakthrough Therapy designation, Priority Review designation and Accelerated Approval, and the purpose
of these programs is to provide important new drugs to patients earlier than under standard FDA review procedures.
A new drug or biologic is eligible for Fast Track designation if it is intended to treat a serious or life-threatening disease or
condition and demonstrates the potential to address unmet medical needs for such disease or condition. Fast Track designation
provides increased opportunities for sponsor meetings with the FDA during preclinical and clinical development, in addition to
the potential for rolling review once a marketing application is filed, meaning that the agency may review portions of the marketing
application before the sponsor submits the complete application, as well as Priority Review, discussed below. In addition, a new
drug or biologic may be eligible for Breakthrough Therapy designation if it is intended to treat a serious or life-threatening disease
or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing
therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical
development. Breakthrough Therapy designation provides all the features of Fast Track designation in addition to intensive guidance
on an efficient drug development program beginning as early as Phase 1, and FDA organizational commitment to expedited
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development, including involvement of senior managers and experienced review staff in a cross-disciplinary review, where
appropriate.
Any product submitted to the FDA for approval, including a product with Fast Track or Breakthrough Therapy designation,
may also be eligible for additional FDA programs intended to expedite the review process, including Priority Review designation
and Accelerated Approval. A product is eligible for Priority Review if it has the potential to provide a significant improvement in
safety or effectiveness in the treatment, diagnosis or prevention of a serious disease or condition. Additionally, products are eligible
for Accelerated Approval if they can be shown to have an effect on a surrogate endpoint that is reasonably likely to predict clinical
benefit, or an effect on a clinical endpoint that can be measured earlier than an effect on irreversible morbidity or mortality which
is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the
severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments. Accelerated Approval is usually
contingent on a sponsor’s agreement to conduct additional post-approval studies to verify and describe the product’s clinical
benefit. In addition, unless otherwise informed by the FDA, the FDA currently requires, as a condition for Accelerated Approval,
that all advertising and promotional materials that are intended for dissemination or publication within 120 days following marketing
approval be submitted to the agency for review during the pre-approval review period, and that after 120 days following marketing
approval, all advertising and promotional materials be submitted at least 30 days prior to the intended time of initial dissemination
or publication.
Fast Track designation, Breakthrough Therapy designation, Priority Review designation and Accelerated Approval do not
change the standards for approval but may expedite the development or review process. Even if a product qualifies for one or
more of these programs, the FDA may later decide that the product no longer meets the conditions for qualification or decide that
the time period for FDA review or approval will not be shortened.
Post-Approval Requirements
Licensed biologics that are manufactured or distributed in the United States are subject to pervasive and continuing regulation
by the FDA, including, among other things, requirements relating to record keeping, periodic reporting, product distribution,
advertising and promotion and reporting of adverse experiences with the product. There is also a continuing, annual prescription
drug product program user fee.
Any biologics manufactured or distributed by us or our contract manufacturers pursuant to FDA approvals would be subject
to continuing regulation by the FDA, including recordkeeping requirements and reporting of adverse experiences associated with
the product. Manufacturers and their subcontractors are required to register their establishments with the FDA and certain state
agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with ongoing
regulatory requirements, including cGMP, which impose certain procedural and documentation requirements upon us and our
contract manufacturers. Failure to comply with statutory and regulatory requirements can subject a manufacturer to possible legal
or regulatory action, such as warning letters, suspension of manufacturing, product seizures, injunctions, civil penalties or criminal
prosecution.
Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or
frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the
approved labeling to add new safety information, requirements for post-market studies or clinical trials to assess new safety risks,
or imposition of distribution or other restrictions under a REMS. Other potential consequences include, among other things:
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restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or
product recalls;
fines, warning letters or holds on post-approval clinical trials;
refusal of the FDA to approve applications or supplements to approved applications, or suspension or revocation of product
approvals;
product seizure or detention, or refusal to permit the import or export of products; or
injunctions or the imposition of civil or criminal penalties.
The FDA closely regulates the post-approval marketing and promotion of biologics, including standards and regulations for
direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities, and promotional
activities involving the internet and social media. A company can make only those claims relating to safety and efficacy that are
approved by the FDA. Physicians may prescribe legally available biologics for uses that are not described in the product’s labeling
and that differ from those tested by us and approved by the FDA. The FDA does not regulate the behavior of physicians in their
choice of treatments. The FDA does, however, impose stringent restrictions on manufacturers’ communications regarding off-
label use. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising and
potential civil and criminal penalties.
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Biosimilars and Regulatory Exclusivity
As part of the Patient Protection and Affordable Care Act enacted in 2010, as amended by the Health Care and Education
Reconciliation Act of 2010 (collectively the "ACA", the Biologics Price Competition and Innovation Act (the "BPCIA") established
an abbreviated pathway for the approval of biosimilar and interchangeable biological products. The abbreviated regulatory pathway
provides legal authority for the FDA to review and approve biosimilar biologics based on their similarity to an existing brand
product, referred to as a reference product, including the possible designation of a biosimilar as interchangeable with a brand
product. Under the BPCIA the approval of a biosimilar product may not be made effective by the FDA until 12 years from the
date on which the reference product was first licensed. Moreover, the extent to which a biosimilar, once approved, will be substituted
for a reference product in a way that is similar to traditional generic substitution for non-biological drug products is not yet clear,
and will depend on a number of marketplace and regulatory factors that are still developing. The BPCIA is complex and continues
to be interpreted and implemented by the FDA. As a result, its ultimate impact, implementation and meaning are subject to
uncertainty. In addition, the period of exclusivity provided by the BPCIA only operates against third parties seeking approval via
the abbreviated pathway, but would not prevent third parties from pursuing approval via the traditional approval pathway. In
addition, foreign regulatory authorities may also provide for exclusivity periods for approved biological products. For example,
biological products in the European Union may be eligible for at least a ten-year period of exclusivity.
Government Regulation Outside of the United States
To market any product outside of the United States, we would need to comply with numerous and varying regulatory
requirements of other countries regarding safety and efficacy and governing, among other things, clinical trials, marketing
authorization, manufacturing, commercial sales and distribution of drugs and biologics. For instance, in the European Economic
Area (the "EEA") (comprised of the 27 European Union Member States plus Iceland, Liechtenstein and Norway) medicinal
products must be authorized for marketing by using either a centralized authorization procedure or national authorization
procedures.
Centralized procedure-Under the centralized procedure, following the opining of the EMA Committee for Medicinal Products
for Human Use ("CHMP"), the European Commission issues a single marketing authorization valid across the EEA. The centralized
procedure is compulsory for human medicines derived from biotechnology processes or advanced therapy medicinal products
(such as gene therapy, somatic cell therapy and tissue engineered products), products that contain a new active substance indicated
for the treatment of certain diseases, such as HIV/AIDS, cancer, neurodegenerative disorders, diabetes, autoimmune diseases and
other immune dysfunctions, viral diseases, and officially designated orphan medicines. For medicines that do not fall within these
categories, an applicant has the option of submitting an application for a centralized marketing authorization to the EMA, as long
as the medicine concerned contains a new active substance not yet authorized in the EEA, is a significant therapeutic, scientific
or technical innovation, or if its authorization would be in the interest of public health in the EEA. Under the centralized procedure
the maximum timeframe for the evaluation of a marketing authorization application (the "MAA") by the EMA is 210 days,
excluding clock stops, when additional written or oral information is to be provided by the applicant in response to questions asked
by the CHMP. Accelerated assessment might be granted by the CHMP in exceptional cases, when a medicinal product is expected
to be of a major public health interest, particularly from the point of view of therapeutic innovation. The timeframe for the evaluation
of an MAA under the accelerated assessment procedure is 150 days, excluding clock stops.
National authorization procedures-There are also two other possible routes to authorize medicinal products in several
countries, which are available for products that fall outside the scope of the centralized procedure:
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Decentralized procedure. Using the decentralized procedure, an applicant may apply for simultaneous authorization in
more than one EU country of medicinal products that have not yet been authorized in any EU country and that do not fall
within the mandatory scope of the centralized procedure.
• Mutual recognition procedure. In the mutual recognition procedure, a medicine is first authorized in one EU Member State,
in accordance with the national procedures of that country. Following this, additional marketing authorizations can be
sought from other EU countries in a procedure whereby the countries concerned recognize the validity of the original,
national marketing authorization.
In the EEA, new products authorized for marketing (i.e., reference products) qualify for eight years of data exclusivity and
an additional two years of market exclusivity upon marketing authorization. The data exclusivity period prevents generic or
biosimilar applicants from relying on the preclinical and clinical trial data contained in the dossier of the reference product when
applying for a generic or biosimilar marketing authorization in the European Union during a period of eight years from the date
on which the reference product was first authorized in the European Union. The market exclusivity period prevents a successful
generic or biosimilar applicant from commercializing its product in the European Union until ten years have elapsed from the
initial authorization of the reference product in the European Union. The ten-year market exclusivity period can be extended to a
maximum of eleven years if, during the first eight years of those ten years, the marketing authorization holder obtains an
authorization for one or more new therapeutic indications which, during the scientific evaluation prior to their authorization, are
held to bring a significant clinical benefit in comparison with existing therapies.
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The criteria for designating an "orphan medicinal product" in the EEA are similar in principle to those in the United States.
In the EEA a medicinal product may be designated as orphan if (1) it is intended for the diagnosis, prevention or treatment of a
life-threatening or chronically debilitating condition; (2) either (a) such condition affects no more than five in 10,000 persons in
the European Union when the application is made, or (b) the product, without the benefits derived from orphan status, would not
generate sufficient return in the European Union to justify investment; and (3) there exists no satisfactory method of diagnosis,
prevention or treatment of such condition authorized for marketing in the European Union, or if such a method exists, the product
will be of significant benefit to those affected by the condition. Orphan medicinal products are eligible for financial incentives
such as reduction of fees or fee waivers and are, upon grant of a marketing authorization, entitled to ten years of market exclusivity
for the approved therapeutic indication. During this ten-year orphan market exclusivity period, no marketing authorization
application shall be accepted and no marketing authorization shall be granted for a similar medicinal product for the same indication.
An orphan product can also obtain an additional two years of market exclusivity in the European Union for pediatric studies. The
ten year market exclusivity may be reduced to six years if, at the end of the fifth year, it is established that the product no longer
meets the criteria for orphan designation, for example, if the product is sufficiently profitable not to justify maintenance of market
exclusivity. Additionally, marketing authorization may be granted to a similar product for the same indication at any time if (i) the
second applicant can establish that its product, although similar, is safer, more effective or otherwise clinically superior; (ii) the
applicant consents to a second orphan medicinal product application; or (iii) the applicant cannot supply enough orphan medicinal
product.
Similar to the United States, the various phases of non-clinical and clinical research in the European Union are subject to
significant regulatory controls.
The Clinical Trials Directive 2001/20/EC, the Directive 2005/28/EC on Good Clinical Practice and the related national
implementing provisions of the individual European Union Member States govern the system for the approval of clinical trials in
the European Union. Under this system, an applicant must obtain prior approval from the competent national authority of the
European Union Member States in which the clinical trial is to be conducted. Furthermore, the applicant may only start a clinical
trial at a specific study site after the competent ethics committee has issued a favorable opinion. The clinical trial application must
be accompanied by, among other documents, an investigational medicinal product dossier, or the Common Technical Document,
with supporting information prescribed by Directive 2001/20/EC, Directive 2005/28/EC, where relevant the implementing national
provisions of the individual European Union Member States and further detailed in applicable guidance documents.
In April 2014, the new Clinical Trials Regulation, (EU) No 536/2014, or Clinical Trials Regulation, was adopted. The Clinical
Trials Regulation is directly applicable in all the European Union Member States, and supersedes the Clinical Trials Directive
2001/20/EC. If a clinical trial continues for more than three years from the day on which the Clinical Trials Regulation became
applicable, the Clinical Trials Regulation will at that time begin to apply to the clinical trial. The Clinical Trials Regulation aims
to simplify and streamline the approval of clinical trials in the European Union. The main characteristics of the regulation include:
a streamlined application procedure via a single entry point, the "European Union portal"; a single set of documents to be prepared
and submitted for the application as well as simplified reporting procedures for clinical trial sponsors; and a harmonized procedure
for the assessment of applications for clinical trials, which is divided in two parts. Part I is assessed by the competent authorities
of all European Union Member States in which an application for authorization of a clinical trial has been submitted (Member
States concerned). Part II is assessed separately by each Member State concerned. Strict deadlines have been established for the
assessment of clinical trial applications. The role of the relevant ethics committees in the assessment procedure will continue to
be governed by the national law of the concerned European Union Member State. However, overall related timelines will be
defined by the Clinical Trials Regulation.
Other Healthcare Laws
Pharmaceutical manufacturers are subject to additional healthcare regulation and enforcement by the federal government
and by authorities in the states and foreign jurisdictions in which they conduct their business. Such laws include, without limitation,
the U.S. federal anti-kickback, fraud and abuse, false claims, consumer fraud, pricing reporting, data privacy and security, and
transparency laws and regulations as well as similar state and foreign laws in the jurisdictions outside the U.S. Violation of any
such laws or any other governmental regulations that apply may result in penalties, including, without limitation, significant
administrative, civil and criminal penalties, damages, fines, additional reporting obligations and oversight if we become subject
to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with these laws, the curtailment
or restructuring of operations, exclusion from participation in governmental healthcare programs and imprisonment.
Coverage and Reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we obtain
regulatory approval. In the United States and markets in other countries, sales of any products for which we receive regulatory
approval for commercial sale will depend, in part, on the extent to which third-party payors and governments provide coverage,
and establish adequate reimbursement levels for such products.
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In the United States, third-party payors include federal and state healthcare programs, private managed care providers, health
insurers and other organizations. The process for determining whether a third-party payor will provide coverage for a product may
be separate from the process for setting the price of a product or for establishing the reimbursement rate that such a payor will pay
for the product. Third-party payors may limit coverage to specific products on an approved list, also known as a formulary, which
might not include all of the FDA-approved products for a particular indication. Third-party payors are increasingly challenging
the price, examining the medical necessity and reviewing the cost-effectiveness of medical products, therapies and services, in
addition to questioning their safety and efficacy. We may need to conduct expensive pharmaco-economic studies in order to
demonstrate the medical necessity and cost-effectiveness of our products, 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 product does not imply that an adequate reimbursement rate will be approved. Furthermore, one payor’s determination
to provide coverage for a product does not assure that other payors will also provide coverage for the product. Adequate third-
party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our
investment in product development.
Different pricing and reimbursement schemes exist in other countries. In the EU, governments influence the price of
pharmaceutical products through their pricing and reimbursement rules and control of national health care systems that fund a
large part of the cost of those products to consumers. Some jurisdictions operate positive and negative list systems under which
products may only be marketed once a reimbursement price has been agreed. To obtain reimbursement or pricing approval, some
of these countries may require the completion of clinical trials that compare the cost-effectiveness of a particular product candidate
to currently available therapies. Other member states allow companies to fix their own prices for medicines, but monitor and
control company profits. The downward pressure on health care costs 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 a commercial pressure on pricing within a country.
The marketability of any product candidates for which we receive regulatory approval for commercial sale may suffer if the
government and third-party payors fail to provide adequate coverage and reimbursement. In addition, emphasis on managed care
in the United States has increased and we expect will continue to increase the pressure on healthcare pricing. Coverage policies
and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for
one or more products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be
implemented in the future.
Healthcare Reform
In the United States and certain foreign jurisdictions, there have been, and we expect there will continue to be, a number
of legislative and regulatory changes to the healthcare system. The ACA substantially changed the way healthcare is financed by
both governmental and private insurers in the United States. By way of example, the ACA increased the minimum level of Medicaid
rebates payable by manufacturers of brand name drugs from 15.1% to 23.1%; required collection of rebates for drugs paid by
Medicaid managed care organizations; imposed a non-deductible annual fee on pharmaceutical manufacturers or importers who
sell certain “branded prescription drugs” to specified federal government programs, implemented a new methodology by which
rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled,
implanted, or injected; expanded eligibility criteria for Medicaid programs; creates a new Patient-Centered Outcomes Research
Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such
research; and established a Center for Medicare Innovation at CMS to test innovative payment and service delivery models to
lower Medicare and Medicaid spending, potentially including prescription drug spending.
Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA, and we expect
there will be additional challenges and amendments to the ACA in the future. By way of example, in 2017, Congress enacted the
Tax Act, which eliminated the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to
maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” On December
14, 2018, a Texas U.S. District Court Judge ruled that the individual mandate is a critical and inseverable feature of the ACA, and
therefore, because it was repealed as part of the Tax Act, the remaining provisions of the ACA are invalid as well. Additionally,
on December 18, 2019, the U.S. Court of Appeals for the Fifth Circuit ruled that the individual mandate was unconstitutional and
remanded the case back to the District Court to determine whether the remaining provisions of the ACA are invalid as well. It is
unclear how these decisions, future decisions, subsequent appeals, and other efforts to repeal and replace the ACA will impact the
ACA.
Other legislative changes have been proposed and adopted since the ACA was enacted, including aggregate reductions of
Medicare payments to providers of 2% per fiscal year and reduced payments to several types of Medicare providers, which will
remain in effect through 2029 absent additional congressional action.
Moreover, there has recently been heightened governmental scrutiny over the manner in which manufacturers set prices for
their marketed products, which has resulted in several Congressional inquiries and proposed and enacted legislation designed,
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among other things, to bring more transparency to product pricing, review the relationship between pricing and manufacturer
patient programs and reform government program reimbursement methodologies for pharmaceutical products. In addition,
individual states in the United States have also become increasingly active in implementing regulations designed to control
pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product
access and marketing cost disclosure and transparency measures and, in some cases, mechanisms to encourage importation from
other countries and bulk purchasing. Furthermore, there has been increased interest by third party payors and governmental
authorities in reference pricing systems and publication of discounts and list prices.
Research and Development
We have dedicated a significant portion of our resources to our efforts to develop our product candidates. We incurred
research and development expenses of $63.1 million, $39.9 million, and $20.0 million during the years ended December 31, 2019,
2018 and 2017, respectively. We anticipate that a significant portion of our operating expenses will continue to be related to
research and development in 2020 as we continue to advance our product candidates through clinical development.
Employees
As of February 7, 2020, we have 98 full-time employees, including 39 with M.D. or Ph.D. degrees. Of those full-time
employees, 73 are engaged in research and development. None of our employees is represented by a labor union or covered by a
collective bargaining agreement. We consider our relationships with our employees to be good.
Corporate and Other Information
We were incorporated in Delaware in May 2014. Our principal executive offices are located at 620 Memorial Drive,
Cambridge, Massachusetts 02139 and our telephone number is (617) 577-0300. Our website address is www.evelobio.com.
Information contained on or accessible through our website is not a part of this Annual Report on Form 10-K, and the inclusion
of our website address in this Annual Report on Form 10-K is an inactive textual reference only.
We file electronically with the U.S. Securities and Exchange Commission (the "SEC") our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information. Our SEC filings are
available to the public over the Internet at the SEC's website at http://www.sec.gov. We make available on our website
at www.evelobio.com, under "Investors," free of charge, copies of these reports as soon as reasonably practicable after filing or
furnishing these reports with the SEC.
Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as
well as the other information in this Annual Report on Form 10-K, including our consolidated financial statements and the
related notes and “Management’s Discussion and Analysis of Results of Operations and Financial Condition,” before deciding
whether to invest in our common stock. The occurrence of any of the events or developments described below could harm our
business, financial condition, results of operations and growth prospects. In such an event, the market price of our common
stock could decline, and you may lose all or part of your investment.
Risks Related to Our Financial Position and Need for Additional Capital
We are a development-stage company and have incurred significant losses since our inception. We expect to incur
losses for the foreseeable future and may never achieve or maintain profitability.
Since inception, we have incurred significant operating losses. For the year ended December 31, 2019 our net loss was
$85.5 million and as of December 31, 2019 we had an accumulated deficit of $198.9 million. Through December 31, 2019, we
have financed our operations through private placements of our preferred stock, borrowings under our previous loan and
security agreement with Pacific Western Bank and our current loan and security agreement with K2 HealthVentures LLC and
other parties ("K2HV") and proceeds from our initial public offering which was completed in May 2018. We have devoted
substantially all of our financial resources and efforts to developing our monoclonal microbial platform, identifying potential
product candidates and conducting preclinical and clinical studies. We are in the early stages of developing our product
candidates, and we have not completed the development of any monoclonal microbial therapies or other drugs or biologics. We
expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses
will increase substantially as we:
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•
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seek to enhance our monoclonal microbial platform and discover and develop additional product candidates;
seek regulatory approvals for any product candidates that successfully complete clinical trials;
seek to establish a sales, marketing and distribution infrastructure and scale-up manufacturing capabilities to
commercialize any products for which we may obtain regulatory approval;
• maintain, expand and protect our intellectual property portfolio; and
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•
add clinical, scientific, operational, financial and management information systems and personnel, including personnel
to support our product development and potential future commercialization efforts and to support our operations as a
public company.
In addition, we anticipate that our expenses will increase substantially if we experience any delays or encounter any issues
with any of the above, including but not limited to failed studies, complex results, safety issues or other regulatory challenges.
To become and remain profitable, we must succeed in developing and eventually commercializing products that generate
significant revenue. This will require us to be successful in a range of challenging activities, including completing preclinical
testing and clinical trials of our product candidates, discovering additional product candidates, obtaining regulatory approval for
these product candidates and manufacturing, marketing and selling any products for which we may obtain regulatory approval.
We are only in the preliminary stages of most of these activities. We may never succeed in these activities and, even if we do, may
never generate revenue that is significant enough to achieve profitability.
Because of the numerous risks and uncertainties associated with pharmaceutical product and biological product development,
we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability.
If we are required by the FDA or the EMA or other regulatory authorities to perform preclinical or clinical studies in addition to
those currently expected, or if there are any delays in completing our preclinical studies or clinical trials or the development of
any of our product candidates, our expenses could increase and revenue could be further delayed.
Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.
Our failure to become and remain profitable would depress our value and could impair our ability to raise capital, expand our
business, maintain our research and development efforts, diversify our product offerings or even continue our operations.
We will need additional funding in order to complete development of our product candidates and commercialize our
products, if approved. If we are unable to raise capital when needed, we could be forced to delay, reduce or discontinue our
product development programs or commercialization efforts.
We expect our expenses to increase in connection with our ongoing activities, particularly as we conduct clinical trials, build
manufacturing capacity and expand into additional therapeutic areas.
We expect that our existing cash and cash equivalents will enable us to fund our planned operating expenses and capital
expenditure requirements to the end of 2020. We have based this estimate on assumptions that may prove to be wrong, and we
could use our capital resources sooner than we currently expect. Our future capital requirements will depend on many factors,
including:
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•
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•
•
•
•
•
•
the progress and results of any ongoing and future clinical trials;
the cost of manufacturing clinical supplies of our product candidates, including EDP1815, EDP1503 and EDP1867;
the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for any other future
product candidates;
the costs, timing and outcome of regulatory review of our product candidates;
the costs and timing of future commercialization activities, including manufacturing, marketing, sales and distribution,
for any of our product candidates for which we receive marketing approval;
the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;
the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual
property rights and defending any intellectual property-related claims;
the effect of competing technological and market developments; and
the extent to which we acquire or invest in businesses, products and technologies, including entering into licensing or
collaboration arrangements for product candidates, although we currently have no commitments or agreements to complete
any such transactions.
Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect
our ability to develop and commercialize our product candidates. In addition, we cannot guarantee that future financing will be
available in sufficient amounts or on terms acceptable to us, if at all. Moreover, the terms of any financing may adversely affect
the holdings or the rights of our stockholders and the issuance of additional securities, whether equity or debt, by us, or the
possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity or convertible
securities would dilute all of our stockholders. The incurrence of indebtedness could result in increased fixed payment obligations
and we may be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations
on our ability to acquire, sell, or license intellectual property rights and other operating restrictions that could adversely impact
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our ability to conduct our business. We could also be required to seek funds through arrangements with collaborators or others at
an earlier stage than otherwise would be desirable and we may be required to relinquish rights to some of our technologies or
product candidates or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our business,
operating results and prospects.
If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay, or discontinue one
or more of our research or product development programs or the commercialization of any product candidates. In addition, we
may be unable to make milestone and royalty payments due under our intellectual property license agreements or other payments
under our agreements with contract research organizations ("CROs") and academic research collaborators, or expand our operations
or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition
and results of operations.
Our limited operating history may make it difficult to evaluate the success of our business to date and to assess our future
viability.
Since our inception in 2014, we have devoted substantially all of our resources to identifying and developing our product
candidates, building our intellectual property portfolio, process development and manufacturing function, planning our business,
raising capital and providing general and administrative support for these operations. All of our product candidates are in clinical
or preclinical development. We have not yet demonstrated our ability to successfully complete a Phase 2 clinical study or a Phase
3 or other pivotal clinical trial, obtain regulatory approvals to commercialize a product, manufacture a commercial scale product,
or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product
commercialization. Additionally, we expect our financial condition and operating results to continue to fluctuate significantly from
quarter to quarter and year to year due to a variety of factors, many of which are beyond our control.
Consequently, any predictions about our future success or viability may not be as accurate as they could be if we had a longer
operating history.
The terms of our loan and security agreements place restrictions on our operating and financial flexibility. If we raise
additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business.
Our loan and security agreement with K2HV for $45.0 million (as amended, the "2019 Credit Facility") is secured by a lien
covering substantially all of our personal property, excluding intellectual property. Contemporaneous with the closing of the first
tranche of funding under the 2019 Credit Facility, we repaid the entire $15.0 million loan balance outstanding under our prior loan
and security agreement with Pacific Western Bank. As of December 31, 2019, the outstanding principal balance under the 2019
Credit Facility was $20.0 million, resulting from the closing of the first tranche of funding which occurred on July 19, 2019. The
2019 Credit Facility contains customary representations, warranties, affirmative and negative covenants and events of default
applicable to us and our subsidiaries.
If we default under the 2019 Credit Facility, K2HV may accelerate all of our repayment obligations and exercise all of their
rights and remedies under the 2019 Credit Facility and applicable law, potentially requiring us to renegotiate our agreement on
terms less favorable to us or to immediately cease operations. Further, if we are liquidated, the lenders’ right to repayment would
be senior to the rights of the holders of our common stock to receive any proceeds from the liquidation. K2HV could declare a
default upon the occurrence of any event, among others, that they interpret as a material adverse effect or a change of control as
delineated under the 2019 Credit Facility, payment defaults, or breaches of covenants thereby requiring us to repay the loan
immediately or to attempt to reverse the declaration of default through negotiation or litigation. Any declaration by the lenders of
an event of default could significantly harm our business and prospects and could cause the price of our common stock to decline.
If we raise any additional debt financing, the terms of such additional debt could further restrict our operating and financial
flexibility.
We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern.
We may be forced to delay or reduce the scope of our development programs and/or limit or cease our operations if we are
unable to obtain additional funding to support our current operating plan. We have identified conditions and events that raise
substantial doubt about our ability to continue as a going concern. As of December 31, 2019, we had $77.8 million in cash and
cash equivalents. Based on our available cash resources, we believe we do not have sufficient cash and cash equivalents on hand
to support current operations for at least one year from the date that the consolidated financial statements as of and for the three-
year period ending December 31, 2019 included in this Annual Report on Form 10-K were issued. This condition raises substantial
doubt about our ability to continue as a going concern for at least one year from the date that the consolidated financial statements
as of and for the three-year period ending December 31, 2019 included in this Annual Report on Form 10-K were issued.
Nevertheless, our consolidated financial statements do not include any adjustments that might result from the outcome of this
uncertainty. We will need to raise additional capital to fund our future operations and remain as a going concern. To the extent
that we raise additional capital through future equity offerings, the ownership interest of common stockholders will be diluted,
which dilution may be significant. However, we cannot guarantee that we will be able to obtain any or sufficient additional funding
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or that such funding, if available, will be obtainable on terms satisfactory to us. In the event that we are unable to obtain any or
sufficient additional funding, there can be no assurance that we will be able to continue as a going concern.
Risks Related to the Discovery, Development and Regulatory Approval of Our Product Candidates
We are very early in our development efforts and may not be successful in our efforts to use our platform to build a pipeline
of product candidates and develop marketable drugs.
We are using our monoclonal microbial platform, with an initial focus on developing therapies in immunology, specifically
inflammatory diseases, and also oncology. While we believe our preclinical and clinical studies to date have validated our platform
to a degree, we are at an early stage of development and our platform has not yet, and may never lead to, approvable or marketable
products. We are developing these product candidates and additional product candidates that we intend to use to treat broader
immunological diseases, respiratory diseases, neuro-inflammation and degeneration, liver diseases, type I diabetes, food allergy,
neurobehavior, cardiovascular disease and diseases of metabolism. We may have problems applying our technologies to these
other areas, and our new product candidates may not demonstrate a comparable ability in treating disease as our initial product
candidates. Even if we are successful in identifying additional product candidates, they may not be suitable for clinical development
as a result of our inability to manufacture more complex monoclonal microbials, limited efficacy, unacceptable safety profiles or
other characteristics that indicate that they are unlikely to be products that will receive marketing approval and achieve market
acceptance. The success of our product candidates will depend on several factors, including the following:
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completion of preclinical studies and clinical trials with positive results;
receipt of marketing approvals from applicable regulatory authorities;
obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;
• making arrangements with third-party manufacturers for, or establishing our own, commercial manufacturing capabilities;
•
•
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•
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launching commercial sales of our products, if and when approved, whether alone or in collaboration with others;
entering into new collaborations throughout the development process as appropriate, from preclinical studies through to
commercialization;
acceptance of our products, if and when approved, by patients, the medical community and third-party payors;
effectively competing with other therapies;
obtaining and maintaining coverage and adequate reimbursement by third-party payors, including government payors,
for our products, if approved;
protecting our rights in our intellectual property portfolio;
operating without infringing or violating the valid and enforceable patents or other intellectual property of third parties;
• maintaining an acceptable safety profile of the products following approval; and
• maintaining and growing an organization of scientists and business people who can develop and commercialize our
products and technology.
If we do not successfully develop and commercialize product candidates based upon our technological approach, we will not
be able to obtain product revenue in future periods, which likely would result in significant harm to our financial position and
adversely affect our stock price.
Our product candidates are intended to act on cells in the small intestine to produce systemic therapeutic effects with
limited systemic exposure. This biological interaction between the small intestine and the rest of the body may not function in
humans the way we have observed in mice and our drugs may not reproduce the systemic effects we have seen in preclinical
data.
We believe our product candidates, including EDP1815, EDP1503 and EDP1867, work by modulating systemic responses
via interactions with cells in the small intestine. This requires our monoclonal microbials, when dosed, to pass safely through the
tissues of the gut, where they can interact with cells in the interior of the small intestine called the lumen. Dosing to achieve
sufficient exposure may require an inconvenient dosing regimen. Even with successful formulation and delivery to achieve proper
exposure of our microbes to the small intestine, we may not get sufficient or even any activity at the site of disease. This may be
because our understanding of the mechanisms of the small intestine do not work in humans the way we believe they do. Despite
there being strong academic literature to support the concept and our observations in preclinical studies in mice, these principles
and the ability to use monoclonal microbials to modulate the immune system and other systems has not yet been proven in humans.
Our product candidates are monoclonal microbials, which are an unproven approach to therapeutic intervention.
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All of our product candidates are based on monoclonal microbials. We have not, nor to our knowledge has any other company,
received regulatory approval for an oral therapeutic based on this approach. We cannot be certain that our approach will lead to
the development of approvable or marketable products. In addition, our monoclonal microbial therapies may have different safety
profiles and efficacy in various indications. Finally, the FDA or other regulatory agencies may lack experience in evaluating the
safety and efficacy of products based on monoclonal microbials, which could result in a longer than expected regulatory review
process, increase our expected development costs and delay or prevent commercialization of our product candidates.
Our platform relies on third parties for biological materials to expand our microbial library.
Our monoclonal microbial platform relies on third parties for biological materials, including human samples containing
bacteria, to expand our microbial library. Some biological materials have not always met our expectations or requirements, and
any disruption in the supply of these biological materials could materially adversely affect our business and ability to build our
pipeline of product candidates. For example, if any supplied biological materials are contaminated, we would not be able to use
such biological materials. Although we have quality control processes and screening procedures, biological materials are susceptible
to damage and contamination. Improper storage of these materials, by us or any third party suppliers, may require us to destroy
some of our raw materials or products.
Even if our product candidates do not cause off target adverse events, there may be immunotoxicity associated with the
fundamental pharmacology of our product candidates.
Our product candidates, including EDP1815, EDP1503 and EDP1867, are designed to work by modulating the immune
system. While we have observed in preclinical studies that our monoclonal microbials have limited systemic exposure, the
pharmacological immune effects we induce are systemic. Systemic immunomodulation from taking our monoclonal microbials
could lead to immunotoxicity in patients, which may cause us or regulatory authorities to delay, limit or suspend clinical
development. Other immunomodulatory agents have shown immunotoxicity. This includes immune suppressive agents, such as
HUMIRA or REMICADE, which have shown an increased risk of infection or in rare instances certain types of blood cancer. In
the case of immune activating agents, such as YERVOY, induction of adverse auto-immune events has been observed in some
patients. Immunotoxicity in one program could cause regulators to view these adverse events as a class effect of our monoclonal
microbials which may impact the timing of the development of our pipeline of potential product candidates. Even if the adverse
events are manageable, the profile of the drug may be such that it limits or diminishes the possible number of patients who could
receive our therapy.
Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their
regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following
marketing approval, if any.
Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt
clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA, EMA or
comparable foreign regulatory authorities. Results of our clinical trials could reveal a high and unacceptable severity and prevalence
of side effects or unexpected characteristics. For example, some of our product candidates may consist of live biological material
that may remain viable in humans, which carries a risk of causing infections in patients. Some infections may require treatment
with antibiotics to eliminate the monoclonal microbial. All our product candidates are screened for antibiotic sensitivity but it is
possible that if antibiotic therapy does not eliminate the live biological material, a resistant version of our strain could remerge.
These events, while unlikely, could cause a delay in our clinical development and/or could increase the regulatory standards for
the entire class of monoclonal microbials. In an instance where the infection risk of taking our product candidates is high, this
may cause the benefit risk profile of therapy to be non-competitive in the market and may lead to discontinuation of development
of the product.
In addition, it is possible that infections from our product candidates could be rare and not frequently observed in our clinical
trials. In larger post marketing authorization trials, however, data could show that the infection risk, while small, does exist. If
unacceptable side effects arise in the development of our product candidates, we, the FDA, EMA or comparable foreign regulatory
authorities, the IRBs at the institutions in which our studies are conducted, or ethics committees, or the data safety monitoring
board ("DSMB") could suspend or terminate our clinical trials or the FDA, EMA or comparable foreign regulatory authorities
could order us to cease clinical trials or deny approval of our product candidates for any or all targeted indications. Treatment-
related side effects could also affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential
product liability claims. In addition, these side effects may not be appropriately recognized or managed by the treating medical
staff. We expect to have to train medical personnel using our product candidates to understand the side effect profiles for our
clinical trials and upon any commercialization of any of our product candidates. Inadequate training in recognizing or managing
the potential side effects of our product candidates could result in patient injury or death. Any of these occurrences may harm our
business, financial condition and prospects significantly.
If any of our product candidates receives marketing approval, and we or others later identify undesirable side effects caused
by such products, a number of potentially significant negative consequences could result, including:
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regulatory authorities may withdraw their approval of the product;
we may be required to recall a product or change the way such product is administered to patients;
additional restrictions may be imposed on the marketing of the particular product or the manufacturing processes for the
product or any component thereof;
we may be required to conduct post-marketing studies or clinical trials;
regulatory authorities may require the addition of labeling statements, such as a ‘‘black box’’ warning or a contraindication;
we may be required to implement a risk evaluation and mitigation strategy or create a medication guide outlining the
risks of such side effects for distribution to patients;
we could be sued and held liable for harm caused to patients;
the product may become less competitive; and
our reputation may suffer.
Any of the foregoing events could prevent us from achieving or maintaining market acceptance of the particular product
candidate, if approved, and result in the loss of significant revenues to us, which would materially and adversely affect our results
of operations and business.
Companies with microbiome products or differing microbial products may produce negative clinical data which will
adversely affect public perception of monoclonal microbials, and may negatively impact regulatory approval of, or demand
for, our potential products.
Our monoclonal microbial product candidates are pharmaceutical compositions of commensal microbes. While we believe
our approach is distinct from microbiome therapies, negative data from clinical trials using microbiome-based therapies (e.g.,
fecal transplant) and other microbial therapies could negatively impact the perception of the therapeutic use of microbial-based
products. This could negatively impact our ability to enroll patients in clinical trials. The clinical and commercial success of our
potential products will depend in part on the public and clinical communities’ acceptance of the use of monoclonal microbials.
Moreover, our success depends upon physicians prescribing, and their patients being willing to receive, treatments that involve
the use of product candidates we may develop in lieu of, or in addition to, existing treatments with which they are already familiar
and for which greater clinical data may be available.
Adverse events in our preclinical studies or clinical trials or those of our competitors or of academic researchers utilizing
monoclonal microbial technologies, even if not ultimately attributable to our product candidates, and the resulting publicity could
result in increased governmental regulation, unfavorable public perception, potential regulatory delays in the testing or approval
of our potential product candidates, stricter labeling requirements for our product candidates that are approved, if any, and a
decrease in demand for any such products.
Catastrophic loss of our master cell banks could significantly impair our ability to manufacture our product candidates.
Our monoclonal microbial product candidates require that we manufacture from master cell banks ("MCBs") of our microbial
strains. There is a possibility of a catastrophic failure or destruction of our MCBs. This could make it impossible for us to continue
to manufacture a specific product. Recreating and recertifying our MCBs is possible but not certain and could put at risk the supply
of our product candidates for preclinical studies or clinical trials or any products, if approved, to our customers.
Clinical drug development involves a lengthy and expensive process, with an uncertain outcome. We may incur additional
costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our
product candidates.
All of our product candidates are currently in clinical or preclinical development. It is impossible to predict when or if any
of our product candidates will prove effective and safe in humans or will receive regulatory approval, and the risk of failure through
the product development process is high. Before obtaining marketing approval from regulatory authorities for the sale of any
product candidate, we must complete preclinical development and then conduct extensive clinical trials to demonstrate the safety
and efficacy of our product candidates in humans. Clinical testing is expensive, difficult to design and implement, can take many
years to complete and is uncertain as to outcome. A failed clinical trial can occur at any stage of testing. The outcome of preclinical
testing and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do
not necessarily predict final results. For example, in our clinical trials, investigational drug products are being delivered in a capsule
for targeted release in the small intestine. This formulation has not previously been clinically tested, nor are we able to dose mice
with a capsule for targeted release in the small intestine. Our ongoing clinical trials will be the first time this formulation is tested,
and we cannot assure you that the results of this formulation will be consistent with the observations from our preclinical studies.
A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical
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trials due to adverse safety profiles or lack of efficacy, notwithstanding promising results in earlier studies, and we cannot be
certain that we will not face similar setbacks.
The results from early clinical trials of product candidates may not predict the results that will be obtained in subsequent
subjects or in subsequent human clinical trials of that product candidate. For example, in August and November 2019, we announced
positive Phase 1b interim clinical data, as measured using certain secondary and exploratory endpoints, from our ongoing clinical
trial of EDP1815 in subjects with mild to moderate psoriasis. Although the interim clinical data from these trials may be encouraging,
the data are preliminary in nature, based on a limited number of people with psoriasis, and the Phase 1 studies are not complete.
There can be no assurance that these studies will ultimately be successful or support further clinical advancement of this product
candidate.
In addition, we cannot be certain as to the type and number of clinical trials the FDA will require us to conduct before we
may successfully gain approval, referred to as licensure in the United States, to market any of our product candidates. Prior to
approving a new therapeutic product, the FDA generally requires that efficacy be demonstrated in two adequate and well-controlled
clinical trials. In some situations, evidence from a Phase 2 trial and a Phase 3 trial or from a single Phase 3 trial can be sufficient
for FDA approval, such as in cases where the trial or trials provide highly reliable and statistically strong evidence of an important
clinical benefit. Additionally, the FDA requires that investigation include adequate tests to demonstrate the safety of the new
therapeutic product. Additional clinical trials could cause us to incur significant development costs, delay or prevent the
commercialization of our products or otherwise adversely affect our business.
We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability
to receive marketing approval or commercialize our product candidates, including:
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regulators, IRBs or ethics committees may not authorize us or our investigators to commence a clinical trial or conduct
a clinical trial at a prospective trial site;
we may experience delays in reaching, or fail to reach, agreement on acceptable clinical trial contracts or clinical trial
protocols with prospective trial sites;
clinical trials of our product candidates may demonstrate undesirable side effects or produce negative or inconclusive
results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product
development programs;
the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment
in these clinical trials may be slower than we anticipate or participants may drop out of these clinical trials at a higher
rate than we anticipate;
our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in
a timely manner, or at all;
we may have to, or regulators, IRB or ethics committees may require that we or our investigators, suspend or terminate
clinical trials of our product candidates for various reasons, including noncompliance with regulatory requirements or a
finding that the participants are being exposed to unacceptable health risks;
the cost of clinical trials of our product candidates may be greater than we anticipate;
the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product
candidates may be insufficient or inadequate;
regulators may revise the requirements for approving our product candidates, or such requirements may not be as we
anticipate; and
regarding trials managed by any future collaborators, our collaborators may face any of the above issues, and may conduct
clinical trials in ways they view as advantageous to them but potentially suboptimal for us.
If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently
contemplate, if we are unable to successfully complete clinical trials of our product candidates or other testing, if the results of
these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:
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be delayed in obtaining marketing approval for our product candidates;
lose the support of any future collaborators, requiring us to bear more of the burden of developing certain microbial
strains;
not obtain marketing approval at all;
obtain marketing approval in some countries and not in others;
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obtain approval for indications or patient populations that are not as broad as we intend or desire;
obtain approval with labeling that includes significant use or distribution restrictions or safety warnings;
be subject to additional post-marketing testing requirements; or
have the product removed from the market after obtaining marketing approval.
Our product development costs will increase if we experience delays in clinical testing or marketing approvals. We do not
know whether any of our preclinical studies or clinical trials will begin as planned, will need to be restructured or will be completed
on schedule, or at all. Significant preclinical or clinical trial delays also could shorten any periods during which we may have the
exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do,
potentially impairing our ability to successfully commercialize our product candidates and harming our business and results of
operations.
If we experience delays or difficulties in the enrollment of patients in clinical trials, our receipt of necessary regulatory
approvals could be delayed or prevented.
We may not be able to initiate or continue clinical trials for our product candidates if we are unable to locate and enroll a
sufficient number of eligible patients to participate in these trials as required by the FDA or similar regulatory authorities outside
the United States, such as the EMA. We are developing our product candidates, EDP1815 and EDP1867, to treat inflammatory
diseases, beginning with psoriasis and atopic dermatitis, and EDP1503 to treat multiple types of cancer. There are a limited number
of patients from which to draw for clinical studies.
Patient enrollment is also affected by other factors including:
the severity of the disease under investigation;
the patient eligibility criteria for the study in question;
the perceived risks and benefits of the product candidate under study;
the availability of other treatments for the disease under investigation;
the existence of competing clinical trials;
the efforts to facilitate timely enrollment in clinical trials;
our payments for conducting clinical trials;
the patient referral practices of physicians;
the ability to monitor patients adequately during and after treatment; and
the proximity and availability of clinical trial sites for prospective patients.
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Our inability to enroll a sufficient number of patients or volunteers for our clinical trials would result in significant delays
and could require us to abandon one or more clinical trials altogether. Enrollment delays in our clinical trials may result in increased
development costs for our product candidates, which would cause the value of our company to decline and limit our ability to
obtain additional financing.
Interim, "topline" and preliminary data from our clinical trials that we announce or publish from time to time may
change as more patient data become available and are subject to audit and verification procedures that could result in material
changes in the final data.
From time to time, we may publicly disclose preliminary or topline data from our preclinical studies and clinical trials, which
is based on a preliminary analysis of then-available data, and the results and related findings and conclusions are subject to change
following a more comprehensive review of the data related to the particular study or trial. We also make assumptions, estimations,
calculations and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully and
carefully evaluate all data. As a result, the topline or preliminary results that we report may differ from future results of the same
studies, or different conclusions or considerations may qualify such results, once additional data have been received and fully
evaluated. Topline data also remain subject to audit and verification procedures that may result in the final data being materially
different from the preliminary data we previously published. As a result, topline data should be viewed with caution until the final
data are available.
From time to time, we may also disclose interim data from our preclinical studies and clinical trials. Interim data from clinical
trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient
enrollment continues and more patient data become available. Adverse differences between preliminary or interim data and final
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data could significantly harm our business prospects. Further, disclosure of interim data by us or by our competitors could result
in volatility in the price of our common stock.
Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations,
conclusions or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular
program, the approvability or commercialization of the particular product candidate or product and our company in general. In
addition, the information we choose to publicly disclose regarding a particular study or clinical trial is based on what is typically
extensive information, and you or others may not agree with what we determine is material or otherwise appropriate information
to include in our disclosure.
If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we will not be able to
commercialize our product candidates or will not be able to do so as soon as anticipated, and our ability to generate revenue
will be materially impaired.
Our product candidates and the activities associated with their development and commercialization, including their design,
testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are
subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by the EMA and similar
regulatory authorities outside the United States. Failure to obtain marketing approval for a product candidate in any jurisdiction
will prevent us from commercializing the product candidate in that jurisdiction, and may affect our plans for commercialization
in other jurisdictions as well. We have not received approval to market any of our product candidates from regulatory authorities
in any jurisdiction. We have only limited experience in filing and supporting the applications necessary to gain marketing approvals
and expect to rely on third parties to assist us in this process.
Securing marketing approval requires the submission of extensive preclinical and clinical data and supporting information
to regulatory authorities for each therapeutic indication to establish the product candidate’s safety and efficacy to such regulatory
authorities’ satisfaction. Securing marketing approval also requires the submission of information about the product manufacturing
process to, and inspection of manufacturing facilities by, the regulatory authorities. Our product candidates may not be effective,
may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics
that may preclude our obtaining marketing approval or prevent or limit commercial use.
The process of obtaining marketing approvals, both in the United States and abroad, is expensive and may take many years.
The scope and amount of clinical data required to obtain marketing approvals can vary substantially from jurisdiction to jurisdiction,
and it may be difficult to predict whether a particular regulatory body will require additional or different studies than those conducted
by a sponsor, especially for novel product candidates such as our monoclonal microbials. The FDA, EMA or other foreign regulatory
authorities may delay, limit, or deny the approval of our product candidates for many reasons, including: our inability to demonstrate
that the clinical benefits of our product candidates outweigh any safety or other perceived risks; the regulatory authority’s
disagreement with the interpretation of data from nonclinical or clinical studies; the regulatory agency’s requirement that we
conduct additional preclinical studies and clinical trials; changes in marketing approval policies during the development period;
changes in or the enactment of additional statutes or regulations, or changes in regulatory review process for each submitted
product application; or the regulatory authority’s failure to approve the manufacturing processes or third-party manufacturers with
which we contract. Regulatory authorities have substantial discretion in the approval process and may refuse to accept a marketing
application as deficient. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay,
limit or prevent marketing approval of a product candidate. Any marketing approval we ultimately obtain may be limited or subject
to restrictions or post-approval commitments that render the approved product not commercially viable. Of the large number of
drugs in development, only a small percentage successfully complete the FDA, EMA or other regulatory approval processes and
are commercialized.
Furthermore, our product candidates may not receive marketing approval even if they achieve their specified endpoints in
clinical trials. Clinical data are often susceptible to varying interpretations and many companies that have believed that their
products performed satisfactorily in clinical trials have nonetheless failed to obtain FDA, EMA or the applicable foreign regulatory
agency approval for their products. The FDA, EMA or foreign regulatory authorities may disagree with our trial design and our
interpretation of data from nonclinical and clinical studies. Upon the review of data from any pivotal trial, the FDA, EMA or
applicable foreign regulatory agency may request that the sponsor conduct additional analyses of the data and, if it believes the
data are not satisfactory, could advise the sponsor to delay filing a marketing application.
Even if we eventually complete clinical testing and receive approval of a BLA or foreign marketing authorization for one
of our product candidates, the FDA, EMA or applicable foreign regulatory agency may grant approval contingent on the performance
of costly additional clinical trials which may be required after approval. The FDA, EMA or the applicable foreign regulatory
agency may also approve our products for a more limited indication and/or a narrower patient population than we originally request,
and the FDA, EMA or applicable foreign regulatory agency may not approve the labeling that we believe is necessary or desirable
for the successful commercialization of our products. Any delay in obtaining, or inability to obtain, applicable regulatory approval
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would delay or prevent commercialization of our product candidates and would materially adversely impact our business and
prospects.
The development of therapeutic products targeting the underlying biology of monoclonal microbials and their interactions
with cells in the small intestine is an emerging field, and it is possible that the FDA, EMA or other regulatory authorities could
issue regulations or new policies in the future affecting our monoclonal microbials that could adversely affect our product candidates.
If we experience delays in obtaining approval or if we fail to obtain approval of our product candidates, the commercial
prospects for our product candidates may be harmed and our ability to generate revenues will be materially impaired.
We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on
product candidates or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we intend to focus on developing product candidates for multiple
initial indications that we identify as most likely to succeed, in terms of both regulatory approval and commercialization. As a
result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that may prove to
have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial
products or profitable market opportunities. Our spending on current and future research and product development programs and
product candidates for specific indications may not yield any commercially viable products. If we do not accurately evaluate the
commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate
through collaboration, licensing or other royalty arrangements, in cases in which it would have been more advantageous for us to
retain sole development and commercialization rights to such product candidate.
A fast track designation by the FDA may not actually lead to a faster development or regulatory review or approval process.
We may seek fast track designation for some of our product candidates. If a drug or biologic is intended for the treatment of
a serious or life-threatening condition and nonclinical or clinical data demonstrate the potential to address unmet medical needs
for this condition, the drug or biologic sponsor may apply for FDA fast track designation. Fast track designation provides increased
opportunities for sponsor meetings with the FDA during preclinical and clinical development, in addition to the potential for rolling
review once a marketing application is filed. The FDA has broad discretion whether or not to grant this designation, and even if
we believe a particular product candidate is eligible for this designation, we cannot assure you that the FDA would decide to grant
it. Even if we do receive fast track designation, we may not experience a faster development process, review or approval compared
to conventional FDA procedures. Fast track designation does not assure ultimate approval by the FDA. The FDA may withdraw
fast track designation if it believes that the designation is no longer supported by data from our product development program.
A breakthrough therapy designation by the FDA for our product candidates may not lead to a faster development or
regulatory review or approval process, and it does not increase the likelihood that our product candidates will receive marketing
approval.
We may seek a breakthrough therapy designation for our product candidates. A breakthrough therapy is defined as a drug
or biologic that is intended to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates
that the drug or biologic may demonstrate substantial improvement over existing therapies on one or more clinically significant
endpoints. For drugs that have been designated as breakthrough therapies, interaction and communication between the FDA and
the sponsor can help to identify the most efficient path for clinical development. Drugs designated as breakthrough therapies by
the FDA may also be eligible for accelerated approval.
Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe one of our product
candidates meets the criteria for designation as a breakthrough therapy, the FDA may disagree and instead determine not to make
such designation. In any event, the receipt of a breakthrough therapy designation for a product candidate may not result in a faster
development process, review or approval compared to conventional FDA procedures and does not assure ultimate approval by
the FDA. In addition, even if one or more of our product candidates qualify as breakthrough therapies, the FDA may later decide
that the products no longer meet the conditions for qualification and rescind the designation.
Risks Related to our Dependence on Third Parties and Manufacturing
We rely, and expect to continue to rely, on third parties to conduct our clinical trials, and those third parties may not
perform satisfactorily, including failing to meet deadlines for the completion of such trials.
We rely, and expect to continue to rely, on third parties, such as contract research organizations ("CROs"), clinical data
management organizations, medical institutions, clinical investigators and potential pharmaceutical partners, to conduct and
manage our clinical trials, including our clinical trials of EDP1815 and EDP1503.
Our reliance on these third parties for research and development activities will reduce our control over these activities but
does not relieve us of our responsibilities. For example, we remain responsible for ensuring that each of our clinical trials is
conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply
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with regulatory standards, commonly referred to as good clinical practices, for conducting, recording and reporting the results of
clinical trials to assure that data and reported results are credible and accurate and that the rights, safety and welfare of trial
participants are protected. Other countries’ regulatory agencies also have requirements for clinical trials with which we must
comply. We also may be required in certain instances to register ongoing clinical trials and post the results of completed clinical
trials on government-sponsored databases, such as ClinicalTrials.gov, within specified timeframes. Failure to do so can result in
fines, adverse publicity and civil and criminal sanctions.
Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If
these third parties do not successfully carry out their contractual duties, do not meet expected deadlines, experience work stoppages,
terminate their agreements with us or need to be replaced, or do not conduct our clinical trials in accordance with regulatory
requirements or our stated protocols, we may need to enter into new arrangements with alternative third parties, which could be
difficult, costly or impossible, and our clinical trials may be extended, delayed, or terminated or may need to be repeated. If any
of the foregoing occur, we may not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates
and may not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates.
We also expect to rely on other third parties to store and distribute drug product required by our clinical trials. Any performance
failure on the part of our distributors could delay clinical development or marketing approval of our product candidates or
commercialization of our products, producing additional losses and depriving us of potential product revenue.
We rely on third parties for the manufacture of our product candidates for preclinical and clinical testing and expect to
continue to do so for the foreseeable future. This reliance on third parties increases the risk that we will not have sufficient
quantities of our product candidates or that such quantities may not be available at an acceptable cost, which could delay,
prevent or impair our development or commercialization efforts.
We rely, and expect to continue to rely, on third parties for the manufacture of our product candidates for preclinical and
clinical testing, as well as for commercial manufacture if any of our product candidates receive marketing approval.
This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates on a timely
basis or at all, or that such quantities will be available at an acceptable cost or quality, which could delay, prevent or impair our
development or commercialization efforts.
We may be unable to establish any agreements with third-party manufacturers on acceptable terms or at all. Even if we are
able to establish agreements with third-party manufacturers, reliance on third-party manufacturers entails additional risks,
including:
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failure of third-party manufacturers to comply with regulatory requirements and maintain quality assurance;
breach of manufacturing agreements by the third-party manufacturers;
failure to manufacture our product according to our specifications;
failure to manufacture our product according to our schedule or at all;
• misappropriation or disclosure of our proprietary information, including our trade secrets and know-how; and
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termination or nonrenewal of agreements by third-party manufacturers at times that are costly or inconvenient for us.
Third-party manufacturers may not be able to comply with cGMP regulations or similar regulatory requirements outside the
United States. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in
sanctions being imposed on us, including clinical holds, fines, injunctions, civil penalties, delays, suspension or withdrawal of
approvals, license revocations, seizures or recalls of product candidates or products, operating restrictions and criminal
prosecutions, any of which could significantly and adversely affect supplies of our products. The contract manufacturers we rely
on to produce our product candidates have never produced a FDA-approved therapeutic. If our contract manufacturers are unable
to comply with cGMP regulation or if the FDA does not approve their facility upon a pre-approval inspection, our product candidates
may not be approved or may be delayed in obtaining approval. In addition, there are a limited number of manufacturers that operate
under cGMP regulations and that might be capable of manufacturing our products. Therefore, our product candidates and any
future product candidates that we may develop may compete with other products for access to manufacturing facilities. Any failure
to gain access to these limited manufacturing facilities could severely impact the clinical development, marketing approval and
commercialization of our product candidates.
Any performance failure on the part of our existing or future manufacturers could delay clinical development or marketing
approval. We do not currently have arrangements in place for redundant source of clinical supplies for both drug substance and
drug product. If our current contract manufacturers cannot perform as agreed, we may be required to replace such manufacturers
and we may be unable to replace them on a timely basis or at all. Our current and anticipated future dependence upon others for
the manufacture of our product candidates or products could delay, prevent or impair our development and commercialization
efforts.
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We have no experience manufacturing our product candidates at commercial scale, and if we decide to establish our own
manufacturing facility, we cannot assure you that we can manufacture our product candidates in compliance with regulations
at a cost or in quantities necessary to make them commercially viable.
We may establish a manufacturing facility for our product candidates for production at a commercial scale. We have no
experience in commercial-scale manufacturing of our product candidates. We currently intend to develop our manufacturing
capacity in part by expanding our current facility or building additional facilities. This activity will require substantial additional
funds and we would need to hire and train a significant number of qualified employees to staff these facilities. We may not be able
to develop commercial-scale manufacturing facilities that are adequate to produce materials for additional later-stage clinical trials
or commercial use.
The equipment and facilities employed in the manufacture of pharmaceuticals are subject to stringent qualification
requirements by regulatory agencies, including validation of facility, equipment, systems, processes and analytics. We may be
subject to lengthy delays and expense in conducting validation studies, if we can meet the requirements at all.
Risks Related to Commercialization of Our Product Candidates and Other Legal Compliance Matters
Even if any of our product candidates receives marketing approval, it may fail to achieve the degree of market acceptance
by physicians, patients, hospitals, third-party payors and others in the medical community necessary for commercial success.
If any of our product candidates receives marketing approval, it may nonetheless fail to gain sufficient market acceptance
by physicians, patients, third-party payors and others in the medical community. For example, current psoriasis treatment involves
the use of steroids and biologics that are well established in the medical community, and physicians may continue to rely on these
treatments. If our product candidates receive approval but do not achieve an adequate level of acceptance, we may not generate
significant product revenue and we may not become profitable. The degree of market acceptance of our approved product candidates,
if any, will depend on a number of factors, including:
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their efficacy, safety and other potential advantages compared to alternative treatments;
the clinical indications for which our products are approved;
our ability to offer them for sale at competitive prices;
their convenience and ease of administration compared to alternative treatments;
the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
the strength of marketing and distribution support;
the availability of third-party coverage and adequate reimbursement for our product candidates;
the prevalence and severity of their side effects and their overall safety profiles;
any restrictions on the use of our products together with other medications;
interactions of our products with other medicines patients are taking; and
the inability of certain types of patients to take our product.
We currently have no sales organization. If we are unable to establish effective sales, marketing and distribution capabilities
or enter into agreements with third parties with such capabilities, we may not be successful in commercializing our product
candidates if and when they are approved.
We do not have a sales or marketing infrastructure and have no experience in the sale, marketing or distribution of our product
candidates. To achieve commercial success for any product for which we obtain marketing approval, we will need to establish a
sales and marketing organization or make arrangements with third parties to perform sales and marketing functions and we may
not be successful in doing so.
In the future, we expect to build a focused sales and marketing infrastructure to market or promote our product candidates in
the United States and potentially elsewhere, if and when they are approved. There are risks involved with establishing our own
sales, marketing and distribution capabilities. For example, recruiting and training a sales force is expensive and time consuming
and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish
marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these
commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and
marketing personnel.
Factors that may inhibit our efforts to commercialize our products on our own include:
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the inability of sales personnel to obtain access to or educate physicians on the benefits of our products;
the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage
relative to companies with more extensive product lines;
unforeseen costs and expenses associated with creating an independent sales and marketing organization; and
the inability to obtain sufficient coverage and reimbursement from third-party payors and governmental agencies.
Outside the United States, we may rely on third parties to sell, market and distribute our product candidates. We may not be
successful in entering into arrangements with such third parties or may be unable to do so on terms that are favorable to us. In
addition, our product revenue and our profitability, if any, may be lower if we rely on third parties for these functions than if we
were to market, sell and distribute any products that we develop ourselves. We likely will have little control over such third parties,
and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we do not
establish sales, marketing and distribution capabilities successfully, either on our own or in collaboration with third parties, we
will not be successful in commercializing our product candidates.
We face substantial competition, which may result in others discovering, developing or commercializing competing products
before or more successfully than we do.
The development and commercialization of new drug and biologic products is highly competitive and is characterized by
rapid and substantial technological development and product innovations. We face competition with respect to our current product
candidates and will face competition with respect to product candidates that we may seek to develop or commercialize in the
future, from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. We
are aware of a number of large pharmaceutical and biotechnology companies, including AbbVie Inc., Agenus Inc., AstraZeneca
plc, Bristol-Myers Squibb, F. Hoffmann-La Roche A.G., Gilead Sciences, Inc., Incyte Corporation, Johnson & Johnson, Merck,
Novartis International A.G., Pfizer Inc. and Regeneron Pharmaceuticals, Inc., as well as smaller, early-stage companies, that are
pursuing the development of products, including microbial-based therapeutics in some instances, for disease indications we are
targeting. Some of these competitive products and therapies are based on scientific approaches that are the same as or similar to
our approach, and others may be based on entirely different approaches. Potential competitors also include academic institutions,
government agencies and other public and private research organizations.
Many of the companies against which we are competing or against which we may compete in the future have significantly
greater financial resources, established presence in the market and expertise in research and development, manufacturing,
preclinical testing, conducting clinical trials, obtaining regulatory approvals and reimbursement and marketing approved products
than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being
concentrated among a smaller number of our competitors.
These third parties compete with us in recruiting and retaining qualified scientific, sales and marketing and management
personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies
complementary to, or necessary for, our programs.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are
more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may
develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain
approval for ours, which could delay us from obtaining FDA approval to market our product candidates and result in our competitors
establishing a strong market position before we are able to enter the market, especially for any competitor developing a microbial-
based therapeutic which will likely share our same regulatory approval requirements. For more information, please see "Risk
Factors-Our product candidates for which we intend to seek approval as biologic products may face competition sooner than
anticipated, which may delay us from marketing our product candidates." In addition, our ability to compete may be affected in
many cases by insurers or other third-party payors seeking to encourage the use of generic or biosimilar products.
Even if we are able to commercialize any product candidates, the products may become subject to unfavorable pricing
regulations or third-party coverage and reimbursement policies, any of which could harm our business.
Our ability to commercialize any product candidates successfully will depend, in part, on the extent to which coverage and
reimbursement for these products and related treatments will be available from government health administration authorities,
private health insurers and other organizations. Government authorities and third-party payors, such as private health insurers and
health maintenance organizations, decide which medications they will pay for and impact reimbursement levels.
Obtaining and maintaining adequate reimbursement for our products may be difficult. We cannot be certain if and when we
will obtain coverage and an adequate level of reimbursement for our products by third-party payors. A primary trend in the U.S.
healthcare industry and elsewhere is cost containment. Government authorities and third-party payors have attempted to control
costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are
requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged
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for drugs. In addition, reimbursement rates from private health insurance companies vary depending on the company, the insurance
plan and other factors. We may also be required to conduct expensive pharmacoeconomic studies to justify coverage and
reimbursement or the level of reimbursement relative to other therapies. If coverage and reimbursement are not available or
reimbursement is available only to limited levels, we may not be able to successfully commercialize any product candidate for
which we obtain marketing approval, and the royalties resulting from the sales of those products may also be adversely impacted.
There may be significant delays in obtaining reimbursement for newly approved drugs, and coverage may be more limited
than the purposes for which the drug is approved by the FDA or similar regulatory authorities outside the United States. Moreover,
eligibility for reimbursement does not imply that a drug will be paid for in all cases or at a rate that covers our costs, including
research, development, manufacture, sale and distribution. Interim reimbursement levels for new drugs, if applicable, may also
not be sufficient to cover our costs and may not be made permanent. Reimbursement rates may vary according to the use of the
drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs and may
be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates
required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports
of drugs from countries where they may be sold at lower prices than in the United States. Our inability to promptly obtain coverage
and adequate reimbursement rates from both government-funded and private payors for any approved products that we develop
could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and
our overall financial condition.
The regulations that govern marketing approvals, pricing, coverage and reimbursement for new drug products vary widely
from country to country. Current and future legislation may significantly change the approval requirements in ways that could
involve additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a drug before
it can be reimbursed. In many countries, the pricing review period begins after marketing or product licensing approval is granted.
In some foreign markets, prescription drug pricing remains subject to continuing governmental control, including possible price
reductions, even after initial approval is granted. As a result, we might obtain marketing approval for a product in a particular
country, but then be subject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods,
and negatively impact the revenues we are able to generate from the sale of the product in that country. Adverse pricing limitations
may hinder our ability to recoup our investment in one or more product candidates, even if our product candidates obtain marketing
approval. There can be no assurance that our product candidates, if they are approved for sale in the United States or in other
countries, will be considered medically necessary or cost-effective for a specific indication, or that coverage or an adequate level
of reimbursement will be available.
Product liability lawsuits against us could cause us to incur substantial liabilities and limit commercialization of any
products that we may develop.
We face an inherent risk of product liability exposure related to the testing of our product candidates in clinical trials and will
face an even greater risk if we commercially sell any products that we develop. If we cannot successfully defend ourselves against
claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual
outcome, liability claims may result in:
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regulatory investigations, product recalls or withdrawals, or labeling, marketing or promotional restrictions;
decreased demand for any product candidates or products that we may develop;
injury to our reputation and significant negative media attention;
withdrawal of clinical trial participants;
significant costs to defend the related litigation;
substantial monetary awards to trial participants or patients;
loss of revenue;
reduced resources of our management to pursue our business strategy; and
the inability to commercialize any products that we may develop.
Our current product liability insurance coverage and any product liability insurance coverage that we acquire in the future
may not be adequate to cover all liabilities that we may incur. We may need to increase our insurance coverage as we expand our
clinical trials or if we commence commercialization of our product candidates. Insurance coverage is increasingly expensive. We
may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may
arise.
Our product candidates for which we intend to seek approval as biologic products may face competition sooner than
anticipated, which may delay us from marketing our product candidates.
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Even if we are successful in achieving regulatory approval to commercialize a product candidate faster than our competitors,
we may face competition from biosimilars. The BPCIA created an abbreviated approval pathway for biological products that are
biosimilar to or interchangeable with an FDA-licensed reference biological product. Under the BPCIA, an application for a
biosimilar product may not be submitted to the FDA until four years following the date that the reference product was first licensed
by the FDA. In addition, the approval of a biosimilar product may not be made effective by the FDA until 12 years from the date
on which the reference product was first licensed. During this 12-year period of exclusivity, another company may still market a
competing version of the reference product if the FDA approves a full BLA for the competing product containing the sponsor’s
own preclinical data and data from adequate and well-controlled clinical trials to demonstrate the safety, purity and potency of
their product. The law is complex and is still being interpreted and implemented by the FDA. As a result, its ultimate impact,
implementation, and meaning are subject to uncertainty. While it is uncertain when such processes intended to implement BPCIA
may be fully adopted by the FDA, any such processes could have a material adverse effect on the future commercial prospects
for our biological products.
We believe that any of our product candidates approved as a biological product under a BLA should qualify for the 12-year
period of exclusivity. However, there is a risk that this exclusivity could be shortened due to congressional action or otherwise,
or that the FDA will not consider our product candidates to be reference products for competing products, potentially creating the
opportunity for generic competition sooner than anticipated. Other aspects of the BPCIA, some of which may impact the BPCIA
exclusivity provisions, have also been the subject of recent litigation. Moreover, the extent to which a biosimilar, once approved,
will be substituted for any one of our reference products in a way that is similar to traditional generic substitution for non-biological
products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing.
In Europe, the European Commission has granted marketing authorizations for biosimilars pursuant to a set of general and
product class-specific guidelines for biosimilar approvals issued over the past few years. In Europe, a competitor may reference
data supporting approval of an innovative biological product, but will not be able to get on the market until 10 years after the time
of approval of the innovative product. This 10-year marketing exclusivity period will be extended to 11 years if, during the first
eight of those 10 years, the marketing authorization holder obtains an approval for one or more new therapeutic indications that
bring significant clinical benefits compared with existing therapies. In addition, companies may be developing biosimilars in other
countries that could compete with our products. If competitors are able to obtain marketing approval for biosimilars referencing
our products, our products may become subject to competition from such biosimilars, with the attendant competitive pressure and
consequences.
Failure to obtain marketing approval in international jurisdictions would prevent our product candidates from being
marketed abroad.
In order to market and sell our product candidates in the European Union and many other jurisdictions, we or our collaborators
must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure
varies among countries and can involve additional testing. The time required to obtain approval in foreign countries may differ
substantially from that required to obtain FDA, EMA or other applicable regulatory approval. Clinical trials conducted in one
country may not be accepted by regulatory authorities in other countries. The regulatory approval process outside the United States
generally includes all of the risks associated with obtaining FDA, EMA or other applicable regulatory approval. In addition, in
many countries outside the United States, it is required that the product be approved for reimbursement before the product can be
approved for sale in that country. We or our collaborators may not obtain approvals for our product candidates from regulatory
authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory
authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure
approval by regulatory authorities in other countries or jurisdictions or by the FDA. However, a failure or delay in obtaining
regulatory approval in one country may have a negative effect on the regulatory process in others. We may not be able to file for
marketing approvals and may not receive necessary approvals to commercialize our products in any market.
Any product candidate for which we obtain marketing approval could be subject to post-marketing restrictions or
withdrawal from the market, and we may be subject to penalties if we fail to comply with regulatory requirements or if we
experience unanticipated problems with our products, when and if any of them are approved.
Any product candidate for which we obtain marketing approval, along with the manufacturing processes, post-approval
clinical data, labeling, advertising and promotional activities for such product, will be subject to the continual requirements of and
review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing
information and reports, registration and listing requirements, cGMP requirements relating to manufacturing, quality control,
quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples
to physicians and recordkeeping. We and our contract manufacturers will also be subject to continual review and periodic inspections
to assess compliance with cGMP. Accordingly, we and others with whom we work must continue to expend time, money and
effort in all areas of regulatory compliance, including manufacturing, production and quality control.
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Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated
uses for which the product may be marketed or to specific conditions of approval, including a requirement to implement a risk
evaluation and mitigation strategy, which could include requirements for a medication guide, communication plan, or restricted
distribution system. If any of our product candidates receives marketing approval, the accompanying label may limit the approved
use of our drug, which could limit sales of the product.
The FDA may also impose requirements for costly post-marketing studies or clinical trials and surveillance to monitor the
safety or efficacy of our approved products. The FDA closely regulates the post-approval marketing and promotion of drugs and
biologics to ensure they are marketed only for the approved indications and in accordance with the provisions of the approved
labeling. The FDA imposes stringent restrictions on manufacturers’ communications regarding off-label use, and if we market our
products outside of their approved indications, we may be subject to enforcement action for off-label marketing. Violations of the
FDA’s restrictions relating to the promotion of prescription drugs may also lead to investigations alleging violations of federal
and state health care fraud and abuse laws, as well as state consumer protection laws.
In addition, if a regulatory agency or we later discover previously unknown problems with our products, such as adverse
events of unanticipated severity or frequency, problems with manufacturers or manufacturing processes, or failure to comply with
regulatory requirements, the regulatory agency may impose restrictions on the products or us, including requiring withdrawal of
the product from the market. Any failure to comply with applicable regulatory requirements may yield various results, including:
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litigation involving patients taking our products;
restrictions on such products, manufacturers or manufacturing processes;
restrictions on the labeling or marketing of a product;
restrictions on product distribution or use;
requirements to conduct post-marketing studies or clinical trials;
warning letters;
withdrawal of products from the market;
suspension or termination of ongoing clinical trials;
refusal to approve pending applications or supplements to approved applications that we submit;
recall of products;
fines, restitution or disgorgement of profits or revenues;
suspension or withdrawal of marketing approvals;
damage to relationships with potential collaborators;
unfavorable press coverage and damage to our reputation;
refusal to permit the import or export of our products;
product seizure or detention;
injunctions; or
imposition of civil or criminal penalties.
Noncompliance with similar European Union requirements regarding safety monitoring or pharmacovigilance can also result
in significant financial penalties. Similarly, failure to comply with U.S. and foreign regulatory requirements regarding the
development of products for pediatric populations and the protection of personal health information can also lead to significant
penalties and sanctions.
Any government investigation of alleged violations of law could require us to expend significant time and resources in
response and could generate negative publicity. In addition, the FDA’s regulations, policies or guidance may change and new or
additional statutes or government regulations may be enacted that could prevent or delay regulatory approval of our product
candidates or further restrict or regulate post-approval activities. Any failure to comply with ongoing regulatory requirements may
significantly and adversely affect our ability to commercialize and generate revenues. If regulatory sanctions are applied or if
regulatory approval is withheld or withdrawn, the value of our company and our operating results will be adversely affected.
We also cannot predict the likelihood, nature or extent of adverse government regulation that may arise from pending or
future legislation or administrative action, either in the United States or abroad. For example, certain policies of the current
presidential administration may impact our business and industry. Namely, the current presidential administration has taken several
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executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise
materially delay, the FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through
rulemaking, issuance of guidance, and review and approval of marketing applications. It is difficult to predict how these
requirements will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory authority.
If these executive actions impose constraints on the FDA’s ability to engage in oversight and implementation activities in the
normal course, our business may be negatively impacted.
Our relationships with customers, physicians and third-party payors will be subject to applicable anti-kickback, fraud
and abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, exclusion
from governmental healthcare programs, contractual damages, reputational harm and diminished profits and future earnings.
Healthcare providers, physicians and third-party payors will play a primary role in the recommendation and prescription of
any product candidates for which we obtain marketing approval. Our future arrangements with third-party payors, physicians and
customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may restrict the
business or financial arrangements and relationships through which we market, sell and distribute any products for which we
obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include the following:
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the federal Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering,
receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either
the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment
may be made under a federal healthcare program, such as Medicare and Medicaid; a person or entity does not need to
have actual knowledge of the statute or specific intent to violate the statute to have committed a violation. In addition,
the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback
Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act (described below);
the false claims and civil monetary penalties laws, including the federal False Claims Act, which, among other things,
impose criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities
for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or
fraudulent, knowingly making, using or causing to be made or used, a false record or statement material to a false or
fraudulent claim or from knowingly or making a false statement to avoid, decrease or conceal an obligation to pay money
to the federal government;
the federal Health Insurance Portability and Accountability Act of 1996 ("HIPAA") imposes criminal and civil liability
for executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;
similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of these statutes
or specific intent to violate them to have committed a violation;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing
regulations, also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy,
security and transmission of individually identifiable health information;
the federal Physician Payment Sunshine Act requires applicable manufacturers of covered drugs to report payments and
other transfers of value to physicians, certain other healthcare professionals beginning in 2022, and teaching hospitals,
and ownership and investment interests held by physicians and their immediate family members; manufacturers are
required to submit reports to the government by the 90th day of each calendar year;
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to our
business practices, including but not limited to, research, distribution, sales or marketing arrangements and claims
involving healthcare items or services reimbursed by non- governmental third-party payors, including private insurers;
state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance
guidelines and the relevant compliance guidance promulgated by the federal government and may require drug
manufacturers to report information related to payments and other transfers of value to physicians and other healthcare
providers, pricing information or marketing expenditures; and
state and foreign laws that govern the privacy and security of health information in some circumstances, many of which
differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted
by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action against us for
violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our
management’s attention from the operation of our business. The shifting compliance environment and the need to build and maintain
a robust system to comply with multiple jurisdictions with different compliance and reporting requirements increases the possibility
that a healthcare company may violate one or more of the requirements.
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Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations
will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply
with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations.
If our operations are found to be in violation of any of these laws or any other governmental laws and regulations that may apply
to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from
government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations.
Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval for and
commercialize our product candidates and affect the prices we may obtain.
In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and
proposed changes regarding the healthcare system that could prevent or delay marketing approval of our product candidates,
restrict or regulate post-approval activities and affect our ability to profitably sell any product candidates for which we obtain
marketing approval.
In the United States, the ACA was intended to broaden access to health insurance, reduce or constrain the growth of healthcare
spending, enhance remedies against fraud and abuse, add new transparency requirements for the healthcare and health insurance
industries, impose new taxes and fees on the health industry and impose additional health policy reforms.
Among the provisions of the ACA that are of importance to our potential product candidates are the following:
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establishment of a new pathway for approval of lower cost biosimilars to compete with biologic products, such as those
we are developing;
an annual, nondeductible fee payable by any entity that manufactures or imports specified branded prescription drugs
and biologic agents;
an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;
a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 70% point-of-sale
discounts off negotiated prices;
extension of manufacturers’ Medicaid rebate liability;
expansion of eligibility criteria for Medicaid programs;
expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; and
a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical
effectiveness research, along with funding for such research.
Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA, and we expect
there will be additional challenges and amendments to the ACA in the future. For example, the Tax Cuts and Jobs Acts (the "TCJA")
was enacted, which, among other things, removed penalties for not complying with the individual mandate to carry health insurance.
On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas, ruled that the individual mandate is a critical
and inseverable feature of the ACA, and therefore, because it was repealed as part of the TCJA, the remaining provisions of the
ACA are invalid as well. On December 18, 2019, the U.S. Court of Appeals for the Fifth Circuit upheld the District Court's decision
that the individual mandate was unconstitutional but remanded the case back to the District Court to determine whether the
remaining provisions of the ACA are invalid as well. It is unclear how these decisions, subsequent appeals and other efforts to
challenge, repeal or replace the ACA will affect the law or our business
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. In August 2011, the
Budget Control Act of 2011, among other things, included aggregate reductions of Medicare payments to providers of 2% per
fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments, will remain in effect through
2029 unless additional Congressional action is taken. On January 2, 2013, President Obama signed into law the American Taxpayer
Relief Act of 2012, which, among other things, reduced Medicare payments to several providers, including hospitals, and an
increase in the statute of limitations period for the government to recover overpayments to providers from three to five years.
These new laws may result in additional reductions in Medicare and other healthcare funding and otherwise affect the prices we
may obtain.
We expect that other healthcare reform measures that may be adopted in the future, may result in additional reductions in
Medicare and other healthcare funding, more rigorous coverage criteria, new payment methodologies and in additional downward
pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government
programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures
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or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our product
candidates, if approved.
Moreover, there has recently been heightened governmental scrutiny over the manner in which manufacturers set prices for
their marketed products. Individual states in the United States have become increasingly aggressive in implementing regulations
designed to contain pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts,
restrictions on certain product access and marketing cost disclosure and transparency measures. Legally mandated price controls
on payment amounts by third-party payors or other restrictions could harm our business, results of operations, financial condition
and prospects. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to
determine what pharmaceutical products and which suppliers will be included in their prescription drug and other healthcare
programs. This could reduce the ultimate demand for our product candidates, if approved, or put pressure on our product pricing,
which could negatively affect our business, results of operations, financial condition and prospects.
Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional
activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the
FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of
our product candidates, if any, may be. In addition, increased scrutiny by Congress of the FDA’s approval process may significantly
delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other
requirements.
Governments outside the United States tend to impose strict price controls, which may adversely affect our revenues, if
any.
In some countries, particularly the countries of the European Union, the pricing of prescription drugs is subject to governmental
control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of
marketing approval for a product. In addition, there can be considerable pressure by governments and other stakeholders on prices
and reimbursement levels, including as part of cost containment measures. Political, economic and regulatory developments may
further complicate pricing negotiations, and pricing negotiations may continue after coverage and reimbursement have been
obtained. Reference pricing used by various European Union member states and parallel distribution or arbitrage between low-
priced and high-priced member states, can further reduce prices. To obtain reimbursement or pricing approval in some countries,
we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available
therapies. If coverage and reimbursement of our products are unavailable or limited in scope or amount, or if pricing is set at
unsatisfactory levels, our business could be harmed, possibly materially.
If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or
penalties or incur costs that could harm 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 and biological materials such as human stool. Our operations also
produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We
cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from
our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources.
We also could incur significant costs associated with civil or criminal fines and penalties for failure to comply with such laws and
regulations.
Although we maintain workers’ compensation insurance to cover us for costs and expenses, we may incur due to injuries to
our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential
liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection
with our storage or disposal of biological, hazardous or radioactive materials.
In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws
and regulations. These current or future laws and regulations may impair our research, development or production efforts. Our
failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.
Risks Related to Our Intellectual Property
If we are unable to adequately protect our proprietary technology, or obtain and maintain issued patents which are
sufficient to protect our product candidates, others could compete against us more directly, which would have a material adverse
impact on our business, results of operations, financial condition and prospects.
Our success depends in large part on our ability to obtain and maintain patent and other intellectual property protection in
the United States and other countries with respect to our proprietary technology and products. We seek to protect our proprietary
position by filing patent applications in the United States and abroad related to our novel technologies and product candidates.
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We also rely on trade secrets to protect aspects of our business that are not amenable to, or that we do not consider appropriate
for, patent protection.
The patent prosecution process is expensive and time-consuming, and we may not be able to file and prosecute all necessary
or desirable patent applications at a reasonable cost, in a timely manner, or in all jurisdictions. Prosecution of our patent portfolio
is at an early stage, and we are beginning to reach the statutory deadlines for deciding whether and where to initiate prosecution
in specific foreign jurisdictions by filing national stage applications based on our Patent Cooperation Treaty applications. As those
deadlines come due, we will have to decide whether and where to pursue patent protection for the various inventions claimed in
our patent portfolio, and we will only have the opportunity to obtain patents in those jurisdictions where we pursue protection. It
is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain
patent protection. It is possible that defects of form in the preparation or filing of our patents or patent applications may exist, or
may arise in the future, such as, with respect to proper priority claims, inventorship, claim scope or patent term adjustments. If
there are material defects in the form or preparation of our patents or patent applications, such patents or applications may be
invalid and unenforceable. Moreover, our competitors may independently develop equivalent knowledge, methods and know-
how. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact
on our business, financial condition and operating results.
Pursuant to our current and future license agreements with third parties, in some circumstances, we may not have the right
to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology that we
license from third parties. We may also require the cooperation of our licensors to enforce any licensed patent rights, and such
cooperation may not be provided. Therefore, these patents and applications may not be prosecuted and enforced in a manner
consistent with the best interests of our business.
Our patent portfolio is in the early stages of prosecution. We currently have nine issued U.S. patents. In addition, we have
received a Notice of Allowance for one U.S. patent application. Although we have numerous patent applications pending,
substantive prosecution has begun in only a small number of those applications. We cannot provide any assurances that any of
our pending patent applications will mature into issued patents and, if they do, that such patents or our current patents will include
claims with a scope sufficient to protect our product candidates or otherwise provide any competitive advantage. For example,
we are pursuing claims to compositions of certain bacterial populations. Any claims that are issued may provide coverage for such
compositions and/or their use. However, such claims would not prevent a third party from commercializing alternative compositions
that do not include the bacterial populations claimed in pending applications, potential applications or patents that have or may
issue. There can be no assurance that any such alternative composition will not be equally effective. These and other factors may
provide opportunities for our competitors to design around our patents, should they issue.
Moreover, other parties have developed technologies that may be related or competitive to our approach, and may have filed
or may file patent applications and may have received or may receive patents that may overlap or conflict with our patent
applications, either by claiming similar methods or by claiming subject matter that could dominate our patent position. In addition,
given the early stage of prosecution of our portfolio, it may be some time before we understand how patent offices react to our
patent claims and whether they identify prior art of relevance that we have not already considered, which could be an impediment
to our patents issuing.
Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the
United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore,
we cannot know with certainty whether we were the first to make the inventions claimed in any issued patents or pending patent
applications, or that we were the first to file for patent protection of such inventions, nor can we know whether those from whom
we may license patents were the first to make the inventions claimed or were the first to file. For these and other reasons, the
issuance, scope, validity, enforceability and commercial value of our patent rights are subject to a level of uncertainty. Our pending
and future patent applications may not result in patents being issued which protect our technology or products, in whole or in part,
or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent
laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow
the scope of our patent protection.
We may be subject to a third-party pre-issuance submission of prior art to the USPTO or become involved in derivation,
reexamination, inter partes review, ex partes reexamination, post-grant review or interference proceedings challenging our patent
rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the
scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly
with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third- party
patent rights. For example, in April 2019, the USPTO granted Genome & Co.'s petition to initiate a post grant review of a patent
issued to the University of Chicago, to which we have an exclusive license from the University of Chicago. The oral hearing was
held on January 15, 2020, and the USPTO is expected to issue its decision by April 15, 2020. Both parties will have the right to
appeal the decision to the Court of Appeals for the Federal Circuit. Although the outcome of the post grant review is uncertain,
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there is a possibility that the USPTO could invalidate the subject patent or require the University of Chicago to narrow the claims
contained in the patent.
Any limitation on the protection of the subject technology could hinder our ability to develop and commercialize applicable
product candidates.
In addition, if the breadth or strength of protection provided by our patents and patent applications is threatened, it could
dissuade companies from collaborating with us to license, develop or commercialize current or future product candidates.
Furthermore, an adverse decision in an interference proceeding can result in a third party receiving the patent right sought by us,
which in turn could affect our ability to develop, market or otherwise commercialize our product candidates. The issuance, scope,
validity, enforceability and commercial value of our patents are subject to a level of uncertainty.
The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal
and factual questions and has in recent years been the subject of much litigation. Due to legal standards relating to patentability,
validity, enforceability and claim scope of patents covering biotechnological and pharmaceutical inventions, our ability to obtain,
maintain and enforce patents is uncertain and involves complex legal and factual questions. Even if issued, a patent’s validity,
inventorship, ownership or enforceability is not conclusive. Accordingly, rights under any existing patent or any patents we might
obtain or license may not cover our product candidates, or may not provide us with sufficient protection for our product candidates
to afford a commercial advantage against competitive products or processes, including those from branded and generic
pharmaceutical companies.
The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:
any of our pending patent applications, if issued, will include claims having a scope sufficient to protect our product
candidates or any other products or product candidates;
any of our pending patent applications will issue as patents;
we will be able to successfully commercialize our product candidates, if approved, before our relevant patents expire;
we were the first to make the inventions covered by any existing patent and pending patent applications;
we were the first to file patent applications for these inventions;
others will not develop similar or alternative technologies that do not infringe or design around our patents;
others will not use pre-existing technology to effectively compete against us;
any of our patents, if issued, will be found to ultimately be valid and enforceable;
third parties will not compete with us in jurisdictions where we do not pursue and obtain patent protection;
we will be able to obtain and/or maintain necessary or useful licenses on reasonable terms or at all;
any patents issued to us will provide a basis for an exclusive market for our commercially viable products, will provide
us with any competitive advantages or will not be challenged by third parties;
we will develop additional proprietary technologies or product candidates that are separately patentable; or
our commercial activities or products will not infringe upon the patents or proprietary rights of others.
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Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming and
would divert the attention of our management and key personnel from our business operations. We may not prevail in any lawsuits
that we initiate, and the damages or other remedies awarded if we were to prevail may not be commercially meaningful. Even if
we are successful, domestic or foreign litigation, or USPTO or foreign patent office proceedings, may result in substantial costs
and distraction to our management. We may not be able, alone or with our licensors or potential collaborators, to prevent
misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the
United States. Furthermore, because of the substantial amount of discovery required in connection with intellectual property
litigation or other proceedings, there is a risk that some of our confidential information could be compromised by disclosure during
this type of litigation or other proceedings. In addition, during the course of this kind of litigation or proceedings, there could be
public announcements of the results of hearings, motions or other interim proceedings or developments or public access to related
documents. If investors perceive these results to be negative, the market price for our common stock could be significantly harmed.
If we fail to comply with our obligations in the agreements under which we may license intellectual property rights from
third parties or otherwise experience disruptions to our business relationships with our licensors, we could lose rights that are
important to our business.
We have entered into and may be required to enter into in the future, intellectual property license agreements that are important
to our business. These license agreements may impose various diligence, milestone payment, royalty and other obligations on us.
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For example, we have entered into exclusive license agreements with the University of Chicago and Mayo Clinic pursuant to
which we are required to use efforts to engage in various development and commercialization activities with respect to licensed
products and are required to satisfy specified milestone and royalty payment obligations. If we fail to comply with any obligations
under our agreements with licensors, we may be subject to termination of the license agreement in whole or in part or increased
financial obligations to our licensors, in which case our ability to develop or commercialize products covered by the license
agreement will be impaired. Further, we may need to outsource and rely on third parties for many aspects of the clinical development,
sales and marketing of our products covered under our current and future license agreements. Delay or failure by these third
parties could adversely affect the continuation of our license agreements with our licensors.
In addition, disputes may arise regarding intellectual property subject to a license agreement, including:
the scope of rights granted under the license agreement and other interpretation-related issues;
the extent to which our technology and processes infringe intellectual property of the licensor that is not subject to the
licensing agreement; and
our diligence obligations under the license agreement and what activities satisfy those obligations.
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If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing
arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates.
The intellectual property which we have licensed from the University of Chicago and Mayo Clinic was discovered through
government funded programs and thus may be subject to federal regulations such as "march-in" rights, certain reporting
requirements, and a preference for U.S. industry. Compliance with such regulations may limit our exclusive rights, subject us
to expenditure of resources with respect to reporting requirements, and limit our ability to contract with non-U.S. manufacturers.
We have licensed certain intellectual property from the University of Chicago and Mayo Clinic. These agreements indicate
that the rights licensed to us are subject to the obligations to and the rights of the U.S. government, including those set forth in
the Bayh-Dole Act of 1980 (the "Bayh-Dole Act"). As a result, the U.S. government may have certain rights to intellectual property
embodied in our current or future therapeutics based on the licensed intellectual property. These U.S. government rights in certain
inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide
license to use inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant
exclusive, partially exclusive, or nonexclusive licenses to any of these inventions to a third party if it determines that: (i) adequate
steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs;
or (iii) government action is necessary to meet requirements for public use under federal regulations, also referred to as "march-
in rights." While the U.S. government has sparingly used, and to our knowledge never successfully exercised, such march-in rights,
any exercise of the march-in rights by the U.S. government could harm our competitive position, business, financial condition,
results of operations, and prospects. If the U.S. government exercises such march-in rights, we may receive compensation that is
deemed reasonable by the U.S. government in its sole discretion, which may be less than what we might be able to obtain in the
open market. Intellectual property generated under a government funded program is also subject to certain reporting requirements,
compliance with which may require us to expend substantial resources.
In addition, the U.S. government requires that any therapeutics embodying any invention generated through the use of U.S.
government funding be manufactured substantially in the United States. The manufacturing preference requirement can be waived
if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on
similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the
circumstances domestic manufacture is not commercially feasible. This preference for U.S. manufacturers may limit our ability
to contract with non-U.S. therapeutic manufacturers for therapeutics covered by such intellectual property.
If we are unable to protect the confidentiality of our trade secrets and know-how, our business and competitive position
would be harmed.
In addition to seeking patents for some of our technology and product candidates, we also rely on trade secrets, including
unpatented know-how, technology and other proprietary information, to maintain our competitive position. We seek to protect
these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them,
such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and
other third parties. We also seek to enter into confidentiality and invention or patent assignment agreements with our employees,
advisors and consultants. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary
information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Our trade secrets
may also be obtained by third parties by other means, such as breaches of our physical or computer security systems. Enforcing
a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome
is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets.
Moreover, if any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have
no right to prevent them, or those to whom they communicate, from using that technology or information to compete with us. If
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any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be
harmed.
Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our
products.
As is the case with other biotechnology companies, our success is heavily dependent on intellectual property, particularly
patents. Obtaining and enforcing patents in the biotechnology industry involves both technological and legal complexity, and is
therefore costly, time-consuming and inherently uncertain. In addition, patent reform legislation could further increase the
uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents.
On September 16, 2011, the Leahy-Smith America Invents Act (the "Leahy-Smith Act") was signed into law. The Leahy-Smith
Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications
are prosecuted and may also affect patent litigation. The USPTO has also developed regulations and procedures to govern
administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act,
in particular the first to file provisions, only became effective on March 16, 2013. A third party that files a patent application in
the USPTO after that date but before us could therefore be awarded a patent covering an invention of ours even if we had made
the invention before it was made by the third party. This will require us to be cognizant going forward of the time from invention
to filing of a patent application. Thus, for our U.S. patent applications containing a priority claim after March 16, 2013, there is
a greater level of uncertainty in the patent law.
Moreover, some of the patent applications in our portfolio will be subject to examination under the pre-Leahy-Smith Act
law and regulations, while other patents applications in our portfolio will be subject to examination under the law and regulations,
as amended by the Leahy-Smith Act. This introduces additional complexities into the prosecution and management of our portfolio.
In addition, the Leahy-Smith Act limits where a patentee may file a patent infringement suit and provides opportunities for
third parties to challenge any issued patent in the USPTO. These provisions apply to all of our U.S. patents, even those issued
before March 16, 2013. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in
U.S. federal court necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding
sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if
first presented in a federal court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate our
patent claims because it may be easier for them to do so relative to challenging the patent in a federal court action. It is not clear
what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its
implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the
enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial
condition.
In addition, recent United States Supreme Court rulings have narrowed the scope of patent protection available in certain
circumstances and weakened the rights of patent owners in certain situations. From time to time, the U.S. Supreme Court, other
federal courts, the United States Congress, or the USPTO, may change the standards of patentability and any such changes could
have a negative impact on our business.
A number of cases decided by the Supreme Court have involved questions of when claims reciting abstract ideas, laws of
nature, natural phenomena and/or natural products are eligible for a patent, regardless of whether the claimed subject matter is
otherwise novel and inventive. These cases include Association for Molecular Pathology v. Myriad Genetics, Inc., 569 U.S. 12-398
(2013) or Myriad; Alice Corp. v. CLS Bank International, 573 U.S. 13-298 (2014); and Collaborative Services v. Prometheus
Laboratories, Inc., or Prometheus, 566 U.S. 10-1150 (2012). In response to these cases, the USPTO has issued guidance to the
examining corps.
The full impact of these decisions is not yet known. The Myriad decision, issued on June 13, 2013, is the most recent Supreme
Court decision to address patent eligibility of natural products. Our current product candidates include natural products, therefore,
this decision and its interpretation by the courts and the USPTO may impact prosecution, defense and enforcement of our patent
portfolio. In Myriad, the Court held that claims to isolated genomic DNA are not patentable, but claims to complementary DNA,
or cDNA, molecules, which are not genomic sequences, may be patent eligible because they are not a natural product. The effect
of the decision on patents for other isolated natural products is uncertain. However, on March 4, 2014, the USPTO issued a
memorandum to patent examiners providing guidance for examining claims that recite laws of nature, natural phenomena or
natural products under the Myriad and Prometheus decisions. The guidance did not limit the application of Myriad to DNA but,
rather, applied the decision broadly to other natural products, which may include our product candidates. The March 4, 2014
memorandum and the USPTO’s interpretation of the cases and announced examination rubric received widespread criticism from
stakeholders during a public comment period and was superseded by interim guidance published on December 15, 2014. The
USPTO’s interpretation of the case law and new guidelines for examination may influence, possibly adversely, prosecution and
defense of certain types of claims in our portfolio.
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In addition to increasing uncertainty with regard to our ability to obtain future patents, this combination of events has created
uncertainty with respect to the value of patents, once obtained. Depending on these and other decisions by Congress, the federal
courts and the USPTO, the laws and regulations governing patents could change or be interpreted in unpredictable ways that would
weaken our ability to obtain new patents or to enforce any patents that may issue to us in the future. In addition, these events may
adversely affect our ability to defend any patents that may issue in procedures in the USPTO or in courts.
Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome
of which would be uncertain and could have a material adverse effect on the success of our business.
Our commercial success depends upon our ability, and the ability of our collaborators, to develop, manufacture, market and
sell our product candidates and use our proprietary technologies without infringing the proprietary rights of third parties. There
is considerable intellectual property litigation in the biotechnology and pharmaceutical industries. While no such litigation has
been brought against us and we have not been held by any court to have infringed a third party’s intellectual property rights, we
cannot guarantee that our technology, products or use of our products do not infringe third-party patents.
Numerous patents and pending applications are owned by third parties in the fields in which we are developing product
candidates, both in the United States and elsewhere. It is also possible that we have failed to identify relevant third-party patents
or applications. For example, applications filed before November 29, 2000 and certain applications filed after that date that will
not be filed outside the United States remain confidential until patents issue. Moreover, it is difficult for industry participants,
including us, to identify all third-party patent rights that may be relevant to our product candidates and technologies because patent
searching is imperfect due to differences in terminology among patents, incomplete databases and the difficulty in assessing the
meaning of patent claims. We may fail to identify relevant patents or patent applications or may identify pending patent applications
of potential interest but incorrectly predict the likelihood that such patent applications may issue with claims of relevance to our
technology. In addition, we may be unaware of one or more issued patents that would be infringed by the manufacture, sale or use
of a current or future product candidate, or we may incorrectly conclude that a third-party patent is invalid, unenforceable or not
infringed by our activities. Additionally, pending patent applications that have been published can, subject to certain limitations,
be later amended in a manner that could cover our technologies, our products or the use of our products. We are aware of several
pending patent applications containing one or more claims that could be construed to cover some of our product candidates or
technology, should those claims issue in their original form or in the form presently being pursued.
The biotechnology and pharmaceutical industries are characterized by extensive litigation regarding patents and other
intellectual property rights. Other parties may allege that our product candidates or the use of our technologies infringe patent
claims or other intellectual property rights held by them or that we are employing their proprietary technology without authorization.
We may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights
with respect to our products and technology, including interference or derivation proceedings before the USPTO and similar bodies
in other countries. Third parties may assert infringement claims against us based on existing intellectual property rights and
intellectual property rights that may be granted in the future. If we were to challenge the validity of an issued U.S. patent in court,
such as an issued U.S. patent of potential relevance to some of our product candidates or methods of use, we would need to
overcome a statutory presumption of validity that attaches to every U.S. patent. This means that in order to prevail, we would have
to present clear and convincing evidence as to the invalidity of the patent’s claims. There is no assurance that a court would find
in our favor on questions of infringement or validity.
Patent and other types of intellectual property litigation can involve complex factual and legal questions, and their outcome
is uncertain. If we are found or believe there is a risk we may be found, to infringe a third party’s intellectual property rights, we
could be required or may choose to obtain a license from such third party to continue developing and marketing our products and
technology. However, we may not be able to obtain any such license on commercially reasonable terms or at all. Even if we were
able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us.
We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we could
be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a
patent. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our
business operations, which could materially harm our business. Claims that we have misappropriated the confidential information
or trade secrets of third parties could have a similar negative impact on our business.
Even if we are successful in these proceedings, we may incur substantial costs and divert management time and attention in
pursuing these proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the patent rights
of others, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court, or
redesign our products. Patent litigation is costly and time-consuming. We may not have sufficient resources to bring these actions
to a successful conclusion. In addition, intellectual property litigation or claims could force us to do one or more of the following:
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pay substantial damages for past use of the asserted intellectual property;
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obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable
terms, if at all; and
in the case of trademark claims, redesign or rename some or all of our product candidates or other brands to avoid infringing
the intellectual property rights of third parties, which may not be possible and, even if possible, could be costly and time-
consuming.
Any of these risks coming to fruition could have a material adverse effect on our business, results of operations, financial
condition and prospects.
Issued patents covering our product candidates could be found invalid or unenforceable or could be interpreted narrowly
if challenged in court.
Competitors may infringe our intellectual property, including our patents or the patents of our licensors. As a result, we may
be required to file infringement claims to stop third-party infringement or unauthorized use. This can be expensive, particularly
for a company of our size, and time-consuming. If we initiated legal proceedings against a third party to enforce a patent, if and
when issued, covering one of our product candidates, the defendant could counterclaim that the patent covering our product
candidate is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity
and/or unenforceability are commonplace. Grounds for a validity challenge include alleged failures to meet any of several statutory
requirements, including lack of novelty, obviousness or non-enablement, or failure to claim patent eligible subject matter. Grounds
for unenforceability assertions include allegations that someone connected with prosecution of the patent withheld relevant
information from the USPTO, or made a misleading statement, during prosecution. Third parties may also raise similar claims
before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-
examination, post grant review and equivalent proceedings in foreign jurisdictions, such as opposition proceedings. Such
proceedings could result in revocation or amendment of our patents in such a way that they no longer cover our product candidates
or competitive products. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect
to validity, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were
unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would
lose at least part, and perhaps all, of the patent protection on our product candidates. Moreover, even if not found invalid or
unenforceable, the claims of our patents could be construed narrowly or in a manner that does not cover the allegedly infringing
technology in question. Such a loss of patent protection would have a material adverse impact on our business.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission,
fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or
eliminated for noncompliance with these requirements.
Periodic maintenance fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages
over the lifetime of the patent and, in some jurisdictions, during the pendency of a patent application. The USPTO and various
foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar
provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee
or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment
or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction.
Noncompliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to,
failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit
formal documents. In such an event, our competitors might be able to enter the market, which would have a material adverse effect
on our business.
We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.
It is our policy to enter into confidentiality and intellectual property assignment agreements with our employees, consultants,
contractors and advisors. These agreements generally provide that inventions conceived by the party in the course of rendering
services to us will be our exclusive property. However, these agreements may not be honored and may not effectively assign
intellectual property rights to us. For example, even if we have a consulting agreement in place with an academic advisor pursuant
to which such academic advisor is required to assign any inventions developed in connection with providing services to us, such
academic advisor may not have the right to assign such inventions to us, as it may conflict with his or her obligations to assign
all such intellectual property to his or her employing institution.
Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in
defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as
exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on
our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a
distraction to management and other employees.
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We may be subject to claims by third parties asserting that our employees or we have misappropriated their intellectual
property, or claiming ownership of what we regard as our own intellectual property.
Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies,
including our competitors or potential competitors. We may also engage advisors and consultants who are concurrently employed
at universities or other organizations or who perform services for other entities. Although we try to ensure that our employees,
advisors and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to
claims that we or our employees, advisors or consultants have used or disclosed intellectual property, including trade secrets or
other proprietary information, of any such party’s former or current employer or in violation of an agreement with another party.
Although we have no knowledge of any such claims being alleged to date, if such claims were to arise, litigation may be necessary
to defend against any such claims.
In addition, while it is our policy to require our employees, consultants, advisors and contractors who may be involved in
the development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful
in executing such an agreement with each party who in fact develops intellectual property that we regard as our own. Our and
their assignment agreements may not be self-executing or may be breached, and we may be forced to bring claims against third
parties, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectual property.
Similarly, we may be subject to claims that an employee, advisor or consultant performed work for us that conflicts with that
person’s obligations to a third party, such as an employer, and thus, that the third party has an ownership interest in the intellectual
property arising out of work performed for us. Litigation may be necessary to defend against these claims. Although we have no
knowledge of any such claims being alleged to date, if such claims were to arise, litigation may be necessary to defend against
any such claims.
If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable
intellectual property rights or personnel. Even if we are successful in prosecuting or defending against such claims, litigation could
result in substantial costs and be a distraction to management.
If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in
our markets of interest and our business may be adversely affected.
Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented or declared generic
or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names,
which we need to build name recognition among potential collaborators or customers in our markets of interest. At times, competitors
may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to
market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other
registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. Over
the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able
to compete effectively and our business may be adversely affected. Our efforts to enforce or protect our proprietary rights related
to trademarks, trade names, domain names or other intellectual property may be ineffective and could result in substantial costs
and diversion of resources and could adversely impact our financial condition or results of operations.
We will not seek to protect our intellectual property rights in all jurisdictions throughout the world and we may not be
able to adequately enforce our intellectual property rights even in the jurisdictions where we seek protection.
Filing, prosecuting and defending patents on product candidates in all countries and jurisdictions throughout the world would
be prohibitively expensive, and our intellectual property rights in some countries outside the United States could be less extensive
than in the United States, assuming that rights are obtained in the United States and assuming that rights are pursued outside the
United States. The statutory deadlines for pursuing patent protection in individual foreign jurisdictions are based on the priority
date of each of our patent applications. For all of the patent families in our portfolio, including the families that may provide
coverage for our lead product candidates, the relevant statutory deadlines have not yet expired. Therefore, for each of the patent
families that we believe provide coverage for our lead product candidates, we will need to decide whether and where to pursue
protection outside the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to
the same extent as federal and state laws in the United States. Consequently, even if we do elect to pursue patent rights outside
the United States, we may not be able to obtain relevant claims and/or we may not be able to prevent third parties from practicing
our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and
into the United States or other jurisdictions.
Competitors may use our technologies in jurisdictions where we do not pursue and obtain patent protection to develop their
own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement
is not as strong as that in the United States. These products may compete with our products and our patents or other intellectual
property rights may not be effective or sufficient to prevent them from competing.
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Even if we pursue and obtain issued patents in particular jurisdictions, our patent claims or other intellectual property rights
may not be effective or sufficient to prevent third parties from so competing.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United
States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain
foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of
patents and other intellectual property protection, especially those relating to biotechnology. This could make it difficult for us to
stop the infringement of our patents, if obtained, or the misappropriation of our other intellectual property rights. For example,
many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition,
many countries limit the enforceability of patents against third parties, including government agencies or government contractors.
In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country
basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent
protection in certain countries, and we will not have the benefit of patent protection in such countries.
If our ability to obtain and, if obtained, enforce our patents to stop infringing activities is inadequate, third parties may
compete with our products, and our patents or other intellectual property rights may not be effective or sufficient to prevent them
from competing. Accordingly, our intellectual property rights around the world may be inadequate to obtain a significant commercial
advantage from the intellectual property we develop or license.
Risks Related to Employee Matters and Managing Growth and Other Risks Related to Our Business
Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified
personnel.
We are highly dependent on Balkrishan (Simba) Gill, our President and Chief Executive Officer, as well as the other principal
members of our management, scientific and clinical team. Although we have entered into employment agreements with our
executive officers, each of them may terminate their employment with us at any time. We do not maintain "key person" insurance
for any of our executives or other employees.
Recruiting and retaining qualified scientific, clinical, manufacturing and sales and marketing personnel will also be critical
to our success. The loss of the services of our executive officers or other key employees could impede the achievement of our
research, development and commercialization objectives and seriously harm our ability to successfully implement our business
strategy. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of time
due to the limited number of individuals in our industry with the breadth of skills and experience required to successfully develop,
gain regulatory approval of and commercialize products. Competition to hire from this limited pool is intense, and we may be
unable to hire, train, retain or motivate these key personnel on acceptable terms given the competition among numerous
pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific
and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including
scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our
consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory
contracts with other entities that may limit their availability to us. If we are unable to continue to attract and retain high quality
personnel, our ability to pursue our growth strategy will be limited.
We expect to expand our development and regulatory capabilities and potentially implement sales, marketing and
distribution capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our
operations.
We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in
the areas of product development, regulatory affairs, clinical affairs and manufacturing and, if any of our product candidates
receives marketing approval, sales, marketing and distribution. To manage our anticipated future growth, we must continue to
implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train
additional qualified personnel. Due to our limited financial resources and the limited experience of our management team in
managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or
recruit and train additional qualified personnel. The expansion of our operations may lead to significant costs and may divert our
management and business development resources. Any inability to manage growth could delay the execution of our business plans
or disrupt our operations.
A variety of risks associated with operating internationally could materially adversely affect our business.
We currently have limited international operations, but our business strategy incorporates potentially expanding
internationally if any of our product candidates receive regulatory approval. Doing business internationally involves a number of
risks, including but not limited to:
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• multiple, conflicting and changing laws and regulations, such as privacy regulations, tax laws, export and import
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failure by us to obtain and maintain regulatory approvals for the use of our products in various countries;
additional potentially relevant third-party patent rights;
complexities and difficulties in obtaining protection and enforcing our intellectual property;
difficulties in staffing and managing foreign operations;
complexities associated with managing multiple payor reimbursement regimes, government payors or patient self-pay
systems;
limits in our ability to penetrate international markets;
financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional
financial crises on demand and payment for our products and exposure to foreign currency exchange rate fluctuations;
natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease
(e.g. novel coronavirus epidemic in China), boycotts, curtailment of trade and other business restrictions;
certain expenses including, among others, expenses for travel, translation and insurance; and
regulatory and compliance risks that relate to maintaining accurate information and control over sales and activities that
may fall within the purview of the U.S. Foreign Corrupt Practices Act, its books and records provisions, or its anti-bribery
provisions, or other anti-bribery and anti-corruption laws.
Any of these factors could significantly harm our future international expansion and operations and, consequently, our results
of operations.
The United Kingdom’s withdrawal from the European Union may have a negative effect on global economic conditions,
financial markets and our business.
On January 31, 2020, the United Kingdom of Great Britain and Northern Ireland (the “United Kingdom”) left the European
Union (“Brexit”). The United Kingdom and the European Union have ratified the Agreement on the Withdrawal of the United
Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community of October
19, 2019 (the “Withdrawal Agreement”), which provides for a transition period during which EU law will remain applicable in
the United Kingdom as though the United Kingdom were still an EU Member State, with limited exceptions. The transition period
is due to end on December 31, 2020. The United Kingdom can request an extension of the transition period for a further one or
two years, but the British government has indicated that it will not extend the transition period beyond the end of 2020. The UK
Parliament has passed the European Union (Withdrawal Agreement) Act of 2020, pursuant to which the various UK statutory
instruments designed to ensure that current EU law operates effectively in the United Kingdom after Brexit now will come into
effect at the end of the transition period. The terms of the United Kingdom’s trading relationship with the European Union after
the conclusion of the transition period are subject to a complex and ongoing negotiation between the United Kingdom and the
European Union whose result remains unclear and which has created significant political and economic uncertainty, including
with respect to the laws and regulations that will apply as the United Kingdom determines which EU laws to replace or replicate.
These developments have had and may continue to have a material adverse effect on global economic conditions and the
stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market
participants to operate in certain financial markets. Any of these factors could depress economic activity and restrict our access
to capital, which could have a material adverse effect on our business, financial condition and results of operations and reduce the
price of common stock.
Depending on the terms of Brexit after the conclusion of the transition period, the United Kingdom could lose its present
rights or terms of access to the single EU market and EU customs areas and to the global trade deals negotiated by the European
Union on behalf of its members. The uncertainty regarding new or modified arrangements between the United Kingdom and other
countries following Brexit may have a material adverse effect on the movement of goods between the United Kingdom and
members of the European Union and the United States, including the interruption of or delays in imports into the United Kingdom
of goods originating within the European Union and exports from the United Kingdom of goods originating there. For example,
shipments into the United Kingdom of drug substance manufactured for the Company in the European Union may be interrupted
or delayed and thereby prevent or delay the manufacture in the United Kingdom of drug product. Similarly, shipments out of the
United Kingdom of drug product to the United States or the European Union may be interrupted or delayed and thereby prevent
or delay the delivery of drug product to clinical sites. Such a situation could hinder our ability to conduct current and planned
clinical trials and have an adverse effect on our business.
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Our business and operations would suffer in the event of information technology and other system failures or security
breaches of or unauthorized access to our systems.
Despite the implementation of security measures, our internal computer systems and those of our current and future contractors
and consultants are vulnerable to damage from computer viruses, unauthorized access, malware, natural disasters, terrorism, war,
telecommunication and electrical failures, cyber-attacks or cyber-intrusions over the Internet, or to attachments to emails and other
security breaches or unauthorized access by persons inside our organization or with access to our internal systems. The risk of a
security breach or disruption, particularly through cyber-attacks or cyber-intrusions, including by computer hackers, foreign
governments and cyber terrorists, generally has increased as the number, intensity and sophistication of attempted attacks and
intrusions from around the world have increased. In addition, our systems safeguard important confidential personal data regarding
patients enrolled in our clinical trials. While we are not aware of any such material 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 to our product
development programs and our business operations. For example, the loss of clinical trial data from completed or future clinical
trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data.
Likewise, we rely on third parties to manufacture our product candidates and conduct clinical trials, and similar events relating
to their computer systems could also have a material adverse effect on our business. To the extent that any disruption or security
breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary
information, we could incur liability and the further development and commercialization of our product candidates could be
delayed.
We rely on a set of cloud-based software services and access these services via the Internet for the vast majority of our
computing, storage, bandwidth, and other services. Any disruption of or interference with our use of our cloud-based services
would negatively affect our operations and could seriously harm our business.
We use several distributed computing infrastructure platforms for business operations, or what is commonly referred to as
"cloud" computing services and we access these services via the Internet. Any transition of the cloud services currently provided
by an existing vendor to another cloud provider would be difficult to implement and will cause us to incur significant time and
expense. Given this, any significant disruption of or interference with our use of these cloud computing services would negatively
impact our operations and our business would be seriously harmed. If our employees or partners are not able to access our cloud
computing services or encounter difficulties in doing so, we may experience business disruption. The level of service provided
by our cloud computing vendors, including the ability to secure our confidential information and the confidential information of
third parties that is shared with us, may also impact the perception of our company and could seriously harm our business and
reputation and create liability for us. If a cloud computing service that we use experiences interruptions in service regularly or for
a prolonged basis, or other similar issues, our business could be seriously harmed.
In addition, a cloud computing service may take actions beyond our control that could seriously harm our business, including:
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increasing pricing terms;
terminating or seeking to terminate our contractual relationship altogether;
establishing more favorable relationships with one or more of our competitors; or
• modifying or interpreting its terms of service or other policies in a manner that impacts our ability to run our business
and operations.
Our cloud computing services have broad discretion to change and interpret its terms of service and other policies with
respect to us, and those actions may be unfavorable to us. Our cloud computing services may also alter how we are able to process
data on the platform. If a cloud computing services makes changes or interpretations that are unfavorable to us, our business could
be seriously harmed.
Our efforts to protect the information shared with us may be unsuccessful due to the actions of third parties, software bugs,
or other technical malfunctions, employee error or malfeasance, or other factors. In addition, third parties may attempt to
fraudulently induce employees or users to disclose information to gain access to our data or third-party data entrusted to us. If any
of these events occur, our or third-party information could be accessed or disclosed improperly. Some partners or collaborators
may store information that we share with them on their own computing system. If these third parties fail to implement adequate
data-security practices or fail to comply with our policies, our data may be improperly accessed or disclosed. And even if these
third parties take all these steps, their networks may still suffer a breach, which could compromise our data.
Any incidents where our information is accessed without authorization, or is improperly used, or incidents that violate our
policies, could damage our reputation and our brand and diminish our competitive position. In addition, affected parties or
government authorities could initiate legal or regulatory action against us over those incidents, which could cause us to incur
significant expense and liability or result in orders or consent decrees forcing us to modify our business practices. Concerns over
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our privacy practices, whether actual or unfounded, could damage our reputation and brand and deter users, advertisers, and
partners from using our products and services. Any of these occurrences could seriously harm our business.
We are also subject to many federal, state, and foreign laws and regulations, including those related to privacy, rights of
publicity, data protection, content regulation, intellectual property, health and safety, competition, protection of minors, consumer
protection, employment, and taxation. By way of example, on June 28, 2018, California enacted the California Consumer Privacy
Act (the "CCPA"), which took effect on January 1, 2020. The CCPA creates individual privacy rights for California consumers
and increases the privacy and security obligations of entities handling certain personal information. The CCPA provides for civil
penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The
CCPA may increase our compliance costs and potential liability, and similar laws have been proposed at the federal level and in
other states. These laws and regulations are constantly evolving and may be interpreted, applied, created, or amended in a manner
that could seriously harm our business.
Changes in funding for the FDA, the SEC and other government agencies could hinder their ability to hire and retain
key leadership and other personnel, and prevent those agencies from performing normal functions on which the operation of
our business may rely, which could negatively impact our business.
The ability of the FDA to take action with respect to regulatory matters can be affected by a variety of factors, including
government budget and funding levels, ability to hire and retain key personnel and accept payment of user fees and statutory,
regulatory and policy changes. In addition, government funding of the FDA, the SEC and other government agencies on which
our operations may rely is subject to the political process, which is inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for regulatory submissions to be reviewed or
approved, or for other actions to be taken, by relevant government agencies, which would adversely affect our business. For
example, over the last several years, including as recently as December 22, 2018, the U.S. government has shut down several
times and certain regulatory agencies, such as the FDA and the SEC, have had to furlough critical FDA, SEC and other government
employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the
FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business. Similarly,
a prolonged government shutdown could prevent the timely review of our patent applications by the USPTO, which could delay
the issuance of any U.S. patents to which we might otherwise be entitled. Additionally, government shutdowns could impact our
ability to access the public markets and obtain necessary capital in order to properly fund our business.
Acquisitions or joint ventures could disrupt our business, cause dilution to our stockholders and otherwise harm our
business.
We may acquire other businesses, products or technologies as well as pursue strategic alliances, joint ventures, technology
licenses or investments in complementary businesses. We have only made one acquisition to date, and our ability to do so
successfully is unproven beyond this instance. Any of these transactions could be material to our financial condition and operating
results and expose us to many risks, including:
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disruption in our relationships with future customers or with current or future distributors or suppliers as a result of such
a transaction;
unanticipated liabilities related to acquired companies;
difficulties integrating acquired personnel, technologies and operations into our existing business;
diversion of management time and focus from operating our business to acquisition integration challenges;
increases in our expenses and reductions in our cash available for operations and other uses;
possible write-offs or impairment charges relating to acquired businesses; and
inability to develop a sales force for any additional product candidates.
Foreign acquisitions involve unique risks in addition to those mentioned above, including those related to integration of
operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks
associated with specific countries.
Also, the anticipated benefit of any acquisition may not materialize. Future acquisitions or dispositions could result in
potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses or
write-offs of goodwill, any of which could harm our financial condition. We cannot predict the number, timing or size of future
joint ventures or acquisitions, or the effect that any such transactions might have on our operating results.
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Risks Related to Our Common Stock
The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for
purchasers of our common stock, and we could be subject to securities class action litigation as a result.
Our stock price is likely to be volatile. The stock market in general and the market for smaller biopharmaceutical companies
in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies.
As a result of this volatility, you may not be able to sell your shares of common stock at or above the price at which you purchase
the shares. The market price for our common stock may be influenced by many factors, including:
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the success of competitive products or technologies;
actual or anticipated changes in our growth rate relative to our competitors;
results of clinical trials of our product candidates or those of our competitors;
developments related to any future collaborations;
regulatory or legal developments in the United States and other countries;
adverse actions taken by regulatory agencies with respect to our preclinical studies or clinical trials, manufacturing or
sales and marketing activities;
any adverse changes to our relationship with third party contractors or manufacturers;
development of new product candidates that may address our markets and may make our existing product candidates less
attractive;
changes in physician, hospital or healthcare provider practices that may make our product candidates less useful;
announcements by us, our collaborators or our competitors of significant acquisitions, strategic partnerships, joint ventures,
collaborations or capital commitments;
developments or disputes concerning patent applications, issued patents or other proprietary rights;
the recruitment or departure of key personnel;
the level of expenses related to any of our product candidates or product development programs;
failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;
press reports or other negative publicity, whether or not true, about our business;
the results of our efforts to discover, develop, acquire or in-license additional product candidates or products;
actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities
analysts;
variations in our financial results or those of companies that are perceived to be similar to us;
changes in the structure of healthcare payment systems;
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general economic, industry and market conditions; and
the other factors described in this "Risk Factors" section.
Any of these factors may result in large and sudden changes in the volume and trading price of our common stock. In the
past, securities class action litigation has often been brought against a company following a decline in the market price of its
securities. This risk is especially relevant for us because biopharmaceutical companies have experienced significant stock price
volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention
and resources, which could harm our business.
Our executive officers, directors and principal stockholders, if they choose to act together, have the ability to control or
significantly influence all matters submitted to stockholders for approval.
Based on the number of shares of common stock outstanding as of February 7, 2020, our executive officers, directors and
stockholders who own more than 5% of our outstanding common stock and their respective affiliates hold, in the aggregate, shares
representing approximately 73% of our outstanding voting stock. As a result, if these stockholders were to choose to act together,
they would be able to control or significantly influence all matters submitted to our stockholders for approval, as well as our
management and affairs. For example, these persons, if they choose to act together, would control or significantly influence the
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election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. They may also have
interests that differ from yours and may vote in a way with which you disagree, and which may be adverse to your interests. This
concentration of ownership control may have the effect of delaying, deferring or preventing a change in control of our company,
could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company
and might ultimately affect the market price of our common stock.
A significant portion of our total outstanding shares are eligible to be sold into the market, which could cause the market
price of our common stock to drop significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market, or the perception in the market that the
holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. Moreover, holders
of an aggregate of approximately 18.4 million shares of our common stock have rights, subject to specified conditions, to require
us to file registration statements covering their shares or to include their shares in registration statements that we may file for
ourselves or other stockholders, including entities affiliated with Flagship Pioneering, until such shares can otherwise be sold
without restriction under Rule 144 of the Securities Act or until the rights terminate pursuant to the terms of the investors’ rights
agreement between us and such holders. We have also registered and intend to continue to register all shares of common stock
that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market
upon issuance, subject to volume limitations applicable to affiliates.
We are an "emerging growth company" and a "smaller reporting company," and the reduced disclosure requirements
applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to
investors.
We are an "emerging growth company" as that term is used in the Jumpstart Our Business Startups Act of 2012 (the "JOBS
Act") and may remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth
anniversary of the completion of the initial public offering of our common stock, (b) in which we have total annual gross revenue
of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our
outstanding common stock that are held by non-affiliates exceeds $700 million as of the prior June 30, and (2) the date on which
we have issued more than $1.0 billion in non-convertible debt during the prior three year period. For so long as we remain an
emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are
applicable to other public companies that are not emerging growth companies. These exemptions include:
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being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim
financial statements, with correspondingly reduced "Management’s Discussion and Analysis of Financial Condition and
Results of Operations" disclosure;
not being required to comply with the auditor attestation requirements in the assessment of our internal control over
financial reporting;
not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight
Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information
about the audit and the financial statements;
reduced disclosure obligations regarding executive compensation; and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder
approval of any golden parachute payments not previously approved.
In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period
for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of these
accounting standards until they would otherwise apply to private companies. We have elected to take advantage of this extended
transition period.
We are also a smaller reporting company, and we will remain a smaller reporting company until the fiscal year following
the determination that our voting and non-voting common shares held by non-affiliates is more than $250 million measured on
the last business day of our second fiscal quarter, or our annual revenues are more than $100 million during the most recently
completed fiscal year and our voting and non-voting common shares held by non-affiliates is more than $700 million measured
on the last business day of our second fiscal quarter. Similar to emerging growth companies, smaller reporting companies are
able to provide simplified executive compensation disclosure, are exempt from the auditor attestation requirements of Section 404,
and have certain other reduced disclosure obligations, including, among other things, being required to provide only two years of
audited financial statements and not being required to provide selected financial data, supplemental financial information or risk
factors.
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We have elected to take advantage of certain of the reduced reporting obligations. We cannot predict whether investors will
find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as
a result, there may be a less active trading market for our common stock and our stock price may be reduced or more volatile.
We have incurred and expect to continue to incur increased costs as a result of operating as a public company, and our
management will be required to devote substantial time to new compliance initiatives and corporate governance practices.
As a public company, and particularly after we are no longer an emerging growth company, we have incurred and expect to
continue to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley
Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of The Nasdaq Global
Select Market and other applicable securities rules and regulations impose various requirements on public companies, including
establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management
and other personnel need to devote a substantial amount of time to these compliance initiatives.
Moreover, these rules and regulations have increased our legal and financial compliance costs and made some activities
more time consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more
expensive for us to maintain director and officer liability insurance, which in turn could make it more difficult for us to attract and
retain qualified members of our board of directors.
We are evaluating these rules and regulations, and cannot predict or estimate the amount of additional costs we may incur
or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack
of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and
governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by
ongoing revisions to disclosure and governance practices.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we are required to furnish a report by our
management on our internal control over financial reporting. However, while we remain an emerging growth company, we will
not be required to include an attestation report on internal control over financial reporting issued by our independent registered
public accounting firm. To achieve compliance with Section 404 within the prescribed period, we are engaged in a process to
document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will
need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess
and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate,
validate through testing that controls are functioning as documented and implement a continuous reporting and improvement
process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within
the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by Section 404. If we
identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence
in the reliability of our consolidated financial statements.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in
reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed,
summarized and reported within the time periods specified in the rules and forms of the SEC.
We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent
limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more
people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system,
misstatements due to error or fraud may occur and not be detected.
If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or
misleading opinion regarding our business, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts
publish about us or our business. If any of the analysts who cover us issue an adverse or misleading opinion regarding us, our
business model, our intellectual property or our stock performance, or if our target preclinical studies or clinical studies and/or
operating results fail to meet the expectations of analysts, our stock price would likely decline. If one or more of these analysts
cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could
cause our stock price or trading volume to decline.
Provisions in our restated certificate of incorporation and amended and restated bylaws could make an acquisition of
our company, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to
replace or remove our current management.
54
Provisions in our restated certificate of incorporation and our amended and restated bylaws may discourage, delay or prevent
a merger, acquisition or other change in control of our company that stockholders may consider favorable, including transactions
in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might
be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In
addition, because our board of directors is responsible for appointing the members of our management team, these provisions may
frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult
for stockholders to replace members of our board of directors. Among other things, these provisions include those establishing:
•
•
•
•
•
•
•
•
•
a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the
membership of a majority of our board of directors;
no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director
candidates;
the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of
directors or the resignation, death or removal of a director, which prevents stockholders from filling vacancies on our
board of directors;
the ability of our board of directors to authorize the issuance of shares of preferred stock and to determine the terms of
those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly
dilute the ownership of a hostile acquirer;
the ability of our board of directors to alter our bylaws without obtaining stockholder approval;
the required approval of the holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt,
amend or repeal our bylaws or repeal the provisions of our restated certificate of incorporation regarding the election and
removal of directors;
a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special
meeting of our stockholders;
the requirement that a special meeting of stockholders may be called only by the chairman of the board of directors, the
chief executive officer, the president or the board of directors, which may delay the ability of our stockholders to force
consideration of a proposal or to take action, including the removal of directors; and
advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors
or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer
from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain
control of us.
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the General
Corporation Law of the State of Delaware, which prohibits a person who owns in excess of 15% of our outstanding voting stock
from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in
excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.
Our restated certificate of incorporation provide that the Court of Chancery of the State of Delaware will be the exclusive
forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a
favorable judicial forum for disputes with us or our directors, officers or other employees.
Our restated certificate of incorporation specifies that, unless we consent in writing to the selection of an alternative forum,
the Court of Chancery of the State of Delaware will be the sole and exclusive forum for most legal actions involving any derivative
action or proceeding brought on our behalf, any action asserting a claim of breach of fiduciary duty owed by any director, officer,
employee or stockholder to us or our stockholders, any action asserting a claim arising pursuant to any provision of the General
Corporation Law of the State of Delaware or any action asserting a claim governed by the internal affairs doctrine. We believe
these provisions benefit us by providing increased consistency in the application of Delaware law by chancellors particularly
experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums
and protection against the burdens of multi-forum litigation. The provision may limit a stockholder’s ability to bring a claim in a
judicial forum that it finds favorable for disputes, and may have the effect of discouraging lawsuits, including those against our
directors and officers. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation
has been challenged in legal proceedings, and it is possible that, in connection with any applicable action brought against us, a
court could find the choice of forum provisions contained in our restated certificate of incorporation to be inapplicable or
unenforceable in such action. If a court were to find the choice of forum provision contained in our restated certificate of
incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action
in other jurisdictions, which could adversely affect our results of operations and financial condition.
55
Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation,
if any, will be your sole source of gain.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings,
if any, to finance the operation and expansion of our business. Therefore, you should not rely on an investment in our common
stock as a source for any future dividend income.
Our board of directors has significant discretion as to whether to distribute dividends. Even if our board of directors decides
to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our
future results of operations and cash flow, our capital requirements and surplus, our financial condition, contractual restrictions
and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our common stock will
likely depend entirely on any future capital appreciation, if any, of our common stock. There is no guarantee that our common
stock will appreciate in value or even maintain the price at which you purchased our common stock.
Our ability to use net operating losses and research and development credits to offset future taxable income may be subject
to certain limitations.
As of December 31, 2019, we had federal and state net operating loss carryforwards ("NOLs") of $96.1 million and $90.4
million, respectively. The federal NOLs includes $49.9 million that will begin to expire at various dates through 2037 and $46.2
million that will carry forward indefinitely. The state NOLs will begin to expire at various dates through 2039. As of December 31,
2019, we also had federal research and development tax credit carryforwards of $3.4 million and state research and development
tax credit carryforwards of $1.9 million, which begin to expire in 2034. A portion of these NOLs and the tax credit carryforwards
could expire unused and be unavailable to offset future income tax liabilities. In addition, in general, under Sections 382 and 383
of the Internal Revenue Code of 1986, as amended (the "Code"), a corporation that undergoes an "ownership change" is subject
to limitations on its ability to utilize its pre-change NOLs or tax credits to offset future taxable income or taxes. For these purposes,
an ownership change generally occurs where the aggregate stock ownership of one or more stockholders or groups of stockholders
who owns at least 5% of a corporation’s stock increases its ownership by more than 50 percentage points over its lowest ownership
percentage within a specified testing period. Our existing NOLs or credits may be subject to limitations arising from previous
ownership changes, and if we undergo an ownership change in the future, our ability to utilize NOLs or credits could be further
limited by Sections 382 and 383 of the Code. In addition, future changes in our stock ownership, many of which are outside of
our control, could result in an ownership change under Sections 382 and 383 of the Code. Our NOLs or credits may also be
impaired under state law. Accordingly, we may not be able to utilize a material portion of our NOLs or credits. The reduction of
the corporate tax rate under the TCJA may cause a reduction in the economic benefit of our net operating loss carryforwards and
other deferred tax assets available to us. Furthermore, under the TCJA, although the treatment of NOLs generated before
December 31, 2017 has generally not changed, NOLs generated in calendar year 2018 and beyond will not be subject to expiration
but will only be able to offset 80% of taxable income. This change may require us to pay federal income taxes even if we have
NOLs that could otherwise offset our taxable income.
Changes in U.S. tax legislation may materially adversely affect our financial condition, results of operations and cash
flows.
The TCJA has significantly changed the U.S. federal income taxation of U.S. corporations, including by reducing the U.S.
corporate income tax rate, limiting interest deductions, modifying or repealing many business deductions and credits (including
reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or
conditions generally referred to as "orphan drugs"), adopting elements of a territorial tax system, imposing a one-time transition
tax, or repatriation tax, on all undistributed earnings and profits of certain U.S.-owned foreign corporations, revising the rules
governing net operating losses and the rules governing foreign tax credits, and introducing new anti-base erosion provisions. In
addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal
taxable income as a starting point for computing state and local tax liabilities.
While some of the changes made by the TCJA may adversely affect us in one or more reporting periods and prospectively,
other changes may be beneficial on a going forward basis. We continue to work with our tax advisors and auditors to determine
the full impact that the TCJA will have on us. We urge our investors to consult with their legal and tax advisors with respect to
the TCJA.
56
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters is located in Cambridge, Massachusetts, where we currently lease 40,765 square feet of office
and laboratory space under a sublease agreement that expires in September 2025. We also lease 6,437 square feet of office and
laboratory space in Cambridge, Massachusetts that we sublease to a third party. This lease and sublease both expire in May 2020.
We believe that our facilities are sufficient to meet the current needs of the company and that suitable space will be available as
and when needed.
Item 3. Legal Proceedings
We are not subject to any material legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable.
57
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
Our common stock began trading on the Nasdaq Global Select Market on May 9, 2018, under the symbol “EVLO” Prior to
that time, there was no public market for our common stock.
Comparative Stock Performance Graph
The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the
SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or Exchange Act. The
following graph shows a comparison from May 9, 2018 (the date our common stock commenced trading on the Nasdaq Global
Select Market) through December 31, 2019, of the cumulative total return for our common stock, the Nasdaq Composite Index,
and the Nasdaq Biotechnology Index. The graph assumes an initial investment of $100 on May 9, 2018. The comparisons in the
graph are not intended to forecast or be indicative of possible future performance of our common stock.
* $100 invested on May 9, 2018 in stock or in index, including reinvestment of dividends.
Holders of Record
As of February 7, 2020, there were approximately 33 holders of record of our common stock. Certain shares are held in
“street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.
This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Dividend Policy
We have never declared or paid any cash dividends on our common stock. We currently intend to retain future earnings to
fund the development and growth of our business. We do not expect to pay any cash dividends in the foreseeable future. Any
future determination to pay dividends will be made at the discretion of our board of directors and will depend on then-existing
conditions, including our financial conditions, operating results, contractual restrictions, capital requirements, business prospects
and other factors our board of directors may deem relevant.
58
Item 6. Selected Financial Data
The following table sets forth our selected consolidated financial data. We derived the consolidated statement of operations
data for the years ended December 31, 2019, 2018, and 2017 and the consolidated balance sheet data as of December 31, 2019
and 2018, from our audited consolidated financial statements, included elsewhere in this Annual Report on Form 10-K. We have
derived the consolidated balance sheet as of December 31, 2017 from our audited consolidated financial statements not included
in this report. Our historical results are not necessarily indicative of results to be expected for any period in the future. The selected
consolidated financial data presented below should be read in conjunction with Part II, Item 7A “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto,
included elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data in this section is not intended
to replace our consolidated financial statements and the related notes thereto.
Statement of Operations Data:
Statement of Operations Data:
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other (expense) income:
Interest income (expense), net
Other expenses
Other income (expense), net
Loss before income taxes
Income tax expense
Net loss
Net loss per share attributable to common stockholders, basic and diluted(1)
Year Ended December 31,
2019
2018
2017
(in thousands, except share and per share amounts)
$
63,128
$
39,885
$
23,229
86,357
(86,357)
1,049
26
1,075
18,218
58,103
(58,103)
1,563
(406)
1,157
19,957
7,574
27,531
(27,531)
(215)
(301)
(516)
$
$
(85,282) $
(56,946) $
(28,047)
(190)
(85,472)
—
(56,946)
—
(28,047)
(2.67) $
(2.78) $
(9.10)
Weighted average number of common shares outstanding, basic and diluted(1)
32,031,862
21,871,029
3,750,790
Balance Sheet Data:
Balance Sheet Data:
As of December 31,
2019
2018
2017
(in thousands)
Cash and cash equivalents and short-term investments
$
77,833
$
147,919
$
Working capital(2)
Total assets
Long-term debt
Convertible preferred stock
Accumulated deficit
Total stockholders’ equity (deficit)
71,266
90,920
19,634
—
(198,853)
60,197
142,387
159,867
12,305
—
(113,381)
136,949
38,246
34,938
43,788
9,966
83,702
(56,411)
(54,723)
(1)
diluted net loss per share attributable to common stockholders.
See Notes 2 and 11 to our audited consolidated financial statements for further details on the calculation of basic and
(2)
We define working capital as current assets less current liabilities.
59
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with Part II, Item 6.“Selected Financial Data” and our
consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and
analysis and other parts of this Annual Report on Form 10-K contain forward-looking statements based upon current beliefs,
plans and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives,
expectations, intentions and projections. Our actual results and the timing of selected events could differ materially from those
anticipated in these forward-looking statements as a result of several factors, including those set forth under Part I, Item1A“Risk
Factors” and elsewhere in this Annual Report on Form 10-K. You should carefully read the “Risk Factors” section of this Annual
Report on Form 10-K to gain an understanding of the important factors that could cause actual results to differ materially from
our forward-looking statements. Please also see the section entitled “Special Note Regarding Forward-Looking Statements.”
Overview
We are discovering and developing oral biologics that are intended to act on cells in the small intestine to produce systemic
therapeutic effects. These cells play a central role in governing the immune, metabolic and neurological systems throughout the
body. We refer to this relationship as the small intestinal axis, or SINTAX. The importance of SINTAX as a therapeutic target has
only recently become appreciated and we have built a platform to discover and develop novel oral biologics which target SINTAX.
These therapeutics have the potential to be effective, safe and affordable medicines and to transform the treatment of major diseases,
driving profound benefits to patients and society.
Our first product candidates are monoclonal microbials: orally delivered pharmaceutical compositions of naturally occurring,
specific single strains of microbes. Monoclonal microbials engage immune cells in the small intestine and drive changes in systemic
biology without systemic exposure and without colonizing the gut in preclinical models. We have observed in preclinical studies
that specific monoclonal microbials can downregulate or upregulate immune responses throughout the body by acting on SINTAX.
Clinical Programs
We are advancing monoclonal microbials to potentially treat a spectrum of immune mediated diseases with an initial focus
on inflammatory diseases and oncology. The efficiency of our platform has, in a relatively short period of time, allowed us to
advance multiple product candidates into clinical trials for a range of inflammatory diseases and cancers.
- EDP1815, a monoclonal microbial candidate for inflammatory diseases:
In November 2018 we initiated our ongoing Phase 1b placebo-controlled dose-escalating safety and tolerability study of
EDP1815 in 24 healthy volunteers and up to 108 individuals with mild to moderate psoriasis or atopic dermatitis.
The primary endpoint of this trial is safety and tolerability. Prospectively defined secondary and exploratory endpoints include
clinical measures of disease, cellular histological biomarkers and blood immune cell biomarkers taken from biopsies and blood
samples, respectively, at the start and end of the 28-day dosing period. Safety and tolerability, and secondary clinical endpoints
are also measured at day 42, two weeks after completion of dosing.
In August 2019, we reported positive interim data from this Phase 1b trial from an initial cohort of 12 individuals with mild
to moderate psoriasis dosed once per day for 28-days with 550mg (low dose) of the enteric capsule formulation of EDP1815 or
placebo. EDP1815 was well tolerated in this cohort with no overall difference reported from placebo.
In November 2019, we reported additional positive interim clinical data from this ongoing Phase 1b trial in a cohort of 18
individuals with mild to moderate psoriasis who were randomized 2:1 to receive a daily dose of 2.76g (high dose) of the enteric
capsule formulation of EDP1815 or placebo for 28 days. EDP1815 continued to be well tolerated in this cohort, with no overall
difference reported from placebo. At the end of the 28-day dosing period, the high dose cohort showed a mean reduction in LSS
consistent with previously reported data from the low dose cohort. Two weeks following the completion of the dosing period, at
day 42, the high dose cohort showed continued reductions from baseline in both mean LSS and PASI, which may be indicative
of sustained clinical activity and dose response.
We expect to report additional data from the Phase 1b trial in a cohort of up to 24 individuals with psoriasis to be dosed with
a new formulation of EDP1815. Data from this cohort will be available in the second quarter of 2020. We also expect to report
data from a cohort of individuals with atopic dermatitis to be dosed with the new formulation of EDP1815 in the second quarter
of 2020.
Based on feedback from the FDA and the MHRA we plan to advance EDP1815 into a Phase 2 dose ranging study, evaluating
three doses of the new formulation of EDP1815 versus placebo in approximately 180 individuals. The primary endpoint of the
study will be the mean reduction in PASI score at 16 weeks. Other clinical measures of psoriasis will also be evaluated. We expect
to initiate the Phase 2 clinical trial in the second quarter of 2020, and to announce interim data by the end of 2020. Clinical data
from this study may enable us to advance directly into Phase 3 registrational studies in 2021, subject to end of Phase 2 discussions
with both the FDA and the EMA.
60
- EDP1503, a monoclonal microbial candidate for oncology:
In December 2018 we initiated our ongoing Phase 1/2 open-label study of EDP1503 in combination with
KEYTRUDA (pembrolizumab) in three cohorts of individuals: microsatellite stable colorectal cancer; triple-negative breast cancer;
and individuals with multiple tumor types who have relapsed on prior PD-1/L1 inhibitor treatment. We plan to enroll up to 120
individuals in this study which is designed to evaluate the safety and tolerability, immune response markers and overall response
rates achieved with EDP1503 in combination with KEYTRUDA.
In November 2019, we announced that the microsatellite stable colorectal cancer cohort has been fully recruited. Several
individuals in this cohort have shown extended stable disease although no formal clinical responses have been evident. Cellular
infiltration biomarker changes were also observed in tumor biopsies taken from these individuals during the EDP1503 monotherapy
period, which we believe are consistent with preclinical observations for EDP1503. We continue to monitor individuals in this
cohort.
Given newly approved treatments for triple-negative breast cancer, we anticipate that the majority of individuals with triple
negative breast cancer to be recruited will have relapsed following prior PD-1/L1 therapy, similar to those in the PD-1 relapsed
cohort. We expect to report further clinical data from this trial in the first half of 2020.
- EDP1066, a monoclonal microbial candidate for inflammatory diseases:
In April 2018 we initiated a Phase 1b placebo-controlled dose-escalating safety and tolerability study of EDP1066 in 36
healthy volunteers and up to 96 subjects with mild to moderate psoriasis or atopic dermatitis which is now complete. EDP1066
was well tolerated with no overall difference reported from placebo in both mild to moderate atopic dermatitis and mild to moderate
psoriasis.
We observed changes in biomarkers of inflammation, an exploratory endpoint, consistent with a pharmacodynamic effect
in a cohort of individuals with mild-to-moderate atopic dermatitis treated with a high dose of the new formulation of EDP1066
which were greater than those previously observed in a cohort of individuals with mild-to-moderate psoriasis treated with a high
dose of the original formulation of EDP1066. No effects were observed in either cohort in the secondary endpoints of clinical
measures of disease. Based on this data, we have decided to discontinue development of EDP1066.
Preclinical Programs
Beyond our first set of clinical product candidates, we have identified several other potential candidates from our discovery
program, and we are continuing to invest in the discovery of additional potential candidates. For example, we expect to initiate a
Phase 1b clinical trial in asthma for EDP1867, a new clinical candidate for inflammatory diseases, in the second half of 2020. We
have also nominated our first clinical candidate based on a reduced form of monoclonal microbials, EDP2939, which we are
advancing through preclinical development.
Financing
We were incorporated and commenced operations in 2014. Since our incorporation, we have devoted substantially all of our
resources to developing our clinical and preclinical candidates, building our intellectual property portfolio and process development
and manufacturing function, business planning, raising capital and providing general and administrative support for these
operations. To date, we have financed our operations primarily with proceeds from sales of common and convertible preferred
stock to our equity investors and borrowings under a loan and security agreement, as amended, with a financial institution. On
May 11, 2018, we completed our initial public offering (the "IPO") of 5,312,500 shares of our common stock at a public offering
price of $16.00 per share. The shares began trading on the Nasdaq Global Select Market on May 9, 2018 under the symbol "EVLO."
The gross proceeds from the IPO were $85.0 million and the net proceeds were approximately $75.8 million, after deducting
underwriting discounts and commissions and other estimated offering expenses payable by us. Upon the closing of the IPO all of
the Company’s outstanding shares of convertible preferred stock automatically converted into 22,386,677 shares of common stock
at the applicable conversion rate then in effect.
On April 27, 2018, we effected a 1-for-4.079 reverse stock split of our common stock. Stockholders entitled to fractional
shares as a result of the reverse stock split received a cash payment in lieu of receiving fractional shares. These cash payments
were not material. All share and per share amounts in the consolidated financial statements and notes thereto have been retroactively
adjusted for all periods presented to give effect to this reverse stock split. The financial statements have also been retroactively
adjusted to reflect adjustments to the conversion ratio for each series of convertible preferred stock effected in connection with
the reverse stock split.
On July 19, 2019 we entered into a loan and security agreement, as amended, with K2HV providing for up to $45.0 million
in potential debt financing, the proceeds of which were used to prepay our entire existing outstanding loan balance, and additional
amounts are intended for the advancement of our research and development activities related to our pipeline of oral biologics and
for general corporate purposes. Under terms of the 2019 Credit Facility, the aggregate principal amount of $45.0 million is available
in three tranches of term loans of $20.0 million, $10.0 million, and $15.0 million, respectively. At closing on July 19, 2019, we
61
borrowed $20.0 million, representing the first tranche under the 2019 Credit Facility. The second tranche will be available to us
between December 1, 2019 and June 1, 2020. The third tranche will be available to us through January 15, 2021, subject to the
achievement of certain clinical development milestones. Interest on the outstanding loan balance will accrue at a variable rate
equal to the greater of (i) 8.65% and (ii) the prime rate as published in the Wall Street Journal, plus 3.15%. We are required to
make monthly interest-only payments through February 2022. If we elect to draw the third tranche, the interest-only period is
extended through August 2022. Subsequent to the interest-only period, we are required to make equal monthly principal payments
plus any accrued interest until the loans mature in August 2024. Upon final payment or prepayment of the loans, we are required
to pay a final payment equal to 4.3% of the loans borrowed.
Through December 31, 2019, we received gross proceeds of $262.9 million from sales of common stock at the IPO,
convertible preferred stock and borrowings under our loan and security agreement.
We are a development stage company and have not generated any revenue. All of our product candidates are in early clinical
or preclinical development. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the
successful development and eventual commercialization of one or more of our product candidates. Since our inception, we have
incurred significant operating losses and we continue to incur significant research and development and other expenses related to
our ongoing operations. For the years ended December 31, 2019, 2018 and 2017, our net loss was $85.5 million, $56.9 million
and $28.0 million, respectively. As of December 31, 2019, we had an accumulated deficit of $198.9 million. We do not expect to
generate revenue from sales of any products for the foreseeable future, if at all.
We expect that our expenses will increase substantially in connection with our ongoing activities, particularly as we:
•
•
•
•
continue the ongoing proof of concept trials for EDP1815 and EDP1503;
potentially initiate additional clinical trials for EDP1815 and EDP1867;
initiate or advance the clinical development of any additional monoclonal microbial product candidates;
conduct research and continue preclinical development of potential product candidates;
• make strategic investments in manufacturing capabilities, including potentially planning and building our own
manufacturing facility;
• maintain our current intellectual property portfolio and opportunistically acquire complementary intellectual property;
•
•
increase research and development employees and employee-related expenses including salaries, benefits, travel and
stock-based compensation expense; and
seek to obtain regulatory approvals for our product candidates.
In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant
commercialization expenses related to product manufacturing, marketing, sales and distribution.
As a result, we will need additional financing to support our continuing operations. Until such time as we can generate
significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private
equity or debt financings or other sources, which may include collaborations with third parties. Adequate additional financing
may not be available to us on acceptable terms, or at all. Our inability to raise capital as and when needed would have a negative
impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenue to
achieve profitability, and we may never do so.
Because of the numerous risks and uncertainties associated with drug development, we are unable to predict the timing or
amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate
revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability
on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate
our operations.
As of December 31, 2019, our principal source of liquidity is cash and cash equivalents, which totaled approximately
$77.8 million. We expect that our existing cash and cash equivalents will enable us to fund our planned operating expenses and
capital expenditure requirements to the end of 2020. We have based these estimates on assumptions that may prove to be wrong,
and we may use our available capital resources sooner than we currently expect. See “Liquidity and Capital Resources."
Based on our current operating plan, we believe we do not have sufficient cash and cash equivalents on hand to support
current operations for at least one year from the date of issuance of the financial statements appearing within this Annual Report
on Form 10-K. To finance our operations beyond that point, we will need to raise additional capital, which cannot be assured. We
have concluded that this circumstance raises substantial doubt about our ability to continue as a going concern for at least one
year from the date that our consolidated financial statements for the year ended December 31, 2019 were issued. As such, we
plan to seek to raise capital from time to time this year through future equity financings, debt financings or partnerships to fund
62
our future operations and remain as a going concern. To the extent that we raise additional capital through future equity offerings,
the ownership interest of common stockholders will be diluted, which dilution may be significant. See Note 1 of the notes to our
consolidated financial statements appearing at the end of this Annual Report on Form 10-K for additional information on our
assessment.
Financial Operations Overview
Revenue
We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products
in the near future if at all. If our development efforts for our current product candidates or additional product candidates that we
may develop in the future are successful and result in marketing approval or if we enter into collaboration or license agreements
with third parties, we may generate revenue in the future from a combination of product sales or payments from such collaboration
or license agreements.
Operating Expenses
Our operating expenses since inception have consisted primarily of research and development activities and general and
administrative costs.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our discovery
efforts, and the development of our product candidates, which include:
•
expenses incurred under agreements with third parties, including investigative sites, external laboratories and contract
research organizations, or CROs, that conduct research, preclinical activities and clinical trials on our behalf
• manufacturing process-development costs as well as technology transfer and other expenses incurred with contract
manufacturing organizations, or CMOs, that manufacture drug substance and drug product for use in our preclinical
activities and any current or future clinical trials;
•
•
•
•
•
•
salaries, benefits and other related costs, including stock-based compensation expense, for personnel in our research and
development functions;
expenses to acquire technologies to be used in research and development;
costs of outside consultants, including their fees, stock-based compensation and related travel expenses;
the cost of laboratory supplies and acquiring, developing and manufacturing preclinical and clinical trial materials;
costs related to compliance with regulatory requirements; and
facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of
facilities and other operating costs.
We expense research and development costs as incurred. We recognize external development costs based on an evaluation
of the progress to completion of specific tasks using information provided to us by our vendors and our clinical investigative sites.
Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs
incurred, and are reflected in our consolidated financial statements as prepaid or accrued research and development expenses.
Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities
are deferred and capitalized, even when there is no alternative future use for the research and development. The capitalized amounts
are expensed as the related goods are delivered or the services are performed.
Our primary focus of research and development since inception has been building a platform to enable us to develop medicines
based on an understanding of the gut-body network and to show potential clinical utility and develop the first set of clinical assets.
Our platform and program expenses consist principally of costs, such as preclinical research, process development research, clinical
and preclinical manufacturing activity costs, clinical development costs, licensing expense as well as an allocation of certain
indirect costs, facility and office related expenses. We do not allocate personnel costs, which include salaries, discretionary bonus
and stock-based compensation costs, as such costs are separately classified as research and development personnel costs.
Research and development activities are central to our business model. Product candidates in later stages of clinical
development generally have higher development costs than those in earlier stages of clinical development, primarily due to the
increased size and duration of later-stage clinical trials. We expect that our research and development expenses will continue to
increase in the foreseeable future as we continue our ongoing clinical trials for our product candidates, including EDP1815 and
EDP1503, initiate additional clinical trials of other product candidates, including EDP1867, continue to discover and develop
additional product candidates, hire additional research and development personnel, build manufacturing capabilities and expand
into additional therapeutic areas.
63
At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary
to complete the development of, and obtain regulatory approval for, any of our product candidates. We are also unable to predict
when, if ever, material net cash inflows will commence from sales or licensing of our product candidates. This is due to the
numerous risks and uncertainties associated with drug development, including the uncertainty of:
•
•
•
•
•
•
•
•
•
•
•
•
our ability to add and retain key research and development personnel;
our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize, our product
candidates;
our successful enrollment in and completion of clinical trials;
the costs associated with the development of our current product candidates and/or any additional product candidates we
identify in-house or acquire through collaborations;
our ability to discover, develop and utilize biomarkers to demonstrate target engagement, pathway engagement and the
impact on disease progression of our product candidates;
our ability to establish an appropriate safety profile with Investigational New Drug-enabling toxicology studies;
our ability to establish and maintain agreements with third-party manufacturers and other entities for clinical trial supply
and future commercial supply, if our product candidates are approved;
the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone
payments thereunder;
our ability to obtain and maintain patent, trade secret and other intellectual property protection and regulatory exclusivity
for our product candidates if and when approved;
our receipt of marketing approvals from applicable regulatory authorities;
our ability to commercialize products, if and when approved, whether alone or in collaboration with others; and
the continued acceptable safety profiles of the product candidates following approval.
A change in any of these variables with respect to the development of any of our product candidates would significantly
change the costs, timing and viability associated with the development of that product candidate. We expect our research and
development expenses to increase at least over the next several years as we continue to implement our business strategy, advance
our current programs, expand our research and development efforts, seek regulatory approvals for any product candidates that
successfully complete clinical trials, identify and develop additional product candidates and incur expenses associated with hiring
additional personnel to support our research and development efforts.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation,
for personnel in our executive, finance, corporate and business development, and administrative functions. General and
administrative expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing,
tax and administrative consulting services; insurance costs; administrative travel expenses; and facility-related expenses, which
include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.
We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support
the expected growth in our research and development activities and the potential commercialization of our product candidates.
We also expect to incur increased expenses associated with being a public company, including increased costs of accounting, audit,
legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements,
director and officer insurance costs and investor and public relations costs.
Interest Income (Expense), Net
Interest income (expense), net consisted primarily of interest earned on our cash, cash equivalents and short-term investments
balances offset by interest expense at the stated rate on borrowings under our loan and security agreement, amortization of deferred
financing costs and interest expense related to the accretion of debt discount associated with the loan and security agreement.
Other Income (Expense), Net
For the year ended December 31, 2019, other income (expense), net consisted primarily of a research and development tax
credit from our operations in the United Kingdom, as well as loss on extinguishment of debt incurred upon the prepayment of our
2016 Credit Facility. Additionally, other expenses include non-cash changes in the fair value of warrants issued in connection
with our loan and security agreement, as well as the change in fair value of a derivative instrument issued in February 2018 in
conjunction with the modification of our debt arrangement.
64
Income Taxes
Income tax expense primarily relates to tax expense at our UK subsidiary.
Since our inception in 2014, we have not recorded any U.S. federal or state income tax benefits for the net losses we have
incurred in each year or our earned research and development tax credits, due to our uncertainty of realizing a benefit from those
items.
Results of Operations
Comparison of Years Ended December 31, 2019 and 2018
The following table summarizes our results of operations for the years ended December 31, 2019 and 2018 (in thousands):
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other (expense) income:
Interest income (expense), net
Other income (expense), net
Other income (expense), net
Net loss before income taxes
Income tax expense
Net loss
Research and Development Expenses (in thousands):
Platform expenses
Inflammation programs
Oncology programs
Research and development personnel costs (including stock-based
compensation)
Total research and development expenses
Year Ended December 31,
2019
2018
Increase/
(Decrease)
$
63,128
23,229
86,357
(86,357)
1,049
26
1,075
(85,282) $
(190) $
(85,472) $
$
39,885
18,218
58,103
(58,103)
1,563
(406)
1,157
(56,946) $
— $
(56,946) $
23,243
5,011
28,254
(28,254)
(514)
432
(82)
(28,336)
(190)
(28,047)
Year Ended December 31,
2019
2018
Increase/
(Decrease)
10,468
25,161
9,226
18,273
63,128
$
$
7,972
13,852
6,012
12,049
39,885
$
$
2,496
11,309
3,214
6,224
23,243
$
$
$
$
$
$
Research and development expenses were $63.1 million for the year ended December 31, 2019, compared to $39.9 million for
the year ended December 31, 2018. The increase of $23.2 million was due primarily to increases of $11.3 million in costs for our
inflammation programs, driven primarily by clinical trial expenses and external manufacturing costs, $2.5 million in platform
expenses in line with our strategy to maximize the potential of our platform, and $3.2 million for our oncology programs primarily
related to increased costs associated with clinical trial expenses and external manufacturing. Personnel costs increased $6.2 million
due primarily to increases in research and development headcount for research, process development, platform, and discovery.
We expect to incur significant research and development expenses in the foreseeable future as we continue our clinical trials for
our product candidates, including EDP1815 and EDP1503, initiate new clinical trials of our other product candidates, including
EDP1867, continue discovery and development efforts for additional product candidates, hire additional research and development
personnel and seek to increase manufacturing capabilities and possibly expand into additional therapeutic areas.
65
General and Administrative Expenses (in thousands):
General and administrative personnel costs (including stock-based
compensation)
Professional fees
Facility costs, office expense and other
Total general and administrative expenses
Year Ended December 31,
2019
2018
Increase/
(Decrease)
$
$
12,345
6,725
4,159
23,229
$
$
8,816
5,377
4,025
18,218
$
$
3,529
1,348
134
5,011
General and administrative expenses were $23.2 million for the year ended December 31, 2019, compared to $18.2 million for
the year ended December 31, 2018. The increase of $5.0 million primarily reflects costs required to support our growing
organization and public company status. Personnel costs increased by $3.5 million due primarily to increases in general and
administrative headcount to build an infrastructure supporting R&D. Professional fees increased $1.3 million, reflecting an increase
in legal, patent and other professional consulting fees. We expect to incur general and administrative expenses at a similar or
increasing level due to personnel and related costs, professional, legal, and patent fees and consulting expenses in support of the
continued growth of the company.
Other Income (Expense), Net
Other income (expense), net for the year ended December 31, 2019 was income of $1.1 million compared to $1.2 million
for the year ended December 31, 2018. This decrease was primarily driven by additional interest expense due to the higher debt
balance under the 2019 Credit Facility, as well as loss on extinguishment of debt incurred upon the prepayment of our 2016 Credit
Facility, partially offset by a research and development tax credit from our operations in the United Kingdom.
Liquidity and Capital Resources
To date, we have financed our operations primarily with the proceeds from the initial public offering of our common stock
combined with proceeds from previous sales of our convertible preferred stock to our equity investors and borrowings under the
loan and security agreement. From our inception through December 31, 2019, we have received gross proceeds of $262.9 million
from such transactions, including $20.0 million borrowed under the 2019 Credit Facility. As of December 31, 2019, we had cash
and cash equivalents of $77.8 million and an accumulated deficit of $198.9 million. We expect that our existing cash and cash
equivalents will enable us to fund our planned operating expenses and capital expenditure requirements to the end of 2020.
On June 3, 2019, the Company filed a Registration Statement on Form S-3 (File No. 333-231911) (the “Shelf”) with the
SEC under which we can offer from time to time common stock, preferred stock, debt securities, warrants and/or units of any
combination thereof in an aggregate amount of up to $200.0 million over a period of up to three years from the date of its
effectiveness on June 6, 2019. The Company also simultaneously entered into a sales agreement with Cowen and Company, LLC,
as sales agent, providing for the offering, issuance and sale by the Company of up to an aggregate $50.0 million of its common
stock from time to time in “at-the-market” offerings under the Shelf. As of December 31, 2019, no securities have been issued
pursuant to the sales agreement.
Debt financing
On July 19, 2019 we entered into the 2019 Credit Facility with K2HV providing for up to $45.0 million of current and future
potential debt financing. The aggregate principal amount is available in three tranches of term loans of $20.0 million, $10.0 million,
and $15.0 million, respectively. At closing on July 19, 2019, we withdrew initial proceeds of $20.0 million representing the first
tranche under the 2019 Credit Facility. The second tranche is available to us between December 1, 2019 and June 1, 2020. The
third tranche will be available to us through January 15, 2021, subject to the achievement of certain clinical development milestones.
Interest on the outstanding loan balance will accrue at a variable rate equal to the greater of (i) 8.65% and (ii) the prime rate
as published in the Wall Street Journal, plus 3.15%. We are required to make monthly interest-only payments through February
2022. If we elect to draw the third tranche, the interest-only period is extended through August 2022. Subsequent to the interest-
only period, we are required to make equal monthly principal payments plus any accrued interest until the loans mature in August
2024. Upon final payment or prepayment of the loans, we are required to pay a final payment equal to 4.3% of the loans borrowed.
We have an option to prepay the loans in whole, subject to a prepayment fee of 2% of the amount prepaid or, if the prepayment
occurs after the 18-month anniversary of the funding date of the loans, 1% of the amount prepaid.
Contemporaneous with the closing of the first tranche of funding described above, we repaid the entire $15.0 million loan
balance outstanding under an existing loan and security agreement with a separate financial institution. In accordance with the
agreement underlying the prior debt facility, we paid an additional 0.5% prepayment fee as additional expense.
66
We have incurred losses and generated negative operating cash flows since our inception and anticipate that we will continue
to incur losses for at least the next several years. We incurred net losses of approximately $85.5 million, $56.9 million and $28.0
million for the years ended December 31, 2019, 2018 and 2017, respectively. Until such time, if ever, as we can generate revenue
from product sales, we expect to finance our cash needs through a combination of equity offerings, debt financings and potential
collaborations, license and development agreements. To the extent that we raise additional capital through future equity offerings
or debt financings, the ownership interest of common stockholders will be diluted, and the terms of these securities may include
liquidation or other preferences that adversely affect the rights of the common stockholders. Debt and equity financings, if available,
may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional
debt, making capital expenditures or declaring dividends. There can be no assurance that such financings will be obtained on terms
acceptable to us, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may
have to significantly delay, scale back or discontinue our research and development programs or future commercialization efforts.
If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with
third parties for one or more of our current or future drug candidates, we may be required to relinquish valuable rights to our
technologies, future revenue streams, research programs or drug candidates or to grant licenses on terms that may not be favorable
to us. Our failure to raise capital as and when needed would have a material adverse effect on our financial condition and our
ability to pursue our business strategy.
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented (in thousands):
Year Ended December 31,
2018
2019
2017
Cash used in operating activities
Cash (used in)/provided by investing activities
Cash provided by financing activities
Net increase in cash, cash equivalents and restricted cash
Operating Activities
$
$
(71,980) $
51,970
4,992
(15,018) $
(47,279) $
(60,128)
162,012
54,605
$
(23,265)
(1,742)
48,967
23,960
Net cash used in operating activities for the year ended December 31, 2019, was $72.0 million, primarily due to our net loss
of $85.5 million. This was partially offset by non-cash charges, including stock-based compensation expense of $8.2 million,
depreciation expense of $1.8 million, and reduction in working capital of $3.5 million.
Net cash used in operating activities for the year ended December 31, 2018, was $47.3 million, primarily due to our net loss
of $56.9 million. This was partially offset by non-cash charges, including stock-based compensation expense of $6.1 million,
depreciation expense of $1.9 million, change in fair value of warrant liability of $0.4 million and reduction in working capital
of $1.2 million.
Net cash used in operating activities for the year ended December 31, 2017, was $23.3 million primarily due to our net loss
of $28.0 million. This was partially offset by non-cash charges, including stock-based compensation expense of $1.5 million,
depreciation expense of $0.8 million, change in fair value of warrant liability of $0.3 million and change in working capital of
$2.2 million.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2019, was $52.0 million, primarily consisting of
maturity of investments totaling $55.0 million, slightly offset by the purchase of capital equipment totaled $3.0 million during the
year.
Net cash used in investing activities for the year ended December 31, 2018, was $60.1 million, primarily consisting of the
purchase of investments totaling $136.1 million, partially offset by maturities of investments totaling $81.3 million. Additionally,
the purchase of capital equipment totaled $5.5 million during the year, slightly offset by $0.2 million of cash received for the sale
of certain equipment.
Net cash provided by investing activities for the year ended December 31, 2017, was $1.7 million, primarily due to the
purchase of capital equipment during the year.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2019 was $5.0 million, primarily due to proceeds
from the issuance of long-term debt under our 2019 Credit Facility and proceeds from the issuance of common stock in connection
with the exercise of option totaling $0.5 million, partially offset by the repayment of our prior debt facility.
67
Net cash provided by financing activities for the year ended December 31, 2018 was $162.0 million, primarily consisting
of net proceeds of $75.8 million from our IPO, net proceeds of $81.3 million from the issuance of our Series C Preferred Stock
as well as net proceeds of approximately $5.0 million from the issuance of long-term debt. This was partially offset by a payment
made for the settlement of a derivative liability of $0.3 million.
Net cash provided by financing activities for the year ended December 31, 2017, was $49.0 million, primarily consisting of
net proceeds of $48.9 million from the issuance of our Series B Preferred Stock.
Funding Requirements
We have incurred losses and cumulative negative cash flows from operations since our inception. As of December 31, 2019,
we had an accumulated deficit of $198.9 million. We anticipate that we will continue to incur significant losses for at least the
next several years. We expect that our research and development and general and administrative expenses will continue to increase.
As a result, we will need additional capital to fund our operations, which we may raise through a combination of the sale of equity,
debt financings, or other sources, including potential collaborations.
We expect our expenses to increase substantially in connection with our ongoing development activities related to the initiation
of clinical studies and preclinical work on additional monoclonal microbial product candidates, which are still in development,
and our follow-on therapeutics and other programs. In addition, we expect to incur additional costs associated with increased
personnel and operating as a public company. We anticipate that our expenses will increase substantially if and as we:
•
•
•
continue our proof of concept clinical trials of EDP1815 and EDP1503;
advance the clinical development of any additional monoclonal microbial product candidates;
conduct research and continue preclinical development of potential product candidates;
• make strategic investments in manufacturing capabilities, including potentially planning and building a small-scale
commercial manufacturing facility;
• maintain our current intellectual property portfolio and opportunistically acquire complementary intellectual property;
•
•
•
•
seek to obtain regulatory approvals for our product candidates;
potentially establish a sales, marketing and distribution infrastructure and scale-up manufacturing capabilities to
commercialize any products for which we may obtain regulatory approval;
add clinical, scientific, operational, financial and management information systems and personnel, including personnel
to support our product development and potential future commercialization efforts and to support our transition to a public
company; and
experience any delays or encounter any issues with any of the above, including but not limited to failed studies, complex
results, safety issues or other regulatory challenges.
We expect that our cash and cash equivalents as of December 31, 2019 will enable us to fund our operating expenses and
capital expenditure requirements to the end of 2020. Our forecast of the period of time through which our financial resources will
be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could
vary as a result of a number of factors. Our forecast is based on assumptions that may prove to be wrong, and we may use our
available capital resources sooner than we currently expect.
As of December 31, 2019, we had $77.8 million in cash and cash equivalents. Based on our available cash resources, we do
not expect to have sufficient cash and cash equivalents on hand to support current operations for at least one year from the date
that the consolidated financial statements as of and for the three-year period ended December 31, 2019 appearing at the end of
this Annual Report on Form 10-K were issued. This condition raises substantial doubt about our ability to continue as a going
concern for at least one year from the date of issuance of the financial statements appearing at the end of this Annual Report on
Form 10-K. As such, we plan to seek to raise capital from time to time this year through future equity financings, debt financings
or partnerships to fund our future operations and remain as a going concern. To the extent that we raise additional capital through
future equity offerings, the ownership interest of common stockholders will be diluted, which dilution may be significant. However,
we cannot guarantee that we will be able to obtain any or sufficient additional funding or that such funding, if available, will be
obtainable on terms satisfactory to us. In the event that we are unable to obtain any or sufficient additional funding, there can be
no assurance that we will be able to continue as a going concern.
Because of the numerous risks and uncertainties associated with the development of EDP1815, EDP1503 and EDP1867,
any additional monoclonal microbial product candidates or any follow-on programs and because the extent to which we may enter
into collaborations with third parties for development of these product candidates is unknown, we are unable to estimate the
amounts of increased capital outlays and operating expenses associated with completing the research and development of our
68
product candidates. Our future capital requirements for our technology platform or our other programs will depend on many
factors, including:
•
•
•
•
•
•
•
•
•
the progress and results of our proof of concept clinical studies of EDP1815 and EDP1503;
the cost of manufacturing clinical supplies of our product candidates;
the scope, progress, results and costs of preclinical development, laboratory testing for any other potential product
candidates;
the costs, timing and outcome of regulatory review of our product candidates;
the costs and timing of future commercialization activities, including manufacturing, marketing, sales and distribution,
for any of our product candidates for which we receive marketing approval;
the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;
the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual
property rights and defending any intellectual property-related claims;
the effect of competing technological and market developments; and
the extent to which we acquire or invest in businesses, products and technologies, including entering into licensing or
collaboration arrangements for product candidates, although we currently have no commitments or agreements to complete
any such acquisitions or investments in businesses.
Identifying potential product candidates and conducting preclinical testing and clinical trials is a time consuming, expensive
and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain
marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial
success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available
for many years, if ever. Accordingly, we will need to obtain substantial additional funds to achieve our business objectives.
Adequate additional funds may not be available to us on acceptable terms, or at all. We currently have an additional $10.0
million available to borrow under the 2019 Credit Facility. To the extent that we raise additional capital through the sale of equity
or convertible debt securities, the ownership interest of existing stockholders will be diluted, and the terms of these securities may
include liquidation or other preferences that adversely affect the rights of common stockholders. Additional debt financing and
preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take
specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require the issuance
of warrants, which could potentially dilute the ownership interest of existing stockholders. The terms of our 2019 Credit Facility
with K2HV preclude us from paying dividends on our equity securities without their consent. If we lack sufficient capital to
expand our operations or otherwise capitalize on our business opportunities, our business, financial condition and results of
operations would be materially adversely affected.
If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may
have to relinquish valuable rights to our technologies, future revenue streams, research programs, or product candidates or grant
licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when
needed, we may be required to delay, limit or terminate our product development programs or any future commercialization efforts
or grant rights to develop and market product candidates to third parties that we would otherwise prefer to develop and market
ourselves.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations at December 31, 2019 and the effect such obligations are expected
to have on our liquidity and cash flows in future periods (in thousands):
Payments Due by Period
Total
Less Than 1
Year
1 – 3 Years
4 – 5 Years
More Than 5
Years
Operating lease commitments(1)
Debt obligations(2)
Obligations for research, development,
manufacturing and other(3)
Other(4)
Total
$
$
$
17,816
26,930
5,018
352
50,116
$
$
$
2,886
1,759
2,929
112
7,686
$
$
$
6,036
9,955
1,416
240
17,647
$
$
$
$
6,403
15,216
673
— $
$
22,292
2,491
—
—
—
2,491
69
(1) Amounts in the table reflect payments due for our laboratory and office space in Cambridge, Massachusetts under two
operating lease agreements that are scheduled to expire in 2020 and 2025, net of future minimum sublease payments.
(2) Reflects the contractually required principal and interest payments payable pursuant to the 2019 Credit Facility.
(3) Amounts represent the minimum cash amounts due on contractually obligated research, development and manufacturing
contracts. Amounts exclude royalties and future milestones under current license agreements as we cannot estimate if they
will occur.
(4) Other amounts consist of non-cancelable obligations related to IT software and subscriptions
We enter into contracts in the normal course of business with CROs for clinical trials, preclinical research studies and testing,
manufacturing and other services and products for operating purposes. These contracts generally provide for termination upon
notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.
Product Licenses
In addition to the amount set forth in the table above, we have certain obligations under licensing agreements with third
parties that are contingent upon achieving various development, regulatory and commercial milestones. Pursuant to our license
agreement with the Mayo Clinic for the development and commercialization of certain microbes including EDP1815, we are
required to make milestone payments to Mayo Clinic of up to an aggregate of approximately $1.0 million upon achievement of
specific development milestones and approximately $56 million upon achievement of specific regulatory and commercial
milestones. Through December 31, 2019, we have paid milestones totaling $0.2 million to the Mayo Clinic.
Pursuant to our license agreement with the University of Chicago for the development and commercialization of certain
microbes for the treatment of cancer, including EDP1503, we are required to make payments to the University of Chicago of up
to an aggregate of approximately $60.9 million upon achievement of specific development milestones, the vast majority of which
are associated with specific regulatory and commercial milestone. Through December 31, 2019, we have incurred milestones
totaling $0.4 million under the license agreement with the University of Chicago, all of which were incurred during 2018. Finally,
pursuant to the terms of each of these license agreements, when and if commercial sales of a product commence, we will pay
royalties to our licensors on net sales of the respective products.
Off-Balance Sheet Arrangements
As of December 31, 2019, we did not have, and we do not currently have, any off-balance sheet arrangements, as defined
in the rules and regulations of the SEC.
Critical Accounting Policies and Use of Estimates
Our management's discussion and analysis of financial condition and results of operations are based on our consolidated
financial statements which are prepared in accordance with generally accepted accounting principles, or GAAP, in the United
States of America. The preparation of our consolidated financial statements and related disclosures requires us to make estimates
and assumptions that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We
believe that the estimates and assumptions involved in the accounting policies described below may have the greatest potential
impact on our consolidated financial statements and, therefore, consider these to be our critical accounting policies. We evaluate
our estimates and assumptions on an ongoing basis using historical experience, known trends and events and various other factors
that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these
estimates under different assumptions and conditions.
Accrued Research and Development Expenses
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research
and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel
to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs
incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service
providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met;
however, some require advanced payments. We make estimates of our accrued expenses as of each balance sheet date in our
consolidated financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued
research and development expenses include fees paid to:
•
•
CROs in connection with performing research services on our behalf including, but not limited to, clinical trials and
preclinical studies;
investigative sites and other providers in connection with clinical trials and preclinical studies;
70
•
•
other research and development service providers such as academic institutions and laboratory services providers in
connection with discovery, preclinical and clinical development activities; and
vendors related to product manufacturing, development and distribution of clinical supplies.
We base our expenses related to clinical trials and preclinical studies on our estimates of the services received and efforts
expended pursuant to quotes and contracts with multiple CROs, investigative sites, laboratories and other providers that conduct
and manage those studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to
contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed
the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend
on factors such as the successful enrollment of patients and the completion of milestones. In accruing service fees, we estimate
the time period over which services will be performed, enrollment of patients, number of sites activated and the level of effort to
be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we
adjust the accrual or amount of prepaid expense accordingly. Although we do not expect our estimates to be materially different
from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and
timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period.
To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses.
Stock-Based Compensation
We measure stock options and other stock-based awards granted to employees and directors based on the fair value on the
date of grant and recognize the corresponding compensation expense of those awards over the requisite service period, which is
generally the vesting period of the respective award. Generally, we issue stock options and restricted stock awards with only
service-based vesting conditions and record the expense for these awards using the straight-line method, adjusting for pre-vesting
forfeitures in the period in which the forfeitures occur. We measure stock-based awards granted to consultants and non-employees
based on the fair value of the award on the date at which the related service is complete. Compensation expense is recognized
over the period during which services are rendered by such consultants and non-employees until completed. At the end of each
financial reporting period prior to completion of the service, the fair value of these awards is remeasured using the then-current
fair value of our common stock and updated assumption inputs in the Black-Scholes option-pricing model.
We estimate the fair value of each stock option grant using the Black-Scholes option-pricing model. Use of this model
requires that we make assumptions as to the volatility of our common stock, the expected term of our stock options, the risk-free
interest rate for a period that approximates the expected term of our stock options, and our expected dividend yield. Prior to May
2018, we were a privately-held company with limited operating history and no company-specific historical and implied volatility
information and accordingly, we estimate our expected volatility based on the historical volatility of a group of publicly traded
peer companies. We expect to continue to do so until such time as we have adequate historical data regarding the volatility of our
traded stock price. We use the simplified method prescribed by SEC Staff Accounting Bulletin No. 107, Share-Based Payment,
to calculate the expected term of options granted to employees and directors. We base the expected term of options granted to
consultants and non-employees on the contractual term of the options. We determine the risk-free interest rate by reference to the
U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of
the award. Expected dividend yield is based on the fact that we have never paid cash dividends and do not expect to pay any cash
dividends in the foreseeable future.
Determination of the Fair Value of Common Stock
Due to the absence of an active market for our common stock prior to the commencement of trading of our common stock
on the Nasdaq Global Select Market on May 9, 2018 in connection with our IPO, our board of directors estimated the fair value
of our common stock at various dates, with input from management, considering our most recently available third-party valuations
of common stock and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant
and which may have changed from the date of the most recent valuation through the date of the grant. Our determination of the
fair value of our common stock was performed using methodologies, approaches and assumptions consistent with the American
Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities
Issued as Compensation. Following our IPO, it is no longer necessary for us to estimate the fair value of our common stock in
connection with our accounting for stock options or other equity awards, as the fair value of our common stock can be determined
by reference to its closing price on The Nasdaq Global Select Market on the date of the applicable grant.
71
For financial statement purposes and prior to the consummation of our IPO, we performed common stock valuations, with
the assistance of a third-party specialist, at various dates, which resulted in valuations of our common stock of $2.49 per share as
of January 15, 2017, $3.06 per share as of March 31, 2017, $4.53 per share as of June 30, 2017, $6.32 per share as of September 30,
2017 and $8.12 per share as of December 31, 2017. In addition to these valuations, we considered various objective and subjective
factors to determine the fair value of our common stock as of each grant date, including:
•
•
•
•
•
•
•
•
•
the prices at which we sold shares of preferred stock and the preferential rights and preferences of the preferred stock
relative to our common stock at the time of each grant;
the progress of our research and development programs, including the status of preclinical studies for our product candidates;
our stage of development and our business strategy;
external market conditions affecting the biotechnology and pharmaceutical industries;
trends within the biotechnology and pharmaceutical industries;
our financial position, including cash and cash equivalents on hand, and our historical and forecasted performance and
operating results;
the lack of an active public market for our common stock and our preferred stock;
the likelihood of achieving a liquidity event, such as an IPO, or sale of our company in light of prevailing market conditions;
and
the analysis of IPOs and the market performance of similar companies in the biotechnology and pharmaceutical industries.
There are significant judgments and estimates inherent in these valuations. These judgments and estimates include
assumptions regarding our future operating performance, the stage of development of our product candidates, the timing of a
potential IPO or other liquidity event and the determination of the appropriate valuation methodology at each valuation date. If
we had made different assumptions, our stock-based compensation expense, net loss attributable to common stockholders and net
loss per share attributable to common stockholders could have been significantly different.
Valuation Methodologies
Our common stock valuations were prepared in accordance with the guidelines in the Practice Aid, which prescribes several
valuation approaches for determining the value of an enterprise, such as the cost, market and income approaches, and various
methodologies for allocating the value of an enterprise to its capital structure and specifically the common stock
Our common stock valuation of January 15, 2017 was prepared using the back-solve method to calculate the total equity
value and the option-pricing method, or OPM, to allocate the total equity value. The back-solve method derives the implied equity
value for one type of equity security from a contemporaneous transaction involving another type of security. We used the back-
solve method to calculate the total equity value of our company in the January 15, 2017 valuation as we had recently completed
convertible preferred stock financings that should be considered in estimating the fair value of our equity per the Practice Aid.
Our remaining common stock valuations were performed using the OPM, or a hybrid of the probability-weighted expected return
method, or PWERM, and the OPM, which we refer to as the hybrid method. The method selected was based on the availability
and the quality of information to develop the assumptions for the methodology.
OPM. The OPM treats common stock and preferred stock as call options on the total equity value of a company, with exercise
prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Under
this method, the common stock has value only if the funds available for distribution to stockholders exceed the value of the
liquidation preferences at the time of a liquidity event, such as a strategic sale or merger. A discount for lack of marketability of
the common stock is then applied to arrive at an indication of value for the common stock.
The OPM uses the Black-Scholes option-pricing model to price the call options. This model defines the fair values of
securities as functions of the current fair value of a company and uses assumptions such as the anticipated timing of a potential
liquidity event and the estimated volatility of the equity securities.
PWERM. Under the PWERM methodology, the fair value of common stock is estimated based upon an analysis of future
values for the company, assuming various outcomes. The common stock value is based on the probability-weighted present value
of expected future investment returns considering each of the possible outcomes available as well as the rights of each class of
stock. The future value of the common stock under each outcome is discounted back to the valuation date at an appropriate risk-
adjusted discount rate and probability weighted to arrive at an indication of value for the common stock.
Hybrid Method. The hybrid method is a PWERM where the equity value in one of the scenarios is calculated using an OPM.
In the hybrid method used by us, two types of future-event scenarios were considered: an IPO and a M&A scenario. The enterprise
value for the IPO scenario was determined using a market approach. The enterprise value for the remaining private scenario was
72
determined using the M&A back-solve approach for the March 2017, February 7, 2018 and March 30, 2018 valuations as we had
recently completed a round of financing in our equity securities. The June 30, 2017, September 30, 2017 and December 31, 2017
valuations utilized the guideline IPO method for the IPO scenario and the guideline transactions method under the merger and
acquisition, or M&A, scenario to determine the value of the Company. In the IPO scenario, we allocated the value to the various
share classes using the direct waterfall approach and under the M&A scenario, we utilized the OPM to allocate the value to the
respective share classes. The relative probability of each type of future-event scenario was determined by our board of directors
based on an analysis of market conditions at the time, including then-current IPO valuations of similarly situated companies, and
expectations as to the timing and likely prospects of the future-event scenarios.
Valuation of Warrants to Purchase Convertible Preferred Stock
We have classified warrants to purchase shares of our Series A, Series A-1, and Series A-3 and Series B convertible preferred
stock as a liability on our balance sheets as these warrants were free-standing financial instruments exercisable into contingently
redeemable shares. The warrants were initially recorded at fair value on the date of grant, and were subsequently remeasured to
fair value at each balance sheet date while the instrument was outstanding. Changes in fair value of these warrants were recognized
as a component of other income (expense), net in our consolidated statements of operations and comprehensive loss.
We used the Black-Scholes option-pricing model, which incorporates assumptions and estimates, to value the preferred
stock warrants. We assessed these assumptions and estimates on a quarterly basis as additional information impacting the
assumptions was obtained. Estimates and assumptions impacting the fair value measurement included the fair value per share of
the underlying convertible preferred stock, the remaining contractual term of the warrant, risk-free interest rate, expected dividend
yield and expected volatility of the price of the underlying preferred stock. We determined the fair value per share of the underlying
preferred stock by taking into consideration our most recent sales of our convertible preferred stock, results obtained from third-
party valuations and additional factors that we deem relevant. During the period that these instruments were outstanding, we had
historically been a private company and lacked company-specific historical and implied volatility information of our stock.
Therefore, we estimated expected stock volatility based on the historical volatility of publicly traded peer companies for a term
equal to the remaining contractual term of the warrants. The risk-free interest rate was determined by reference to the U.S. Treasury
yield curve for time periods approximately equal to the remaining contractual term of the warrants. We estimated a 0% dividend
yield based on the expected dividend yield and the fact that we have never paid or declared dividends. Significant changes to the
fair value of the underlying stock would have resulted in a significant change in the fair value measurements.
Upon closing of the Company’s IPO on May 11, 2018, the warrants converted to common stock warrants. On that date, the
Company performed the final remeasurement of the warrants using the fair value of the underlying common shares of $16.00 per
share on May 11, 2018, recorded the change in fair value in other income (expense), net in the consolidated statement of operations
and comprehensive loss and reclassified the carrying value to additional paid in capital. All outstanding warrants were exercised
in full in the second quarter of 2018.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Interest Rate Fluctuation Risk
We are exposed to market risk related to changes in interest rates. As of December 31, 2019, our cash and cash
equivalents consisted of cash and money market accounts. Our primary exposure to market risk is interest income sensitivity,
which is affected by changes in the general level of U.S. interest rates. However, because of the short-term nature of the
instruments in our portfolio, an immediate 10% change in market interest rates would not have a material impact on the fair
market value of our investment portfolio or on our financial position or results of operations.
As of December 31, 2019, we had $20.0 million of borrowings outstanding under our 2019 Credit Facility with K2HV.
This term loan bears interest at a variable annual rate equal to the greater of (i) 8.65% and (ii) the prime rate plus 3.15% ,
thereby exposing us to interest rate risk. Based upon the prime rate at December 31, 2019 of 4.75% and considering the
$20.0 million of principal outstanding, an immediate 10% change in the Prime Rate would not have a material impact on our
debt-related obligations, financial position or results of operation.
Foreign Currency Fluctuation Risk
We are not currently exposed to significant market risk related to changes in foreign currency exchange rates; however,
we have contracted with and may continue to contract with foreign vendors that are located in Europe. Our operations may be
subject to fluctuations in foreign currency exchange rates in the future.
Inflation Fluctuation Risk
Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation had a
material effect on our business, financial condition or results of operations during the years ended December 31, 2019 and
2018.
73
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements, together with the report of our independent registered public accounting firm,
appear in this Annual Report on Form 10-K beginning on page F-1 and are incorporated by reference into this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
Management’s Evaluation of our Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and our principal financial officer, evaluated, as
of the end of the period covered by this Annual Report on Form 10-K, the effectiveness of our disclosure controls and procedures,
as defined under 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our principal executive officer and
principal financial officer concluded that, as of December 31, 2019, our disclosure controls and procedures as of such date are
effective at the reasonable assurance level. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange Act are recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the
reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management
recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance
of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined
in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our management, under the supervision and with the participation of our
principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2019 based on the framework in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on the results of its evaluation,
management concluded that our internal control over financial reporting was effective as of December 31, 2019.
Attestation Report of the Registered Public Accounting Firm
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm due to an
exemption established by the JOBS Act for “emerging growth companies.”
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act, that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Item 9B. Other Information
None.
74
Item 10. Directors, Executive Officers, and Corporate Governance
PART III
The information required by this Item will be set forth in the sections entitled “Proposal No. 1 Election of Directors,”
“Corporate Governance” and “Delinquent Section 16(a) Reports” of our proxy statement for our 2020 annual meeting of
stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2019, and is incorporated into this
Annual Report on Form 10-K by reference.
Item 11. Executive Compensation
The information required by this Item will be set forth in the sections entitled “Executive Compensation” and “Director
Compensation” of our proxy statement for our 2020 annual meeting of stockholders to be filed with the SEC within 120 days of
the fiscal year ended December 31, 2019, and is incorporated into this Annual Report on Form 10-K by reference.
Item 12. Securities Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Other than the information set forth below, the information required by this Item will be set forth in the section entitled
“Stock Ownership” of our proxy statement for our 2020 annual meeting of stockholders to be filed with the SEC within 120 days
of the fiscal year ended December 31, 2019, and is incorporated into this Annual Report on Form 10-K by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2019, regarding our common stock that may be issued under:
(1) the Evelo Biosciences, Inc. 2015 Stock Incentive Plan (the "2015 Plan"); (2) Evelo Biosciences, Inc. 2018 Stock Incentive
Plan, (the "2018 Plan"); and (3) the Evelo Biosciences, Inc. 2018 Employee Stock Purchase Plan (the “ESPP”).
Number of Securities to
be Issued Upon
Exercise of Outstanding
Options, Warrants, and
Rights
(a)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants, and Rights
(b)
Number of Securities
Available for Future
Issuance Under Equity
Compensation Plans
(excludes securities
reflected in column (a))
(c)
3,693,741
1,997,733
$
$
— $
— $
$
5,691,474
4.44
11.71
—
—
6.99
—
1,063,503
336,356
—
1,399,859
Plan category:
Equity compensation plans approved
by stockholders
2015 Plan (1)
2018 Plan (2)
ESPP (3)
Equity compensation plans not
approved by stockholders
Total
(1)
As such, the 113,006 securities previously reserved under the 2015 Plan have been excluded from the table above.
In connection with our IPO, we adopted the 2018 Plan and will not make future grants or awards under the 2015 Plan.
Pursuant to the terms of the 2018 Plan, the number of shares of common stock available for issuance under the 2018 Plan
(2)
automatically increases on each January 1, until and including January 1, 2028, by an amount equal to the lesser of (A) 4% of the
aggregate number of shares of common stock outstanding on the final day of the immediately preceding calendar year and (B)
such smaller number of shares of common stock as is determined by the board of directors.
(3)
Pursuant to the terms of the 2018 ESPP, the number of shares of common stock that may be issued under the 2018 ESPP
will automatically increase on each January 1, until and including January 1, 2028, by an amount equal to the lesser of (A) 1% of
the aggregate number of shares of common stock outstanding on the final day of the immediately preceding calendar year and (ii)
such smaller number of shares of common stock as is determined by the board of directors. The board of directors determined
that, as to the January 1, 2020 increase, no shares be added to the number of shares reserved under the ESPP.
91
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will be set forth in the sections entitled “Corporate Governance” and “Certain
Transactions with Related Persons” of our proxy statement for our 2020 annual meeting of stockholders to be filed with the
SEC within 120 days of the fiscal year ended December 31, 2019, and is incorporated into this Annual Report on Form 10-K by
reference.
Item 14. Principal Accountant Fees and Services
The information required by this Item will be set forth in the section entitled “Proposal No. 2 Ratification of Appointment
of Independent Registered Public Accounting Firm” of our proxy statement for our 2019 annual meeting of stockholders to be
filed with the SEC within 120 days of the fiscal year ended December 31, 2019, and is incorporated into this Annual Report on
Form 10-K by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements.
The response to this portion of Item 15 is set forth under Item 8 hereof.
(a)(2) Financial Statement Schedules.
All schedules have been omitted because they are not required or because the required information is given in the Consolidated
Financial Statements or Notes thereto.
(a)(3) Exhibits.
Exhibit
Number
Description of Exhibit
3.1
3.2
4.1
4.2
4.3
10.1#
10.2#
10.7
10.8
10.9#
Restated Certificate of Incorporation of Evelo Biosciences, Inc.
Amended and Restated Bylaws of Evelo Biosciences, Inc.
Fourth Amended and Restated Investors’ Rights Agreement, dated
February 9, 2018, by and among Evelo Biosciences, Inc. and the
investors named therein
Specimen Stock Certificate evidencing the shares of common
stock
Description of Capital Stock
Incorporated by Reference
Form
8-K
8-K
S-1/A
S-1/A
File
No.
001-384
73
001-384
73
333-224
278
333-224
278
Exhibit
Filing
date
Filed
Herewith
3.1
3.2
5/11/18
5/11/18
4.1
4/30/18
4.2
4/30/18
*
*
*
*
2015 Stock Incentive Plan, as amended, and U.K. sub-plan and
forms of agreements thereunder
2018 Incentive Award Plan, and U.K. sub-plan and forms of
awards thereunder
S-1/A
S-1/A
333-224
278
333-224
278
10.1
4/30/18
10.2
4/30/18
10.3#
2018 Employee Stock Purchase Plan, as amended
10.4#
Non-Employee Director Compensation Program, as amended
10.5#
Executive Severance Plan, as amended
10.6#
Form of Indemnification Agreement for Directors and Officers
S-1/A
Lease between Evelo Biosciences, Inc. and 620 Memorial
Leasehold LLC, dated July 14, 2015, as amended on January 24,
2018
S-1/A
333-224
278
333-224
278
10.6
4/30/18
10.7
4/30/18
Sublease Agreement between Evelo Biosciences, Inc. and Bio-Rad
Laboratories, Inc., dated December 27, 2017
S-1/A
333-224
278
10.8
4/30/18
Terms and Conditions of Employment between Evelo Biosciences
(UK) Limited and Duncan McHale, M.B.B.S., Ph.D., effective as
of May 1, 2019
8-K
001-384
73
10.1
4/25/19
92
10.10#
10.11#
10.12#
10.13#
10.14
10.15†
10.16†
10.17†
Offer Letter between Evelo Biosciences, Inc. and Balkrishan
(Simba) Gill, Ph.D., dated June 25, 2015, as amended on April 26,
2018
Offer Letter between Evelo Biosciences, Inc. and Mark Bodmer,
Ph.D., dated October 6, 2015
Letter Agreement, dated September 16, 2019, between Evelo
Biosciences, Inc. and David R. Epstein
Consulting Agreement, dated September 16, 2019, between Evelo
Biosciences, Inc. and David R. Epstein
Master Services Agreement, dated September 1, 2018, between
Evelo Biosciences, Inc. and Weatherden Ltd
Patent License Agreement between Mayo Foundation for Medical
Education and Research and Evelo Biosciences, Inc., dated August
6, 2017
Exclusive License Agreement between The University of Chicago
for an Immuno-oncology Technology and Evelo Biosciences, Inc,
dated March 10, 2016
S-1/A
333-224
278
10.11
4/30/18
S-1/A
8-K
8-K
10-K
333-224
278
001-384
73
001-384
73
001-384
73
10.10
4/30/18
10.1
9/18/19
10.2
9/18/19
10.12
2/15/19
S-1/A
333-224
278
10.14
4/30/18
S-1/A
333-224
278
10.15
4/30/18
Exclusivity and Commitment Agreement between Biose and Evelo
Biosciences, Inc., dated February 15, 2018
S-1/A
333-224
278
10.16
4/30/18
10.18††
Amendment No. 1 to Exclusivity and Commitment Agreement
between Biose and Evelo Biosciences, Inc., dated August 1, 2019
10-Q
001-384
73
10.4
11/5/19
10.19††
Collaboration Agreement between Evelo Biosciences, Inc. and
Sacco S.r.l. dated July 9, 2019
10-Q
001-384
73
10.4
8/6/19
10-Q
001-384
73
10.3
8/6/19
10.20
21.1
23.1
31.1
31.2
32.1
32.2
Loan and Security Agreement by and among Evelo Biosciences,
Inc. and the other borrowers party thereto, the lenders party
thereto, K2 HealthVentures LLC, as administrative agent for such
lenders, and Ankura Trust Company, LLC, as collateral agent for
such lenders, dated July 19, 2019, as amended
Subsidiaries of Evelo Biosciences, Inc.
Consent of Ernst & Young LLP
Certification of Principal Executive Officer Pursuant to Rules
13a-14(a) and 15d-14(a) under the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification of Principal Financial Officer Pursuant to Rules
13a-14(a) and 15d-14(a) under the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification of Principal Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
Certification of Principal Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
101.INS XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
101.SC
H
101.CA
L
101.DE
F
101.LA
B
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
93
*
*
*
*
**
**
*
*
*
*
*
*
* Filed herewith
** Furnished herewith
# Indicates management contract or compensatory plan.
† Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment.
†† Portions of this exhibit (indicated by asterisks) have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K
Certain agreements filed as exhibits to this Annual Report on Form 10-K contain representations and warranties that the
parties thereto made to each other. These representations and warranties have been made solely for the benefit of the other parties
to such agreements and may have been qualified by certain information that has been disclosed to the other parties to such
agreements and that may not be reflected in such agreements. In addition, these representations and warranties may be intended
as a way of allocating risks among parties if the statements contained therein prove to be incorrect, rather than as actual statements
of fact. Accordingly, there can be no reliance on any such representations and warranties as characterizations of the actual state
of facts. Moreover, information concerning the subject matter of any such representations and warranties may have changed since
the date of such agreements.
(b) Financial Statement Schedules. Schedules not listed above have been omitted because the information required to be set
forth therein is not applicable or is shown in the audited consolidated financial statements or notes thereto.
94
Item 16. Form 10-K Summary
Not applicable.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 14, 2020
By:
/s/ Balkrishan (Simba) Gill, Ph.D.
EVELO BIOSCIENCES, INC.
Balkrishan (Simba) Gill, Ph.D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons
on behalf of the registrant in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Balkrishan (Simba) Gill
Balkrishan (Simba) Gill, Ph.D.
President, Chief Executive Officer and Director
(principal executive officer)
February 14, 2020
/s/ Jonathan Poole
Jonathan Poole
/s/ David R. Epstein
David R. Epstein
/s/ Juan Andres
Juan Andres
/s/ Ara Darzi
Lord Ara Darzi
/s/ Jose-Carlos Gutiérrez-Ramos
Jose-Carlos Gutiérrez-Ramos
/s/ Theodose Melas-Kyriazi
Theodose Melas-Kyriazi
/s/ David P. Perry
David P. Perry
/s/ Nancy A. Simonian
Nancy A. Simonian, M.D.
Chief Financial Officer
(principal financial and accounting officer)
February 14, 2020
Chairman of the Board of Directors
February 14, 2020
February 14, 2020
February 14, 2020
February 14, 2020
February 14, 2020
February 14, 2020
February 14, 2020
Director
Director
Director
Director
Director
Director
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EVELO BIOSCIENCES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Evelo Biosciences, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Evelo Biosciences, Inc. (the Company) as of December
31, 2019 and 2018, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and
stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2019, and the related
notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of
its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S.
generally accepted accounting principles.
The Company's Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a
going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, has
limited financial resources, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern.
Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note
1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for
the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly,
we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2017.
Boston, MA
February 14, 2020
F-2
Evelo Biosciences, Inc.
Consolidated Balance Sheets
(In thousands, except per share and share amounts)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Other assets
Total assets
Liabilities, preferred stock, and stockholders’ equity
Current liabilities:
Accounts payable
Accrued expenses
Other current liabilities
Total current liabilities
Noncurrent liabilities:
Long-term debt, net of current portion
Deferred rent, net of current portion
Other noncurrent liabilities
Total liabilities
Commitments and contingencies (Note 9)
Stockholder’s equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and
outstanding at December 31, 2019 and 2018, respectively
Common stock, $0.001 par value; 200,000,000 shares authorized; 32,232,258 and
31,951,540 shares issued and 32,170,605 and 31,825,769 shares outstanding at
December 31, 2019 and 2018, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
Total liabilities, convertible preferred stock and stockholders’ equity
December 31,
2019
2018
$
$
$
77,833
—
3,176
81,009
8,341
1,570
90,920
620
8,758
365
9,743
19,634
1,148
198
30,723
93,101
54,818
3,703
151,622
6,925
1,320
159,867
1,519
4,965
2,751
9,235
12,305
1,071
307
22,918
—
—
32
259,018
—
(198,853)
60,197
90,920
$
32
250,316
(18)
(113,381)
136,949
159,867
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Evelo Biosciences, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except share and per share amounts)
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income (expense), net
Other income (expenses), net
Other income (expense), net
Loss before income taxes
Income tax expense
Net loss
Reconciliation of net loss to net loss attributable to common
stockholders:
Net loss
Convertible preferred stock dividends
Net loss attributable to common stockholders
Net loss per share attributable to common stockholders, basic and
diluted
Weighted-average number of common shares outstanding, basic and
diluted
Comprehensive loss:
Net loss
Other comprehensive loss:
Unrealized loss on investments, net of tax of $0
Comprehensive loss
Year Ended December 31,
2018
2019
2017
$
63,128
23,229
86,357
(86,357)
1,049
26
1,075
(85,282) $
(190)
(85,472)
$
39,885
18,218
58,103
(58,103)
1,563
(406)
1,157
(56,946) $
—
(56,946)
(85,472)
—
(85,472) $
(56,946)
(3,937)
(60,883) $
19,957
7,574
27,531
(27,531)
(215)
(301)
(516)
(28,047)
—
(28,047)
(28,047)
(6,085)
(34,132)
(2.67) $
(2.78) $
(9.10)
32,031,862
21,871,029
3,750,790
(85,472) $
(56,946) $
(28,047)
18
(85,454) $
(18)
(56,964) $
—
(28,047)
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-4
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Evelo Biosciences, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
2018
2019
2017
$
(85,472) $
(56,946) $
(28,047)
Operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense
Depreciation expense
Change in fair value of warrant and debt derivative liability
Net (accretion of discount)/amortization of premium on marketable securities
Non-cash interest expense
Gain on sale of fixed assets
Prepaid expenses and other current assets
Accounts payable
Accrued expenses and other current liabilities
Other liabilities
Net cash used in operating activities
Investing activities
Purchase of investments
Proceeds from sales and maturities of investments
Purchases of property and equipment
Proceeds from the sale of fixed assets
Net cash used in investing activities
Financing activities
Net proceeds from the issuance of common stock upon completion of initial public
offering
Deferred issuance costs
Net proceeds from the issuance of convertible preferred stock
Net proceeds from the issuance of long-term debt
Settlement of derivative liability
Proceeds from the exercise of stock options, restricted common stock and warrants
Repayment of long-term debt
Net cash provided by financing activities
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash – beginning of year
Cash, cash equivalents and restricted cash – end of year
Supplemental disclosure of cash flow information
Cash paid for interest
Noncash investing and financing activities
Conversion of convertible preferred stock into common stock upon closing of initial
public offering
Conversion of convertible preferred stock warrants into common stock warrants
Property and equipment additions in accounts payable and accrued expenses
Issuance of debt derivative liability in connection with long-term debt facility
Issuance of warrants in connection with long-term debt facility
Accretion of convertible preferred stock to redemption value
$
$
$
$
$
$
$
$
8,165
1,764
—
(164)
255
(2)
372
(585)
3,694
(7)
(71,980)
—
55,000
(3,032)
2
51,970
—
—
—
19,481
—
511
(15,000)
4,992
(15,018)
94,351
79,333
1,166
$
$
6,059
1,935
406
—
103
—
(3,052)
(221)
3,594
843
(47,279)
(136,087)
81,250
(5,462)
171
(60,128)
75,829
—
81,336
4,975
(250)
122
—
162,012
54,605
39,746
94,351
742
$
$
246
— $
— $
$
— $
— $
— $
165,778
$
$
819
$
348
$
150
89
$
— $
1,542
834
301
—
35
—
(347)
774
1,733
(90)
(23,265)
—
—
(1,742)
—
(1,742)
—
(15)
48,903
—
—
79
—
48,967
23,960
15,786
39,746
437
—
—
84
—
—
32
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Evelo Biosciences, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Evelo Biosciences, Inc. ("Evelo" or the "Company”) is a biotechnology company which was incorporated in Delaware on
May 6, 2014. The Company is discovering and developing oral biologics that act on cells in the small intestine with systemic
therapeutic effects. The Company is advancing these oral biologics with the aim of treating a broad range of immune mediated
diseases with an initial focus on inflammatory diseases and oncology. The Company is headquartered in Cambridge, Massachusetts.
Since inception, the Company has devoted substantially all of its efforts to research and development and raising capital.
The Company has not generated any revenue related to its primary business purpose to date. The Company is subject to a number
of risks similar to those of other development stage companies, including dependence on key individuals, the need to develop
commercially viable products, competition from other companies, many of whom are larger and better capitalized, and the need
to obtain adequate additional financing to fund the development of its products.
On April 27, 2018, the Company filed an amended and restated certificate of incorporation with the Secretary of State of
the State of Delaware, to effect a 1-for-4.079 reverse stock split of the Company’s common stock. All share and per share data
shown in the accompanying consolidated financial statements and related notes have been retroactively revised to reflect the
reverse stock split.
On May 11, 2018, the Company completed an initial public offering (the “IPO”) of 5,312,500 shares of its common stock
for aggregate gross proceeds of $85.0 million. The Company received $75.8 million in net proceeds after deducting underwriting
discounts and commissions and other estimated offering expenses payable by the Company. Upon closing of the IPO, all of the
outstanding shares of convertible preferred stock automatically converted into 22,386,677 shares of common stock at the applicable
conversion ratio then in effect.
Going Concern
In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-15,
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated
whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company's ability to
continue as a going concern within one year after the date that the consolidated financial statements are issued.
The Company has incurred operating losses since inception and expects such losses and negative operating cash flows to
continue for the foreseeable future. Through December 31, 2019, the Company has raised gross proceeds of approximately $262.9
million from the sale of common stock, the sale of convertible preferred stock, and from the issuance of debt. At December 31,
2019, the Company had cash, cash equivalents and short-term investments of $77.8 million. The Company recorded net losses
of $85.5 million, $56.9 million and $28.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. As of
December 31, 2019, the Company had an accumulated deficit of $198.9 million.
The transition to profitability is dependent upon the successful development, approval, and commercialization of its products
and product candidates and the achievement of a level of revenues adequate to support its cost structure. Based on the Company’s
current operating plan, the Company believes that its cash and cash equivalents at December 31, 2019 will not be sufficient to
fund operations and capital expenditures for at least the twelve months following the filing of this Annual Report on Form 10-K
and the Company will need to obtain additional funding. The Company intends to pursue strategic partnerships and collaborations,
or obtain additional funding through its available financing sources which include, additional public offerings of common stock
and private financing of debt or equity. Management’s belief with respect to its ability to fund operations is based on estimates
that are subject to risks and uncertainties. If actual results are different from management’s estimates, the Company may need to
seek additional funding sooner than would otherwise be expected. There can be no assurance that the Company will be able to
obtain additional funding on acceptable terms, if at all. If the Company is unable to obtain sufficient funding, it could be required
to delay its development efforts, limit activities and reduce research and development costs, which could adversely affect its
business prospects. Because of the uncertainty in securing additional funding and the insufficient amount of cash and investment
resources at December 31, 2019, management has concluded that substantial doubt exists with respect to the Company’s ability
to continue as a going concern within one year after the date that the consolidated financial statements are issued.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”). Any reference in these notes to applicable guidance is meant to refer
to the authoritative United States generally accepted accounting principles as found in the Accounting Standard Codification
(“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).
F-7
2. Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant
estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the accrual of research
and development expenses and the valuation of stock-based awards. The Company bases its estimates on historical experience
and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. Actual results
could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned, controlled subsidiaries.
All intercompany transactions and balances have been eliminated in consolidation.
Subsequent Event Considerations
The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the
consolidated financial statements to provide additional evidence for certain estimates or to identify matters that require additional
disclosure. Subsequent events have been evaluated as required. The Company has evaluated all subsequent events and determined
that there are no material recognized or unrecognized subsequent events requiring disclosure, other than those disclosed in this
Annual Report on Form 10-K.
Emerging Growth Company Status
Evelo is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, (the "JOBS Act"),
and it may take advantage of reduced reporting requirements that are otherwise applicable to public companies. Evelo may take
advantage of these exemptions until it is no longer an emerging growth company. Section 107 of the JOBS Act provides that an
emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation
of new or revised accounting standards. Evelo has elected to use the extended transition period for complying with new or revised
accounting standards; and as a result of this election, its consolidated financial statements may not be comparable to companies
that comply with public company effective dates. Evelo may take advantage of these exemptions up until the last day of the fiscal
year following the fifth anniversary of IPO or such earlier time that it is no longer an emerging growth company. Evelo would
cease to be an emerging growth company if it has more than $1.07 billion in annual revenue; it has more than $700.0 million in
market value of its stock held by non-affiliates (and has been a public company for at least 12 months and has filed one annual
report on Form 10-K), or it has issued more than $1.0 billion of non-convertible debt securities over a three-year period.
Concentrations of Credit Risk and Off-Balance Sheet Risk
Financial instruments that potentially expose the Company to concentrations of credit risk primarily consist of cash, cash
equivalents and short-term investments. The Company places its cash, cash equivalents and short-term investments in primarily
two custodian accounts at accredited financial institutions. The Company’s available-for-sale investments primarily consist of
U.S. Treasury securities. The Company has not experienced any realized losses on any of its accounts and management believes
such funds are subject to minimal credit risk. Such deposits have and will continue to exceed federally insured limits.
As of December 31, 2019 and 2018, the Company has no off-balance sheet risk such as foreign exchange contracts, option
contracts, or other foreign hedging arrangements.
The Company is subject to a number of risks similar to other early-stage biopharmaceutical companies, including, but not
limited to, the need to obtain adequate additional funding, possible failure of current or future preclinical testing or clinical trials,
its reliance on third parties to conduct its clinical trials, the need to obtain regulatory and marketing approvals for its product
candidates, competitors developing new technological innovations, the need to successfully commercialize and gain market
acceptance of the Company’s product candidates, its right to develop and commercialize its product candidates pursuant to the
terms and conditions of the licenses granted to the Company, protection of proprietary technology, the ability to make milestone,
royalty or other payments due under any license or collaboration agreements, and the need to secure and maintain adequate
manufacturing arrangements with third parties. If the Company does not successfully commercialize or partner any of its product
candidates, it will be unable to generate product revenue or achieve profitability.
Comprehensive Loss
Comprehensive loss includes net loss and certain changes in stockholders’ equity (deficit) that are excluded from net loss.
The Company's only element of other comprehensive income (loss) is unrealized gains and losses on available-for-sale investments.
Comprehensive loss totaled $85.5 million and $57.0 million for the years ended December 31, 2019 and 2018, respectively, and
was not significantly different than net loss. For the year ended December 31, 2017 comprehensive loss was equal to net loss.
F-8
Cash, Cash Equivalents and Restricted Cash
Cash equivalents are comprised of highly liquid investments that are readily convertible into cash with original maturities
of three months or less. Cash and cash equivalents include cash held in banks and amounts held in money market funds and U.S.
treasuries with original maturities of three months or less. Cash equivalents are stated at cost, which approximates market value.
The Company’s restricted cash consists of restricted cash in connection with building leases for the Company’s office and laboratory
premises and deposits held in relation to the company's credit card facility. Restricted cash as of December 31, 2019 and 2018
was $1.5 million and $1.3 million, respectively, and is classified within other assets on the accompanying consolidated balance
sheet. The following reconciles cash, cash equivalents and restricted cash as of December 31, 2019 and 2018, as presented on the
Company's statements of cash flows to its related balance sheet accounts (in thousands):
Cash and cash equivalents:
Cash
Money market funds
Total cash and cash equivalents
Restricted cash
Cash, cash equivalents and restricted cash
Investments
December 31,
2019
2018
$
$
1,634
$
76,199
77,833
1,500
79,333
$
1,300
91,801
93,101
1,250
94,351
The Company accounts for and classifies its investments as either “available-for-sale,” “trading,” or “held-to-maturity,” in
accordance with the accounting guidance related to the accounting and classification of certain investments in debt and equity
securities. The determination of the appropriate classification is based primarily on management’s intent to sell the investment at
the time of purchase. As of December 31, 2019, the Company had no investments. As of December 31, 2018, all of the Company's
investments were classified as available‑for‑sale securities.
Available‑for‑sale securities are those securities which the Company views as available for use in current operations, if
needed. The Company generally classifies its available‑for‑sale securities as short‑term investments, even though the stated maturity
date may be one year or more beyond the current balance sheet date. Available‑for‑sale investments are stated at fair value with
their unrealized gains and losses included in accumulated other comprehensive loss within stockholders’ (deficit) equity, until
such gains and losses are realized in other income (expense) within the consolidated statements of operations and comprehensive
loss or until an unrealized loss is considered other‑than‑temporary.
The Company recognizes other‑than‑temporary impairments of its investments in debt securities when there is a decline in
fair value below the amortized cost basis and if (a) it has the intent to sell the security or (b) it is more likely than not that the
Company will be required to sell the security prior to recovery of its amortized cost basis. If either of these conditions is met, the
Company recognizes the difference between the amortized cost of the security and its fair value at the impairment measurement
date in the consolidated statements of operations and comprehensive loss. If neither of these conditions is met, the Company must
perform an additional analysis to evaluate whether the unrealized loss is associated with the creditworthiness of the issuer of the
security rather than other factors, such as interest rates or market factors. If the Company determines from this analysis that it does
not expect to receive cash flows sufficient to recover the entire amortized cost of the security, a credit loss exists, the impairment
is considered other-than-temporary and is recognized in its consolidated statements of operations and comprehensive loss.
Fair Value of Financial Instruments
ASC 820, Fair Value Measurement (“ASC 820”), establishes a fair value hierarchy for instruments measured at fair value
that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions
(unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on
market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s
assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the
best information available in the circumstances.
ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant
assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes between the
following:
•
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;
F-9
•
•
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly; and
Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market
participants would use in pricing the asset or liability.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the
determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining
fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based
on the lowest level of any input that is significant to the fair value measurement.
An entity may choose to measure many financial instruments and certain other items at fair value at specified election dates.
Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The
Company did not elect to measure any additional financial instruments or other items at fair value.
Warrants to Purchase Convertible Preferred Stock
The Company accounts for warrant instruments that either conditionally or unconditionally obligate the issuer to transfer
assets as liabilities regardless of the timing of the redemption feature or price, even though the underlying shares may be classified
as equity. These warrants are subject to revaluation at each balance sheet date, and any changes in fair value are recorded as a
component of other income/(expense), until the earlier of their exercise or expiration or the completion of a liquidation event, at
which time the warrant liability may be reclassified to stockholders’ equity if the criteria for recording the warrant as an equity
instrument are met. Per the terms of the warrants, upon completion of a qualified public offering, any unexercised warrants are
converted into warrants to purchase common shares.
Property and Equipment
Property and equipment consists of computer hardware and software, furniture and fixtures, office equipment, research and
lab equipment, and leasehold improvement recorded at cost. Lab equipment used in research and development activities is only
capitalized when it has an alternative future use. These amounts are depreciated using the straight-line method over the estimated
useful lives of the assets. Purchased assets that are not yet in service are recorded to construction-in-process and no depreciation
expense is recorded. Once they are placed in service they are reclassified to the appropriate asset class.
A summary of the estimated useful lives is as follows:
Classification
Computer hardware
Computer software
Furniture and fixtures
Research and lab equipment (new/used)
Leasehold improvements
Repairs and maintenance costs are expensed as incurred.
Impairment of Long-Lived Assets
Estimated Useful Life
3 - 5 Years
3 years
7 years
5 years / 3 years
Lesser of asset life or
remaining life of lease
The Company periodically evaluates property and equipment for impairment whenever events or changes in circumstances
indicate that a potential impairment may have occurred. If such events or changes in circumstances arise, the Company compares
the carrying amount of the long-lived assets to the estimated future undiscounted cash flows expected to be generated by the long-
lived assets. If the estimated aggregate undiscounted cash flows are less than the carrying amount of the long-lived assets, an
impairment charge, calculated as the amount by which the carrying amount of the assets exceeds the fair value of the assets, is
recorded. The fair value of the long-lived assets is determined based on the estimated discounted cash flows expected to be
generated from the long-lived assets. The Company has not recorded any material impairment charges during the years presented.
Deferred Rent
Certain of the Company’s operating lease agreements include scheduled rent escalations over the lease term, as well as lease
incentives. Rent expense is charged ratably over the life of the lease. Deferred rent consists of the difference between cash payments
and the recognition of rent expense on a straight-line basis for the buildings the Company occupies. Lease incentives are recorded
as a deferred rent liability and are amortized on a straight-line basis over the term of the lease as a reduction to rent expense.
F-10
Research and Development Costs
Research and development costs are expensed in the period incurred. Research and development expenses consist of both
internal and external costs such as payroll, consulting, and manufacturing costs associated with the development of the Company’s
product candidates. Costs for certain development activities, such as clinical trials and manufacturing development activities, are
recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical
site activations, and information provided to the Company by its vendors on their actual costs incurred or level of effort
expended. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern
of costs incurred, and are reflected on the consolidated balance sheets as prepaid or accrued research and development expenses.
Nonrefundable advance payments for goods or services to be received in the future for use in research and development
activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are
performed.
The Company has and may continue to acquire the rights to develop and commercialize new product candidates from third
parties. The upfront payments to acquire license, product or rights, as well as any future milestone payments, are immediately
recognized as research and development expense provided that there is no alternative future use of the rights in other research and
development projects. Any milestone payments made for Intellectual Property after regulatory approval, or that have alternative
future use, are capitalized and amortized.
Income Taxes
The Company records deferred tax assets and liabilities for the expected future tax consequences of temporary differences
between the Company’s financial statement carrying amounts and the tax bases of assets and liabilities and for loss and credit
carryforwards using enacted tax rates expected to be in effect in the years in which the differences reverse. A valuation allowance
is provided to reduce the net deferred tax assets to the amount that will more likely than not be realized. The Company determines
whether it is more likely than not that a tax position will be sustained upon examination. If it is not more likely than not that a
position will be sustained, none of the benefit attributable to the position is recognized. The tax benefit to be recognized for any
tax position that meets the more-likely-than-not recognition threshold is calculated as the largest amount that is more than 50%
likely of being realized upon resolution of the contingency. The Company accounts for interest and penalties related to uncertain
tax positions as part of its provision for income taxes.
Stock-Based Compensation
The Company records stock-based compensation for options granted to employees and directors based on the grant date fair
value of awards issued. The expense is recorded over the requisite service period, which is the vesting period, on a straight-line
basis. The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options. The determination
of the fair value of stock options on the date of grant using an option-pricing model is affected by the Company’s common stock
price, as well as a number of other assumptions. The Company records forfeitures as they occur.
The Company accounts for stock-based compensation arrangements with non-employees based upon the fair value of the
consideration received or the equity instruments issued, whichever is more reliably measurable. The measurement date for non-
employee awards is generally the date performance of services required from the non-employee is complete. Stock-based
compensation costs for non-employee awards are recognized as services are provided, which is generally the vesting period, on
a straight-line basis. The unvested portion of the stock options is subject to re-measurement over the vesting period and forfeitures
are recorded as they occur.
Segments
The Company has one operating segment. The Company’s chief operating decision maker, its Chief Executive Officer,
manages the Company’s operations on a consolidated basis for the purpose of allocating resources.
Net Loss per Share Attributable to Common Stockholders
Basic net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted-average
number of shares of common stock outstanding during the period, without consideration for common stock equivalents. Net loss
applicable to common stockholders is calculated by adjusting the net loss of the Company for cumulative preferred stock dividends.
Diluted net loss per share applicable to common stockholders is calculated by adjusting weighted average shares outstanding for
the dilutive effect of common stock equivalents outstanding for the period. For purposes of the dilutive net loss per share applicable
to common stockholders calculation, convertible preferred stock, warrants, stock options, and unvested restricted stock are
considered to be common stock equivalents but are excluded from the calculation of diluted net loss per share applicable to common
stockholders, as their effect would be anti-dilutive; therefore, basic and diluted net loss per share applicable to common stockholders
were the same for all periods presented.
F-11
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”),
and further updated through ASU 2016-12 (“ASU 2016-12”), which amends the existing accounting standards for revenue
recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount to which an entity expects
to be entitled when products are transferred to customers. This guidance is effective for annual reporting periods, and interim
periods within those years, beginning after December 15, 2017, for public entities and no later than for annual reporting periods
beginning after December 15, 2018, for non-public entities. The new revenue standard may be applied retrospectively to each
prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company adopted
ASU 2014-09 on January 1, 2019 and has concluded that the adoption did not have a material impact on its consolidated financial
statements as the Company is not yet generating revenues.
In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808)-Clarifying the Interaction
between Topic 808 and Topic 606 ("ASU 2018-18"). The amendments in ASU 2018-18 make targeted improvements to U.S.
GAAP for collaborative arrangements by clarifying that certain transactions between collaborative arrangement participants should
be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit
of account. In those situations, all the guidance in Topic 606 should be applied, including recognition, measurement, presentation,
and disclosure requirements. In addition, unit-of-account guidance in Topic 808 was aligned with the guidance in Topic 606 (that
is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is
within the scope of Topic 606. ASU 2018-18 is effective for fiscal years beginning after December 15, 2019, and interim periods
within those fiscal years. Early adoption is permitted, including adoption in any interim period. The amendments in this Update
should be applied retrospectively to the date of initial application of Topic 606. The Company adopted ASU 2018-18 on January
1, 2019 and has concluded the adoption did not have a material impact on its consolidated financial statements as the Company
does not have any collaborative agreements under which any participant is considered a customer of the Company.
Accounting Pronouncements Issued and Not Adopted as of December 31, 2019
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which supersedes the guidance in
former ASC 840, Leases. The new standard requires lessees to apply a dual approach, classifying leases as either finance or
operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification
will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term
of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12
months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to the historical
guidance for operating leases. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements,
which permits entities to continue applying legacy guidance in ASC 840, Leases, including its disclosure requirements, in the
comparative periods presented in the year that the entity adopts the new leasing standard. This guidance is effective for annual
reporting periods, and interim periods within those years, beginning after December 15, 2018 for most public entities. The Company
will adopt this new standard on January 1, 2020 using the transition method permitted by ASU 2018-11. The Company has elected,
in transition, to apply the package of practical expedients which allows the Company not to reassess whether existing contracts
are or contain leases, the classification of existing leases, and whether initial direct costs qualify for capitalization. Additionally,
the Company expects to elect the package of practical expedients to: i) not recognize lease assets and lease liabilities for leases
with a term of 12 months of less; and ii) not separate the non-lease components from the associated lease components for leases
of real estate and, instead, account for each non-lease component and associated lease component as a single component. Although
its assessment is not complete, the Company currently expects the adoption of this guidance to result in the addition of material
balances of leased assets and corresponding lease liabilities to its consolidated balance sheets, primarily relating to leases of office
space.
In June 2018, the FASB issued ASU No. 2018-07, Stock-based Compensation: Improvements to Nonemployee Share-based
Payment Accounting (Topic 718) ("ASU 2018-07"), which amends the existing accounting standards for share-based payments
to nonemployees. This ASU aligns much of the guidance on measuring and classifying nonemployee awards with that of awards
to employees. Under the new guidance, the measurement of nonemployee equity awards is fixed on the grant date. This ASU
becomes effective in the first quarter of fiscal year 2020 and early adoption is permitted but no earlier than the Company's adoption
date of Topic 606. Entities will apply the ASU by recognizing a cumulative-effect adjustment to retained earnings as of the beginning
of the annual period of adoption. The Company is currently evaluating the impact that ASU 2018-07 will have on its consolidated
financial statements.
3. Investments
As of December 31, 2019, the Company did not hold any short-term investments. As of December 31, 2018, the Company
had short-term investments, consisting entirely of U.S. treasury securities, of $54.8 million.
F-12
The following table summarizes the Company's investments held at December 31, 2018, which are all classified as
thousands):
(in
available-for-sale
Description
December 31, 2018:
U.S. treasury securities
Total
Amortized Cost
Unrealized Gain
Unrealized Loss
Fair Value
$
$
54,836
54,836
$
$
— $
— $
(18) $
(18) $
54,818
54,818
The amortized cost of available-for-sale securities is adjusted for amortization of premiums and accretion of discounts
to maturity. At December 31, 2019 the Company had no accumulated other comprehensive loss. There were no material realized
gains or losses recognized on the sale or maturity of available-for-sale securities during the years ended December 31, 2019 or
2018, and as a result, there were no material reclassifications out of accumulated other comprehensive loss for the same periods.
As of December 31, 2018, the aggregate fair value of securities held by the Company in an unrealized loss position for less
than twelve months was $54.8 million and none of these securities had remaining maturities of greater than one year. The Company
has the intent and ability to hold such securities until recovery. The Company determined that there has been no material change
in the credit risk of the above investments. As a result, the Company determined it did not hold any investments with any other-
than-temporary impairment as of December 31, 2018.
F-13
4. Fair Value Measurements
The following tables present information about the Company’s financial assets and liabilities that have been measured at
fair value as of December 31, 2019 and 2018 (in thousands):
Description
Assets:
Money market funds included within cash and cash
equivalents
Total
Description
Assets:
Money market funds included within cash and cash
equivalents
U.S. treasury securities included within short-term
investments
Total
December 31,
2019
Active
Markets
(Level 1)
Observable
Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
76,199
76,199
$
$
76,199
76,199
$
$
— $
— $
—
—
December 31,
2018
Active
Markets
(Level 1)
Observable
Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
91,801
$
91,801
$
— $
54,818
—
54,818
146,619
$
91,801
$
54,818
$
—
—
—
$
$
$
$
As of December 31, 2019 and 2018, the Company's cash equivalents and short-term investments have been initially valued
at the transaction price and subsequently valued utilizing a third-party pricing service. The Company validates the prices provided
by its third-party pricing service by understanding the models used and obtaining market values from other pricing sources.
5. Property and Equipment, Net
Property and equipment consists of the following (in thousands):
Property and equipment:
Lab equipment
Leasehold improvements
Furniture and fixtures
Computers and software
Office equipment
Construction-in-process
Property and equipment
Less: accumulated depreciation
Property and equipment, net
December 31,
2019
2018
$
7,479
$
2,014
750
204
9
1,594
12,050
(3,709)
$
8,341
$
5,393
1,824
525
115
9
1,011
8,877
(1,952)
6,925
The Company recognized $1.8 million, $1.9 million and $0.8 million of depreciation expense for the years ended
December 31, 2019, 2018 and 2017, respectively.
6. Accrued Expenses
Accrued expenses consist of the following (in thousands):
Accrued external research and development expenses
Accrued payroll and related expenses
Accrued professional fees
Accrued other
Total accrued expenses
F-14
December 31,
2019
2018
$
$
4,583
$
3,149
659
367
8,758
$
1,587
2,198
1,010
170
4,965
7. Loan and Security Agreement
2016 Credit Facility
In 2016, the Company entered into a credit facility (the “2016 Credit Facility”) with a bank that allowed the Company to
borrow up to $15.0 million. Borrowings under the 2016 Credit Facility were secured by a lien on all Company assets, excluding
intellectual property.
Prior to 2018, a total of $10.0 million was drawn under the 2016 Credit Facility, and in February 2018, the Company drew
the remaining $5.0 million available. This resulted in an increase to the interest rate to the higher of (i) prime plus 0.25% or
(ii) 4.50% per annum and extended the interest only payment period through to August 15, 2019. Upon the expiration of the interest
only period, amounts borrowed would have been repayable over 24 equal monthly payments of principal plus interest accrued
through August 15, 2021. The Company had the ability to prepay the outstanding balance of the 2016 Credit Facility at its option
with a prepayment fee of 2% of principal amount if prepayment was made before August 15, 2018 or 0.5% if the prepayment was
made between August 15, 2018 and August 15, 2019.
In conjunction with the February 2018 drawdown, the Company issued a warrant to purchase up to 34,722 shares of the
Company’s Series B preferred stock at an exercise price of $1.80 per share. As part of the February 2018 drawdown, the loan and
security agreement was amended to include the payment of a $0.3 million success fee to the financial institution in the event of a
liquidation event, including an initial public offering. The success fee represented an embedded derivative which the Company
bifurcated from the debt arrangement and carried at fair value. In May 2018, the Company completed its IPO and paid the success
fee of $0.3 million. In addition, the warrant issued in February 2018 was exercised in May 2018.
The 2016 Credit Facility contained negative covenants restricting the Company’s activities, including limitations on cash
deposits, dispositions, mergers or acquisitions, incurring indebtedness or liens, paying dividends or making investments and certain
other business transactions. There were no financial covenants associated with the agreement
2019 Credit Facility
On July 19, 2019, the Company entered into a loan and security agreement (as amended, the "2019 Credit Facility") with
K2 HealthVentures LLC and others (collectively, "K2HV") pursuant to which the K2HV agreed to make term loans in an aggregate
principal amount of up to $45.0 million available to the Company in three tranches. The initial tranche of $20.0 million was funded
upon closing on July 19, 2019. The second tranche of $10.0 million is available to be funded at the Company's election between
December 1, 2019 and June 1, 2020, subject to certain customary conditions. The third tranche of $15.0 million is available to be
funded at the Company's election on or before January 15, 2021, subject to certain customary conditions and the achievement of
certain clinical development milestones. Borrowings under the 2019 Credit Facility are collateralized by substantially all of the
Company's personal property, excluding intellectual property, and the Company pledged its equity interests in its subsidiaries,
subject to certain limitations with respect to its foreign subsidiaries.
Interest on the outstanding loan balance will accrue at a variable annual rate equal to the greater of (i) 8.65% and (ii) the
prime rate plus 3.15%. The Company is required to make interest-only payments on the loans on a monthly basis through February
28, 2022. If the Company elects to draw the third tranche, the interest-only period will be extended through August 31, 2022.
Subsequent to the interest only periods, the Company is required to make equal monthly payments of principal plus interest until
the loans mature on August 1, 2024. Upon final payment or prepayment of the loans, the Company must pay a final payment equal
to 4.3% of the loans borrowed, which is being accrued to interest expense over the term of the loan using the effective-interest
method. The Company incurred fees associated with establishing the 2019 Credit Facility of $0.4 million. The Company has an
option to prepay the loans in whole, subject to a prepayment fee of 2% of the amount prepaid or, if the prepayment occurs after
the 18-month anniversary of the funding date of the loans, 1% of the amount prepaid.
The 2019 Credit Facility contains customary representations, warranties and covenants and also includes customary events
of default, including payment defaults, breaches of covenants, change of control and occurrence of a material adverse effect. The
Company has determined that the risk of subjective acceleration under the material adverse events clause was remote and therefore
has classified the long-term portion of the outstanding principal in non-current liabilities. Upon the occurrence and continuation
of an event of default, a default interest rate of an additional 5% per annum may be applied to the outstanding loan balances, and
the administrative agent, collateral agent, and lenders may declare all outstanding obligations immediately due and payable and
exercise all of their rights and remedies as set forth in the 2019 Credit Facility and under applicable law. As of December 31, 2019,
the Company was in compliance with all covenants under the 2019 Credit Facility.
The Company used the proceeds from the initial $20.0 million tranche to prepay the full $15.0 million loan balance
outstanding under the 2016 Credit Facility on July 19, 2019.
F-15
The Company has the following minimum aggregate future loan payments at December 31, 2019 (in thousands):
2020
2021
2022
2023
2024
Total minimum payments
Less amounts representing interest and discount
Long-term debt
$
$
$
1,759
1,754
8,201
8,847
6,369
26,930
(7,296)
19,634
Interest expense related to the Company's 2016 Credit Facility was approximately $0.5 million, $0.9 million, and $0.5 million,
respectively, for the years ended December 31, 2019, 2018 and 2017.
Interest expense related to the Company's 2019 Credit Facility was approximately $0.8 million for the year ended
December 31, 2019.
8. In-License Agreements
Mayo Foundation for Medical Education and Research
On June 10, 2016, the Company entered into a Research and License Agreement, (the “2016 Mayo License Agreement”)
with the Mayo Foundation for Medical Education and Research, an affiliate of Mayo Clinic (the “Mayo Clinic”). Under the 2016
Mayo License Agreement, the Mayo Clinic was entitled to certain participation rights in connection with the issuance and sale of
Series B Preferred Stock. The 2016 Mayo License Agreement allowed the Mayo Clinic to purchase shares at the same price paid
as other investors and is considered to be a fair value contract. In 2018, the Mayo Clinic purchased 1,666,667 shares of Series B
Preferred Stock at $1.80 per share. Also pursuant to the 2016 Mayo License Agreement, the Mayo Clinic received 490 shares of
common stock upon the completion of certain project milestones as well as warrants to purchase common stock (the “Mayo
Warrants”) exercisable for 18 shares and 116 shares of common stock upon the completion of certain additional project milestones.
The Mayo Warrants were fully vested and expensed in 2016. On April 9, 2018, the Mayo Clinic exercised its warrant and was
issued 134 shares of common stock.
On August 6, 2017, the Company and the Mayo Clinic entered into a license agreement (“2017 Mayo License Agreement”).
Under the 2017 Mayo License Agreement, the Mayo Clinic granted the Company (i) an exclusive, worldwide, sublicensable
license under the Mayo Clinic’s rights to certain intellectual property and microbial strains (ii) a non-exclusive, worldwide,
sublicensable license to certain related know-how, in each case, to develop and commercialize certain microbial strains and licensed
products incorporating any such strains. As consideration, the Company paid a nonrefundable upfront fee of $0.2 million and
annual license maintenance fees. Nonrefundable upfront fees were expensed in full to research and development expense in 2017.
Annual maintenance fees will be expensed as incurred over the term of the agreement. The Company may owe the Mayo Clinic
milestone payments upon the achievement of certain development, regulatory, and commercial milestones, up to a maximum of
$56.0 million in the aggregate, as well as royalties on net sales of licensed products in low single-digit percentages. As of
December 31, 2019, the Company has incurred milestone payments to date totaling approximately $0.2 million under the agreement
of which no amounts are currently due.
University of Chicago
On March 10, 2016, the Company and the University of Chicago entered into a patent license agreement (“2016 University
of Chicago Agreement”). Under the 2016 University of Chicago Agreement, the University of Chicago granted the Company (i) an
exclusive, royalty-bearing and sublicensable license under the Licensed Patents and (ii) a non-exclusive, royalty-bearing,
sublicensable license to access the technical information to diligently develop and commercialize Licensed Products. As
consideration, the Company paid a nonrefundable upfront fee of less than $0.5 million and will pay annual license maintenance
fees. Nonrefundable upfront fees were expensed in full to research and development expense in 2016. Annual maintenance fees
will be expensed as incurred over the term of the agreement. The Company may owe the University of Chicago milestone payments,
totaling an aggregate of approximately $60.9 million, upon the achievement of certain development, regulatory, and commercial
milestones, as well as royalties on net sales of licensed products ranging from low to high single-digit percentages. In addition,
the Company also agreed to pay the University of Chicago a share of sublicense revenue. As of December 31, 2019, the Company
has incurred milestone payments to date totaling approximately $0.4 million under the agreement of which no amounts are currently
due.
F-16
9. Commitments and Contingencies
Lease Obligations
In January 2018, the Company entered into an operating sublease arrangement to lease approximately 40,765 square feet
for its office and research development space at 620 Memorial Drive, Cambridge, MA 02139 from February 2018 to September
2025. The Company maintains an additional separate operating lease for office and laboratory space that is scheduled to expire
in 2020. The leases require security deposits, which the Company has primarily met with letters of credit from a financial institution
that are secured with cash on deposit.
In June 2018, the Company entered into a sublease arrangement with a third party to lease space subject to an operating lease
that is scheduled to expire in 2020. The future minimum rental payments to be received under this agreement total $0.2 million
and are equivalent to the minimum payments due from the Company to the landlord.
The Company recorded $2.9 million, $3.2 million, and $1.0 million of rent expense for the years ended December 31, 2019,
2018 and 2017, respectively, which are net of sublease rental income of $0.5 million, $0.2 million, and none, respectively.
The minimum aggregate future lease commitments at December 31, 2019, are as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
$
3,088
2,973
3,062
3,154
3,249
2,492
$
18,018
Collaboration Agreement with Sacco S.r.l.
In July 2019, the Company entered into an agreement with Sacco S.r.l. ("Sacco"), an affiliate of one of the Company’s
existing contract manufacturing organizations, pursuant to which and subject to certain exceptions for pre-existing products for
pre-existing customers, Sacco will manufacture and supply single strain, non-genetically modified microbes intended for oral
delivery or oral use in pharmaceutical products exclusively for the Company for a period of five years. Sacco may terminate the
agreement if the provision of manufacturing services has been, or is scheduled to be, inactive for a period of six consecutive
months. The Company has agreed to pay Sacco an aggregate of €3.0 million, €0.6 million annually, during the exclusivity period.
The Company recognized €0.6 million in expense associated with this agreement during the year ended December 31, 2019.
Equipment Funding Arrangement
In July 2019, the Company entered into an arrangement with one of its external manufacturing partners providing the Company
with priority access to future manufacturing services which will be rendered using certain dedicated equipment. In return for such
access, the Company committed to provide funding for the purchase of the dedicated equipment in an aggregate amount of £0.8
million. An upfront payment of £0.4 million was paid in 2019 and, the remaining amounts will be paid subject to the manufacturer's
installation and qualification of the equipment, estimated to occur in early 2020.
Agreement with Biose Industrie
On February 15, 2018, the Company entered into an agreement with Biose Industrie (“Biose”), a French corporation, in
which Biose has agreed to exclusively manufacture certain microbial biotherapeutic products for the Company and reserve agreed
upon manufacturing resources to conduct manufacturing runs for such products. Under the terms of this agreement, the Company
agreed to annual fees in the mid-six digits in consideration of both exclusivity for the manufacture of monoclonal microbials and
for a set minimum number of manufacturing runs per year. Exclusivity fees paid and any minimum commitments are expensed
as incurred. At December 31, 2019, aggregate minimum payments over the remaining contract life total approximately $1.3
million.
Litigation and Other Proceedings
The Company may periodically become subject to legal proceedings and claims arising in connection with on-going business
activities, including claims or disputes related to patents that have been issued or that are pending in the field of research on which
the Company is focused. The Company is not a party to any material litigation and does not have contingency reserves established
for any litigation liabilities.
In April 2019, the United States Patent and Trademark Office ("USPTO"), granted a third-party petition to initiate a post-
grant review of a patent issued to the University of Chicago, to which the Company has an exclusive license from the University
F-17
of Chicago. Although the Company believes that the subject patent is valid, there is a possibility that the USPTO could invalidate
the patent or require the University of Chicago to narrow the claims contained in the patent. Under the terms of the license
agreement, the Company is responsible for reimbursing the University of Chicago for patent defense.
10. Stockholders’ Equity (Deficit) and Convertible Preferred Stock
Common Stock
On April 27, 2018, the Company filed an amendment to its certificate of incorporation with the Secretary of State of the
State of Delaware to effect a 1-for-4.079 reverse stock split of the Company’s common stock. All share and per share data shown
in the consolidated financial statements and related notes have been retroactively revised to reflect the reverse stock split.
On May 11, 2018, the Company completed an IPO of 5,312,500 shares of its common stock for aggregate gross proceeds
of $85.0 million. The Company received approximately $75.8 million in net proceeds after deducting underwriting discounts and
commissions and other estimated offering expenses payable by the Company. Upon closing of the IPO, all of the outstanding
shares of convertible preferred stock automatically converted into 22,386,677 shares of common stock at the applicable conversion
ratio then in effect
On May 11, 2018, the Company filed a restated certificate of incorporation with the Secretary of the State of Delaware,
which became effective in connection with the closing of the IPO. Pursuant to the restated certificate of incorporation, the Company
is authorized to issue 200,000,000 shares of common stock and 10,000,000 shares of preferred stock.
On June 3, 2019, the Company filed a Registration Statement on Form S-3 (File No. 333-231911) (the “Shelf”) with the
SEC in relation to the registration of common stock, preferred stock, debt securities, warrants and/or units of any combination
thereof in the aggregate amount of up to $200.0 million for a period of up to three years from the date of the filing. The Company
also simultaneously entered into a sales agreement with Cowen and Company, LLC, as sales agent, providing for the offering,
issuance and sale by the Company of up to an aggregate $50.0 million of its common stock from time to time in “at-the-market”
offerings under the Shelf. As of December 31, 2019, no securities have been issued pursuant to the sales agreement.
Convertible Preferred Stock
Upon closing of the IPO in May 2018, all 91,315,295 outstanding shares of the Series A, Series A-1, Series A-2, Series A-3,
Series B and Series C Preferred Stock automatically converted into 22,386,677 shares of the Company’s common stock at the
applicable conversion ratio of 1-for-4.079. Prior to conversion, all shares of Preferred Stock accrued a cumulative dividend of 8%
per annum. Dividends for the applicable periods are included in net loss attributable to common shareholders on the consolidated
statement of operations through the conversion date. All accrued dividends earned on Preferred Stock were forfeited as of the
conversion.
In February and March 2018, the Company issued a total of 25,232,199 shares of Series C Preferred Stock at purchase price
of $3.23 for gross proceeds $81.5 million under the same terms as the Series B Preferred Stock.
11. Stock-Based Compensation
2018 Incentive Award Plan
The Company’s board of directors adopted on April 18, 2018, and the Company’s stockholders approved, the 2018 Incentive
Award Plan (the “2018 Plan”), which became effective May 8, 2018 and under which the Company may grant cash and equity-
based incentive awards to the Company’s employees, officers, directors, consultants and advisors. Following the effectiveness of
the 2018 Plan, the Company ceased making grants under the 2015 Stock Incentive Plan (as amended the “2015 Plan"). The 2018
Plan initially allowed the Company to grant awards for up to 1,344,692 shares of common stock plus that number of shares of
common stock subject to awards outstanding under the 2015 Plan, that are forfeited, lapse unexercised or are settled in cash. Each
year starting with 2019, the number of shares available for grants of awards under the 2018 Plan will be increased automatically
on January 1 by a number of shares of common stock equal to the lesser of 4% of the shares of common stock outstanding on the
final day of the preceding calendar year or the number of shares determined by the Company’s board of directors. Accordingly,
on January 1, 2019, the number of shares authorized for issuance under the 2018 Incentive Plan was increased by 1,273,031 shares
and on January 1, 2020 this number was further increased by 1,286,824 shares. The 2015 Plan continues to govern the terms and
conditions of the outstanding awards granted under it.
The exercise price of stock options granted under the 2018 Plan is equal to not less than the fair market value of a share of
the Company’s common stock on the grant date. Other terms of awards, including vesting requirements, are determined by the
board of directors and are subject to the provisions of the 2018 Plan. Stock options granted to employees generally vest over a
four-year period but may be granted with different vesting terms. Certain options provide for accelerated vesting in the event of
a change in control. Awards granted to non-employee consultants generally vest monthly over a period of one to four years. Stock
options granted under the 2018 Plan expire no more than 10 years from the date of grant. As of December 31, 2019, equity-based
incentive awards covering 2,214,826 shares of the Company’s common stock have been issued under the 2018 Plan, of which
F-18
217,093 shares have been canceled and none have been exercised. As of December 31, 2019, 1,063,503 shares of common stock
are available for future grant under the 2018 Plan, which includes 443,513 shares subject to awards that were originally granted,
and have since the effective date of the 2018 Plan been canceled or repurchased, under the 2015 Plan.
2015 Stock Incentive Plan
Prior to the approval of the 2018 Plan, the Company granted equity awards under the 2015 Plan, which originally provided
for grant of incentive stock options, non-qualified stock options, restricted stock awards, or RSAs, and other stock-based awards
to the Company’s employees, officers, directors, consultants and advisors.
The terms of equity award agreements, including vesting requirements, were determined by the board of directors and are
subject to the provisions of the 2015 Plan. Stock options granted to employees generally vest over a four-year period but may be
granted with different vesting terms. A limited number of awards contain performance-based vesting criteria and for such awards
that are deemed probable of vesting, the Company records expense in the period in which such determination is made through
any estimated remaining vesting period. Certain options provide for accelerated vesting in the event of a change in control. Awards
granted to non-employee consultants generally vest monthly over a period of one to four years. Stock options issued under the
2015 Plan expire no more than 10 years from the date of grant. As of the effectiveness of the 2018 Plan, the Company ceased
making awards under the 2015 Plan.
Under the 2015 Plan, the Company was authorized to grant equity awards up to an aggregate of 5,417,044 shares of common
stock. As of December 31, 2019, an aggregate of 5,758,518 options and other equity awards had been granted under the 2015
Plan, of which 1,185,268 have been exercised, 879,522 have been canceled and 18,468 have been repurchased as of December 31,
2019. A total of 113,006 shares previously reserved under the 2015 Plan that had not been exercised or were otherwise subject to
outstanding exercise awards were no longer authorized as of May 8, 2018.
Stock-Based Compensation Expense
Stock-based compensation expense included in the Company’s statements of operations is as follows (in thousands):
Research and development
General and administrative
Total stock-based compensation expense
Stock Options
Year Ended December 31,
2019
2018
2017
$
$
3,648
$
2,508
$
4,517
3,551
849
693
8,165
$
6,059
$
1,542
A summary of the Company’s stock option activity and related information is as follows:
Weighted
Average -
Exercise Price
Weighted
Average -
Remaining
Contractual Life
Aggregate
Intrinsic
Value(1)
(in thousands)
Shares
Options outstanding at December 31, 2018
Granted
Exercised
Canceled
Options outstanding at December 31, 2019
Exercisable at December 31, 2019
Vested and expected to vest as of December 31, 2019
4,917,811
1,510,850
$
$
(280,718) $
(456,469) $
5,691,474
2,427,373
5,691,474
$
$
$
5.64
11.04
1.82
9.08
6.99
4.30
6.99
7.88
7.05
7.88
$
$
$
5,543
4,253
5,543
(1) The aggregate intrinsic value of options is calculated as the difference between the exercise price of the stock options and
the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value
of the common stock as of the end of the period.
The Company had 3,264,101 unvested stock options outstanding as of December 31, 2019. The weighted-average fair value
of options granted during the years ended December 31, 2019, 2018 and 2017 was $7.46, $8.00 and $4.89, respectively. The
aggregate intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017 was $1.8 million, $1.0
million and $0.8 million, respectively.
F-19
When utilizing the Black-Scholes option-pricing model to determine the grant date fair value of stock options granted to
employees as well as the vesting or re-measurement date fair value for awards granted to non-employees, the Company used the
following weighted average, or ranges of, assumptions for options granted to employees and options granted to non-employees:
Employee option grants
Risk-free interest rate
Expected life (in years)
Volatility
Expected dividend rate
Year Ended December 31,
2019
2018
2017
2.28%
6.02
76.2%
0.00%
2.74%
6.17
77.0%
0.00%
2.03%
6.18
79.5%
0.00%
Expected Term: The expected term represents the period that the options granted are expected to be outstanding and is
determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term).
The expected life is applied to the stock option grant group as a whole as the Company does not expect substantially different
exercise or post-vesting termination behavior among its employee population.
Expected Volatility: The Company used an average historical stock price volatility of comparable public companies within
the biotechnology and pharmaceutical industry that were deemed to be representative of future stock price trends as the Company
does not have any trading history for its common stock.
Risk-Free Interest Rate: The Company based the risk-free interest rate over the expected term of the options based on the
constant maturity rate of U.S. Treasury securities with similar maturities as of the date of the grant.
Expected Dividend: The Company has not paid and does not anticipate paying any dividends in the near future. Therefore,
the expected dividend yield was zero.
Fair Value of Underlying Common Stock: Prior to the commencement of trading of the Company's common stock on the
Nasdaq Global Select Market, or Nasdaq, on May 9, 2018 in connection with the Company's IPO, the Company determined the
fair value of the underlying common stock based on input from management and approved by the Board of Directors, which
utilized the valuation of the Company’s enterprise value determined utilizing various methods including the back-solve method,
the option-pricing method, or OPM, or a hybrid of the probability-weighted expected return method, or PWERM, and the OPM.
The total enterprise value was then allocated to the various outstanding equity instruments, including the underlying common
stock, utilizing the option-pricing model. Following the Company's IPO, the fair value of the underlying common stock has been
determined by referencing the closing price on the Nasdaq on the date of each award.
Non-employee option grants
Risk-free interest rate
Expected life (in years)
Volatility
Expected dividend rate
Year Ended December 31,
2019
2018
2017
1.98%
7.63
76.0%
0.00%
2.71%
8.29
75.6%
0.00%
2.30%
9.43
78.9%
0.00%
The Company estimates the expected life of options granted based on the remaining contractual term of the option for options
granted to non-employees.
On January 30, 2018, the Company issued 250,000 shares of Series B Preferred Stock to a non-employee consultant as part
of the consideration for the service performed and completed in 2017. The Company recognized $0.7 million as general and
administrative expense in the consolidated statement of operations of which $0.1 million was recorded in 2018.
As of December 31, 2019, total unrecognized stock-based compensation expense relating to unvested stock options was
$18.2 million. This amount is subject to change as the unvested portion of the stock options granted to non-employees is subject
to re-measurement over the vesting period. This amount is expected to be recognized over a weighted average period of 2.39 years.
2018 Employee Stock Purchase Plan
The Company's board of directors adopted on April 18, 2018, and the Company’s stockholders approved, the 2018 Employee
Stock Purchase Plan (the “ESPP”), which became effective on May 8, 2018. A total of 336,356 shares of common stock were
initially reserved for issuance under the ESPP. In addition, the number of shares of common stock that may be issued under the
F-20
ESPP will automatically increase on the first day of each calendar year, beginning in 2020 and ending in 2028, by an amount equal
to the lesser of (i) 1% of the number of shares of the Company’s common stock outstanding on the last day of the applicable
preceding calendar year and (ii) an amount determined by the Company’s board of directors. The Company’s board of directors
determined not to increase the number of shares that may be issued under the ESPP on January 1, 2020. The Company's board of
directors has authorized an initial offering period under the ESPP commencing on February 1, 2020.
12. Income Taxes
The Company has recorded a tax provision for December 31, 2019 of $0.2 million. The Company did not record a tax benefit
for the periods presented due to the losses incurred and the need for a full valuation allowance on net deferred tax assets. The tax
expense recorded for the December 31, 2019 period primarily relates to current tax expense at the Company's UK subsidiary. The
difference between the income tax expense at the U.S. federal statutory rate and the recorded provision is primarily due to the
valuation allowance provided on all deferred tax assets. The Company’s loss before income tax for the periods presented was
generated in the United States with a small profit generated by the Company's subsidiary in the United Kingdom.
U.S. federal tax statutory rate
State taxes, net of federal benefit
Non-deductible stock compensation
Other non-deductible expenses
Credits
Change in valuation allowance
Other
Total
Deferred tax assets:
Net operating loss carryforwards
Research and development credits
Capitalized research and development, patent and start-up costs
Accrued expenses
Stock based compensation
Depreciation
Deferred tax assets before valuation allowance
Valuation allowance
Net deferred tax assets
December 31,
2019
2018
21.0 %
7.0 %
(0.6)%
(0.4)%
1.6 %
(29.1)%
0.3 %
(0.2)%
21.0 %
6.5 %
(1.0)%
(0.6)%
2.3 %
(28.2)%
— %
— %
December 31,
2019
2018
$
25,895
$
4,856
22,101
1,006
2,335
(295)
55,898
(55,898)
$
— $
26,339
2,721
360
918
1,017
(281)
31,074
(31,074)
—
As of December 31, 2019, the Company had approximately $96.1 million and $90.4 million of Federal and state Net Operating
Losses (“NOLs”), respectively. The Federal NOLs include $49.9 million which expire at various dates through 2037, and $46.2
million which carryforward indefinitely. The state NOLs expire at various dates through 2039. As of December 31, 2019, the
Company had federal and state research credits of $3.4 million and $1.9 million, respectively, which expire at various dates through
2039.
Realization of future tax benefits is dependent on many factors, including the Company’s ability to generate taxable income
within the net operating loss carryforward period. Under the Internal Revenue Code provisions, certain substantial changes in the
Company’s ownership, including the sale of the Company or significant changes in ownership due to sales of equity, have limited
and may limit in the future, the amount of net operating loss carryforwards which could be used annually to offset future taxable
income. The Company has not yet completed an analysis of ownership changes. The Company may also experience ownership
changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside the Company’s control.
As a result, the Company’s ability to use our pre-change NOLs to offset U.S. federal taxable income may be subject to limitations,
which could potentially result in increased future tax liability to the Company. In addition, at the state level, there may be periods
during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.
All NOLs generated post tax reform will have an indefinite life, are not subject to carryback provisions and limited to 80% of
income in any year.
F-21
The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets.
Management has considered the Company’s history of cumulative net losses incurred since inception and its lack of
commercialization of any products or generation of any revenue from product sales since inception and has concluded that it is
more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance
has been established against the net deferred tax assets as of December 31, 2019 and 2018, respectively. The valuation allowance
increased by $24.8 million in 2019 primarily due to increases in net operating losses and research and development credits.
As of December 31, 2019 and 2018, the Company had no unrecognized tax benefits, respectively. Interest and penalty
charges, if any, related to unrecognized tax benefits would be classified as income tax expense. The Company does not expect
any significant change in its uncertain tax positions in the next twelve months.
13. Net Loss Per Share
Basic and diluted net loss per common share is determined by dividing net loss attributable to common stockholders by the
weighted-average common shares outstanding during the period. The Company has computed diluted net loss per common share
after giving consideration to all potentially dilutive common shares, including options to purchase common stock, restricted
common stock, convertible preferred stock and warrants to purchase convertible preferred stock, outstanding during the period
determined using the if-converted and treasury stock methods, except where the effect of including such securities would be
antidilutive. Because the Company has reported net losses since inception, these potential common shares have been anti-dilutive
and therefore basic and diluted net loss per share have been equivalent.
The following table presents securities that have been excluded from the computations of diluted weighted-average shares
outstanding as they would be anti-dilutive:
Convertible preferred shares (as converted to common stock)
Warrant to purchase convertible preferred shares (as converted to common
stock) and common shares
Unvested common stock from early exercise of options
Stock options to purchase common stock
Total
14. Related Party Transactions
Year Ended December 31,
2019
2018
—
—
61,653
5,691,474
5,753,127
—
—
125,781
4,917,811
5,043,592
2017
16,139,518
47,628
257,876
3,179,536
19,624,558
The Company entered into an employment arrangement with Duncan McHale, an executive officer of Weatherden Ltd
(“Weatherden”), a United Kingdom based clinical development consulting firm, beginning in December 2017. Pursuant to the
terms of the agreement, the Company has agreed to pay Mr. McHale £0.3 million per year to serve as the Company’s Chief Medical
Officer. The Company receives clinical advisory services from Weatherden through a supply of service agreement that was entered
into during 2017 and, subsequently, a master services agreement in 2018. Duncan McHale, the Company’s Chief Medical Officer
is a part owner of Weatherden. During the years ended December 31, 2019, 2018 and 2017, the Company paid Weatherden $1.0
million, $0.7 million, and $0.3 million, respectively. As of December 31, 2019 and 2018, the amounts due to Weatherden were
$0.2 million and $0.2 million, respectively.
In June 2018, the Company entered into a subleasing arrangement with Ring Therapeutics (formerly known as VL46), an
affiliate of one of its stockholders, Flagship Venture Funds. Under the terms of the sublease, the Company will invoice VL46 for
an aggregate $0.9 million in rent payments which are due during the period from July 1, 2018 through May 31, 2020 plus any
related taxes and lease operating costs. As of December 31, 2019, $0.7 million related to this sublease agreement has been recorded
as an offset to rent expense within the consolidated statements of operations and comprehensive loss.
F-22
The Company entered into a consulting agreement with David Epstein (the "Consulting Agreement"), the Company's
Chairman of the Board, effective September 16, 2019 pursuant to which Mr. Epstein will provide strategic advisory and other
consulting services to the Company. The Consulting Agreement has a one year term and may be earlier terminated by either Mr.
Epstein or the Company upon 30 days’ notice, or 24 hours’ notice by the non-breaching party in the event of a breach. In accordance
with the terms of the Consulting Agreement, Mr. Epstein was granted an option to purchase 75,000 shares of the Company’s
common stock, which award vests in 36 equal monthly installments subject to his continued provision of consulting services to
the Company pursuant to the Consulting Agreement on the applicable vesting date. Under the Consulting Agreement, Mr. Epstein
also is entitled to receive (i) an annual equity award on each anniversary of the effective date of the Consulting Agreement in the
form of an option to purchase shares of the Company’s common stock having an aggregate grant date fair market value equal to
approximately $0.2 million, as determined by the Board in its discretion based on customary option pricing methodologies, which
award vests in full on the first anniversary of the grant date, subject to his continued provision of consulting services to the Company
pursuant to the Consulting Agreement on the applicable vesting date, and (ii) an aggregate annual cash consulting fee of $0.3
million for his consulting services. All of the foregoing options, to the extent then outstanding, will be subject to accelerated vesting
upon the occurrence of a change in control of the Company.
15. Selected Quarterly Financial Information (Unaudited)
The following table contains unaudited quarterly financial information for 2019 and 2018. The Company believes that the
following information reflects all normal recurring adjustments necessary for a fair statement of the information for the periods
presented. The operating results for any quarter are not necessarily indicative of results for any future period.
Three Months Ended
2019
(in thousands except per share data)
March 31
June 30
Total operating expenses
Total other expense (income), net
Income tax expense
Net loss
Net loss per share attributable to common stockholders,
basic and diluted
$
$
$
(in thousands except per share data)
March 31
June 30
Total operating expenses
Total other expense (income), net
Net loss
Convertible preferred stock dividends
Net loss attributable to common stockholders
Net loss per share attributable to common stockholders,
basic and diluted
$
$
$
$
$
20,804
(505)
—
(20,299) $
September 30
21,496
$
December 31
22,670
$
(261)
190
(22,599)
137
—
(21,633) $
21,387
(446)
—
(20,941) $
(0.64) $
(0.65) $
(0.67) $
(0.70)
Three Months Ended
2018
10,425
$
75
(10,500) $
(2,417)
(12,917) $
$
September 30
16,457
$
(600)
(15,857) $
—
(15,857) $
December 31
15,993
(550)
(15,443)
—
(15,443)
15,228
(82)
(15,146) $
(1,520)
(16,666) $
(3.29) $
(0.85) $
(0.50) $
(0.49)
F-23
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Board of Directors
Executive Officers
Stock Transfer Agent
Juan Andres
Chief Technical Operations and
Quality Officer, Moderna, Inc.
Professor the Lord Ara Darzi of
Denham
Chair of Surgery, Imperial College
London
David R. Epstein
Executive Partner, Flagship Pioneering
Balkrishan (Simba) Gill, Ph.D.
President & Chief Executive Officer,
Evelo Biosciences, Inc.
Theodose Melas-Kyriazi
Chief Financial Officer, Levitronix
Technologies LLC
David P. Perry
President and Chief Executive Officer,
Indigo Agriculture, Inc.
Nancy A. Simonian, M.D.
President and Chief Executive Officer,
Syros Pharmaceuticals, Inc.
Balkrishan (Simba) Gill, Ph.D.
Chief Executive Officer, President and
Treasurer
Mark Bodmer, Ph.D.
Chief Scientific Officer and President
of Research and Development
Duncan McHale, M.B.B.S, Ph.D.
Chief Medical Officer
Daniel S. Char
General Counsel and Secretary
Headquarters
620 Memorial Drive
Cambridge, MA 02139
Phone: 617-577-0300
Website
www.evelobio.com
American Stock Transfer & Trust
Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Phone: 800-937-5449
www.astfinancial.com
Stock Exchange
Evelo Biosciences, Inc.’s common
stock shares are listed and traded on
the Nasdaq Global Select Market
under the ticker symbol “EVLO”
Investor Relations
Jessica Cotrone
Phone: 617-577-0300
jcotrone@evelobio.com
© 2020 Evelo Biosciences, Inc.
Evelo Biosciences, Inc.
620 Memorial Drive
Cambridge, MA 02139
www.evelobio.com
BR299734-0420-10K