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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
For the Fiscal Year Ended December 31, 2020
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)
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(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90
days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
☐
☒
☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☒
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒
The aggregate market value of the registrant's the voting and non-voting common stock held by non-affiliates was approximately $112.8 million based on the closing price
of the registrant’s common stock on June 30, 2020, 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 March 5, 2021, there were 53,334,947 shares of the registrant's common stock outstanding.
Portions of the registrant’s definitive proxy statement for its 2021 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, 2020, are incorporated by reference into Part III of this
Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
TABLE OF CONTENTS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
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
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART III
Exhibits and Financial Statement Schedules
Form 10-K Summary
SIGNATURES
PART IV
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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 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.
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Factors that may cause actual results to differ materially from current expectations include, among other things, those set forth in
“Summary Risk Factors” and Part I, Item 1A. “Risk Factors,” below and 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 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.
SUMMARY RISK FACTORS
Our business is subject to numerous risks and uncertainties, including those described in Part I, Item 1A. “Risk Factors” in this
Annual Report on Form 10-K. You should carefully consider these risks and uncertainties when investing in our common stock. The principal
risks and uncertainties affecting our business include the following:
• 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. Moreover, our limited operating history may make it difficult to
evaluate the success of our business to date and to assess our future viability.
• 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.
• Our product candidates are based on targeting SINTAX™, the small intestinal axis, which is an unproven approach to therapeutic
intervention
• We are dependent on the success of our product candidates. If the product candidates do not successfully complete clinical
development or receive regulatory approval, our business may be harmed.
•
The regulatory approval process is lengthy, expensive and uncertain, and we may be unable to obtain regulatory approval for our
product candidates under applicable regulatory requirements of the United States and internationally. The denial or delay of any such
approval would delay commercialization of our product candidates and adversely impact our ability to generate revenue, our
business and our results of operations.
• We rely, and will continue to rely, on third parties to conduct our clinical trials for our product candidates, and those third parties may
not perform satisfactorily, including failing to meet deadlines for the completion of such trials.
• We do not have our own manufacturing capabilities and will rely on third parties to produce additional clinical supplies, if needed, and
commercial supplies of our product candidates. This reliance on third parties increases the risk that we will not have sufficient
quantities of our product candidates or such quantities at an acceptable cost, which could delay, prevent or impair our development
or commercialization efforts.
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If we are unable to establish our own sales, marketing and distribution capabilities, or enter into agreements with third parties to sell
and market our product candidates, we may not be successful in commercializing our product candidates if and when they are
approved, and we may not be able to generate any revenue.
The successful commercialization of our product candidates will depend in part on the extent to which governmental authorities and
health insurers establish coverage, adequate reimbursement levels and pricing policies. Failure to obtain or maintain coverage and
adequate reimbursement for our product candidates, if approved, could limit our ability to market those products and decrease our
ability to generate revenue.
• We face substantial competition, which may result in others discovering, developing or commercializing drugs before or more
successfully than we do.
• Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory
approval, cause us to suspend or discontinue clinical trials, limit the commercial
profile of an approved label, or result in significant negative consequences following marketing approval, if any.
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If we are unable to adequately protect our proprietary technology, or obtain and maintain issued patents which are sufficient to
protect our product candidates, other companies could compete against us more directly, which would have a material adverse
impact on our business, results of operations, financial condition and prospects.
The COVID-19 pandemic has adversely impacted and may continue to adversely impact, our business, including our preclinical
studies and clinical trials, results of operations and financial condition.
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Item 1. Business
Overview
PART I
Evelo Biosciences is discovering and developing a new class of orally delivered investigational medicines that are intended to act on
cells in the small intestine to produce therapeutic effects throughout the body. The target cells in the small intestine play a central role in
governing human immune, metabolic and neurologic systems. We refer to this biology as the small intestinal axis, or SINTAX™. We have
built a platform to discover and develop novel oral medicines which target the small intestinal axis. By harnessing the small intestinal axis, we
have the potential to transform healthcare via medicines that have the potential to be effective, safe, convenient and affordable and to
thereby treat patients at all stages of diseases and to treat patients globally.
Our first product candidates are orally delivered pharmaceutical preparations of naturally occurring, specific single strains of microbes.
In preclinical models, our product candidates engaged immune cells in the small intestine and drove changes in systemic biology without any
observed systemic exposure. We have observed in early clinical trials and preclinical studies that our approach led to modulated immune
responses throughout the body by acting on the small intestinal axis. Our most advanced product candidate, EDP1815 is being developed
for the treatment of inflammatory diseases and the hyperinflammatory response associated with COVID-19. Additional product candidates
include EDP1867 and EDP2939 for the treatment of inflammatory disease and EDP1908 for the treatment of cancer.
Orally delivered SINTAX medicines have the potential to address patient needs at all stages of disease due to their potentially superior
characteristics over current therapies:
•
In preclinical models, our product candidates have acted through multiple clinically relevant and validated biological pathways. By
acting on multiple pathways simultaneously, we believe our product candidates could impact disease in ways that are not possible
with current single-target or dual-target therapies.
• Our data suggest that our product candidates for inflammatory diseases have the potential to resolve disease causing inflammation
whilst preserving immunity, a significant potential benefit. Anti-inflammatory therapies often cause significant immune suppression.
• We believe our product candidates are likely to be well-tolerated as they are derived from naturally occurring, specific single
commensal strains of human bacteria, have not shown systemic exposure in clinical trials, and have been cleared from the body with
no colonization of the gut.
• Our products candidates are formulated as oral medicines, which many patients prefer over injectable biologics and burdensome
application of topical drugs.
• We have developed robust manufacturing processes for our product candidates, allowing for large-scale production and the potential
for global, room-temperature stable distribution of our product candidates at affordable prices.
• We believe our discovery and development of oral SINTAX medicines has the potential to be more efficient than other product
classes such as cell therapy, monoclonal antibodies and small molecules. We believe that our product candidates will not require the
lengthy target validation and compound discovery requirements of conventional drug discovery.
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
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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 SINTAX medicines across the full spectrum of disease severity, including in
patients with mild and moderate forms of disease. We intend to pursue what we believe to be the inherent advantages of SINTAX
medicines to enable use in all stages of disease.
• Advance and scale our SINTAX medicine 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 microbial library and enhance our
proprietary in vitro and in vivo assays 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 SINTAX medicine. In the future, we intend to invest in 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 some of 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 medicines. 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.
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, atopic dermatitis, 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 2019, three of the fifteen top selling drugs
worldwide were anti-TNFα antibodies, with HUMIRA alone generating worldwide annual net sales of $19.7 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
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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.
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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 1b clinical data to date also support this theory.
SINTAX medicines 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 manufacturing. We have developed proprietary insights and tools that enhance our ability to
produce pharmaceutical compositions of microbes at scale. This allows us to deliver potentially therapeutic doses of appropriately formulated
strains.
We are developing SINTAX medicines- whole, inactivated microbes and bacterial extracellular vesicles ("EVs") 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. SINTAX medicines are orally delivered pharmaceutical compositions of specific strains of microbes or EVs from specific strains of
microbes.
We believe key features and advantages of our SINTAX medicine candidates are:
•
Single strain. Our product candidates are pharmaceutical compositions of single strains of microbes or EVs produced by 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.
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• Orally administered formulation. We intend to deliver our initial product candidates orally in formulations designed for targeted
release 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 SINTAX medicines, if approved.
•
Limited systemic exposure. In preclinical studies, we observed that our product candidates 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 believe that these
factors suggest that SINTAX medicines may have limited systemic off-target side-effects. Our Phase 1b clinical data to date support
this potential.
• Action on multiple clinically relevant and validated pathways. Our preclinical data have shown that SINTAX medicines 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. Additionally, our data suggest that
SINTAX medicines resolve inflammation whilst preserving immunity, a significant potential benefit compared to other anti-
inflammatory therapies that often cause significant immune suppression.
Given these expected features, we believe that SINTAX medicines may have a number of advantages in comparison to other
immunotherapies such as antibodies, cell therapies and small molecules.
SINTAX Medicine 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 SINTAX 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 SINTAX medicines 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 SINTAX medicines passed through the gut and did not
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distribute around the body or engraft in the gut. Furthermore, this preclinical activity was observed to be independent of the ability of our
SINTAX medicines to replicate. From this observation, we believe that activity of SINTAX medicines is likely driven by recognition of
structural motifs on the surface of microbes or EVs by immune cells in the small intestine. Our candidate selection process may include an
additional manufacturing step for our whole-microbe candidates to develop them as non-replicating product candidates, such as EDP1867.
We are also developing reduced forms of our whole-microbe product candidates, or EVs, to target SINTAX. Preclinical studies suggest that
this approach may further improve potency and activity and we anticipate the initiation of clinical development of EDP2939 and EDP1908,
our initial EV product candidates, in 2022.
Formulation. In our first clinical trials, product candidates were formulated as capsules containing lyophilized powder for targeted
release in the small intestine. We have continued to explore potency and dose as it relates to formulation and have developed manufacturing
processes that increase the concentration of EDP1815. Additionally, we have developed a tablet formulation with the higher concentration of
EDP1815, also for targeted release in the small intestine. We have tested capsules with the higher concentration in a human experimental
model of inflammation and we intend to test capsules and tablets with the higher concentration of EDP1815 in patients in our on-going Phase
1b clinical trial during 2021. We are committed to continuously investing in formulation development to improve the potency and 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 SINTAX
medicines into therapies. Our expertise and investments in laboratory and pilot scale development have allowed us to mitigate challenges
inherent to manufacturing of SINTAX medicines at clinical scale.
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, EV purification,
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 cGMP regulations. For
each of our clinical product candidates, we have observed therapeutic activity in lyophilized powder form and in compressed tablet form in
relevant preclinical mouse models and, in the case of EDP1815, in clinical studies using lyophilized powder in capsules.
We have been able to manufacture SINTAX medicines 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 SINTAX
medicines.
Product Development Strategy and Portfolio
We are advancing SINTAX medicines 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, including in neuroinflammation and metabolism, 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.
In addition to product candidates based on whole, inactivated microbes, which include EDP1815 and EDP1867, we continue to advance
the development of orally delivered EVs. EVs are lipoprotein nanoparticles naturally produced by some bacteria. EVs have the potential to
enable increased target engagement driven by their small size as they are approximately 1/1,000 the volume of whole microbes. We have
nominated two EV clinical candidates, EDP2939 and EDP1908 for the treatment of inflammatory diseases and cancer respectively and
anticipate first-in-human studies of this new product form in 2022.
th
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Our ongoing and planned clinical trials for our current product candidates are illustrated below.
Notes:
1
The Phase 2/3 TACTIC-E study is an investigator-sponsored study being conducted by Cambridge University Hospitals NHS Foundation Trust
The Phase 2 trial is in collaboration with Rutgers University and Robert Wood Johnson University Hospital
Evelo is conducting Phase 1b studies on increased concentration and tablet formulations of EDP1815
2
3
Inflammatory Diseases Portfolio
We have three candidates in development for inflammatory diseases. EDP1815 is a whole-microbe product candidate currently in a
Phase 2 trial for the treatment of psoriasis, with plans underway for an additional Phase 2 trial in atopic dermatitis, following positive Phase
1b data announced in December 2020 and January 2021. Additionally, we advanced EDP1867, an inactivated, whole-microbe product
candidate, into a Phase 1b study in February 2021 in patients with atopic dermatitis. EDP2939 is our first product candidate based on EVs,
and we anticipate initiation of clinical development of this product candidate in 2022.
EDP1815
EDP1815 is an investigational oral biologic being developed for the treatment of inflammatory diseases. It is a single strain of
Prevotella histicola, selected for its specific pharmacology.
Human Experimental Model of Inflammation
In addition to testing our product candidates in patients with inflammatory disease, we also have employed a human experimental
model of inflammation in healthy volunteers. This model is very similar in design to a standard preclinical model of T cell driven inflammation.
We have recently used this model to test two different concentrations of EDP1815 to investigate the relative effectiveness of the different
concentrations. A total of 32 volunteers were enrolled into the trial and treated with either EDP1815 (n=12 per formulation) or placebo (n=4
per formulation) daily for 28 days. The participants were immunized with an antigen used in preclinical inflammation experiments. After 28
days of daily oral dosing with EDP1815 or placebo, the participants were given a skin challenge with the same antigen, which causes
measurable skin inflammation a day later. Inflammation was determined by measuring five parameters in the skin at the challenge site.
The increased concentration of drug results from improvements made in the commercial-scale manufacturing process, referred to as
A2. This is the same active drug at four times the concentration compared to a prior manufacturing process, referred to as A'. Twelve
participants were dosed with A’ EDP1815. Another 12 participants were given the higher concentration A2 EDP185. Eight participants who
received a placebo were divided between the two treatment groups. The results are in the figure below.
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A2 EDP1815 is more effective than A’ at same total dose in human experimental model of inflammation
The higher concentration A2, given in fewer capsules, resulted in numerically superior reductions across the full range of skin scores
compared to A’ and placebo. A2 and A’ were given at the same total daily dose of drug. These results are consistent with preclinical data that
showed increased drug concentration resulted in increased activity. This is a key advance in our understanding of how to get more benefit
from SINTAX medicine candidates. We plan to evaluate tablets and capsules containing the higher concentration A2 EDP1815 in patients
with psoriasis in our on-going Phase 1b trial, and expect to report data in the third quarter of 2021. Results from the Phase 1b trial and our
on-going Phase 2 trial in psoriasis will position us to go forward into Phase 3 trials with an optimized dose and formulation of EDP1815,
which may further improve on the positive results already seen.
Psoriasis and atopic dermatitis
Phase 2 clinical trial in psoriasis
Based on previously reported positive clinical data in two cohorts of individuals with mild and moderate psoriasis in a Phase 1b
clinical trial, we advanced EDP1815 into a Phase 2 dose ranging trial, evaluating three doses of A' EDP1815 in capsules versus placebo in
approximately 225 individuals with mild and moderate psoriasis. The primary endpoint of the trial is the mean reduction in Psoriasis Area and
Severity Index (“PASI”) score at 16 weeks. Other clinical measures of psoriasis are also being evaluated. We initiated the Phase 2 clinical
trial in October 2020 and have completed enrollment and, therefore, now plan to report topline data for all patients in the study in the third
quarter of 2021. Clinical data from this trial, if positive, may enable us to advance directly into Phase 3 registrational trials, subject to end of
Phase 2 discussions with regulatory agencies.
We intend to evaluate EDP1815 in additional inflammatory disease indications, depending on the results from the Phase 2 trial.
Potential indications include psoriatic arthritis, axial spondylarthritis and rheumatoid arthritis.
Phase 1b clinical trial in atopic dermatitis
In November 2018, we initiated our ongoing Phase 1b double-blind placebo-controlled dose-escalating safety and tolerability trial of
EDP1815 in healthy volunteers and individuals with mild or moderate psoriasis or atopic dermatitis. The primary endpoint of the phase 1b
trial is safety and tolerability.
In December 2020 and January 2021, we reported positive clinical data from our Phase 1b trial in a cohort of patients with mild and
moderate atopic dermatitis (n=24), randomized 2:1 to receive EDP1815 in capsules or placebo for 56 days. EDP1815 was well-tolerated with
no treatment-related adverse events of moderate or severe intensity, and no serious adverse events. Secondary endpoints included a range
of established markers of clinical efficacy in atopic dermatitis, such the Eczema Area and Severity Index (“EASI”), the Investigator’s Global
Assessment times body surface area (“IGA* BSA”), and the SCORing Atopic Dermatitis (“SCORAD”) scores.
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Table 1
Clinical Measure
Treatment Difference between EDP1815 and Placebo Percentage Change at Day 56*
EASI
IGA*BSA
52% (p=0.062)
65% (p=0.022)
SCORAD
*Least Squares Mean Percentage Change From Baseline. Note that the Phase 1b trial was not powered to detect statistically significant
outcomes on efficacy endpoints: p-values presented are nominal values presented for illustrative purposes only.
55% (p=0.043)
The data showed consistent improvements in percentage change from baseline compared to placebo for all three clinical scores:
EASI, IGA*BSA, and SCORAD. In addition, 7 out of 16 (44%) patients treated with EDP1815 achieved an outcome of a 50% improvement
from baseline in EASI score by day 70, compared with 0% in the placebo group, showing sustained improvement in those patients
responding to EDP1815.
In addition to physician-reported clinical outcomes, this trial also assessed patient-reported outcomes. Treatment with EDP1815
resulted in clinically meaningful improvement in the Dermatology Life Quality Index (“DLQI”) and Patient-Oriented Eczema Measure
(“POEM”). These patient-reported outcomes capture the important impact of the disease on patients, including the domains of itch and sleep,
both of which saw improvements in patients receiving EDP1815 in the trial. All five measures of itch within the Pruritus-Numerical Rating
Scale (“Pruritus-NRS”), SCORAD, POEM, and DLQI showed greater improvements in the treated group at day 56 compared with placebo.
We believe these results provide further evidence that modulating SINTAX has the potential to drive significant clinical benefit without the
need for systemic exposure.
Subject to regulatory approval, we anticipate initiation of a Phase 2 trial of EDP1815 in atopic dermatitis in the third quarter of 2021.
COVID-19
EDP1815 is being evaluated in two ongoing clinical studies for the treatment of hospitalized COVID-19 patients. The first is a Phase
2 double-blind, placebo-controlled clinical trial evaluating the safety and efficacy of EDP1815 for the treatment of individuals diagnosed with
COVID-19 early in the course of their disease. The trial initially will evaluate 60 individuals to determine if early intervention with EDP1815
can prevent the progression of COVID-19 symptoms and the development of COVID-Related complications. Individuals who have presented
at the emergency room within the last 36 hours and tested positive for SARS-CoV-2 are randomized 1:1 to receive the capsule formulation of
EDP1815 or placebo for 14 days, along with the standard of care. The primary endpoint is reduced requirements for oxygen therapy, as
measured by the ratio of oxygen saturation (SpO2) / fraction of inspired oxygen (FiO2). Key secondary endpoints include total symptom
duration, progression along the World Health Organization (“WHO”) scale of disease severity, and mortality. The trial is being led by Reynold
A. Panettieri, Jr., M.D., Vice Chancellor for Translational Medicine and Science at Rutgers Biomedical and Health Sciences and Professor of
Medicine at Rutgers Robert Wood Johnson Medical School.
EDP1815 is also included as a treatment arm in the TACTIC-E clinical trial. TACTIC-E is a Phase 2/3 randomized trial, sponsored by
Cambridge University Hospitals NHS Foundation Trust, that is expected to evaluate up to 469 patients per arm at Addenbrooke’s Hospital
and other leading clinical centers in the United Kingdom and select international sites. The trial is investigating the safety and efficacy of
certain experimental therapies in the prevention and treatment of life-threatening complications associated with COVID-19 in hospitalized
individuals at early stages of the disease. The trial is enrolling individuals with COVID-19 who have identified risk factors for developing
severe complications and are at risk of progression to the intensive care unit or death. The primary outcome measure of the trial is time to
incidence (up to day 14) of any one of the following: death, mechanical ventilation, extracorporeal membrane oxygenation, cardiovascular
organ support, renal failure, hemofiltration or dialysis. Secondary outcome measures include duration of stay in hospital, duration of oxygen
therapy, changes in biomarkers associated with COVID-19 progression, and time to clinical improvement.
As a result of the varying infection rates and resulting hospitalizations that have occurred with the pandemic, we experienced slower
than expected enrollment early on in both trials and now expect to report data from the clinical trial conducted at the Robert Wood Johnson
University Hospital and interim safety data and futility
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analysis from TACTIC-E in the second quarter of 2021. In order to expedite patient recruitment and expand access to potential therapies for
COVID-19, new trial sites have been opened for TACTIC-E, including in the United Kingdom and Mexico.
If EDP1815 is successfully developed and approved as a treatment for COVID-19, we believe that we could rapidly scale the
manufacturing of EDP1815 to supply the drug at a reasonable cost. If approved and established as effective for early intervention, we expect
that oral EDP1815 could also be useful in the outpatient setting to control the community impact of the COVID-19 pandemic. If the Phase 2
trials are successful in COVID-19, we plan to investigate EDP1815 as a potential therapy for other diseases, such as influenza infection, in
which hyperinflammation and cytokine storm can play a key role.
EDP1867
EDP1867 is an inactivated investigational oral biologic being developed for the treatment of 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 multiple pathways of inflammation. This observed activity suggests a number of possible initial clinical
indications to pursue for EDP1867, including TH2-dependent inflammation, which underlies atopic diseases and a large spectrum of asthma.
We initiated our first Phase 1b clinical trial of EDP1867 in healthy volunteers and patients with moderate atopic dermatitis in February of 2021
and expect to report interim data in the fourth quarter of 2021.
EDP2939
EDP2939 is an EV investigational oral biologic being developed for the treatment of inflammatory diseases. EDP2939 is the first EV
product candidate we have nominated in our inflammation program and we anticipate initiation of clinical development in 2022.
Inflammation Preclinical Data
Each of our product candidates in our inflammation program have demonstrated the potential 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. Importantly, pre-clinical experiments
and human biomarker data from the EDP1815 Phase 1b clinical trial in patients with psoriasis, suggest that SINTAX medicines are
inflammation resolving and are not immunosuppressive.
Inflammation Development Strategy
We selected mild-to-moderate psoriasis and atopic dermatitis, the most common type of eczema, as indications for first-in-human
studies based upon our preclinical data, unmet 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 topical steroids, which either inadequately control inflammation, are not safe for long-term use, or are inconvenient and
burdensome in application, leading to poor adherence and reduced efficacy in a real-world setting. 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 majority of eligible patients do not receive
biologics. Many patients are uncomfortable with high-cost, injectable antibody therapies or with the toxicity concerns and monitoring
requirements of systemic immunosuppressants. There is a large need across the spectrum of disease severity, and especially for midline,
pre-biologic patients, for a safe and well-tolerated oral medicine that resolves the systemic inflammation that drives psoriasis and atopic
dermatitis.
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.
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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
SINTAX medicines 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 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 are developing SINTAX medicines for the treatment of multiple cancer types.
EDP1908
In December 2020, we announced EDP1908 as our lead product candidate in oncology following presentation of preclinical data at the
Society for Immunotherapy for Cancer meeting in November 2020. Preclinical data presented showed that orally administered EDP1908, an
EV, resulted in superior tumor growth control versus either the parent microbial strain or anti-PD-1 therapy, with an observed dose-dependent
reduction in tumor growth. We anticipate initiation of clinical development in 2022.
Preclinical data suggests that EDP1908 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 EDP1908 stimulated upregulation of the
immune response to tumors. Oral administration of EDP1908 in preclinical mouse models resulted in robust, dose-dependent anti-tumor
activity superior to that of anti-PD-1 using different immune mechanisms. The effects were at least comparable to those reported in the
literature for intratumorally administered immune stimulators.
We believe that EDP1908, and possibly additional EV product candidates, have the potential to broaden the base of cancer
immunotherapy and augment current standard-of-care therapies. Treatment with EDP1908 in syngeneic mice suggested a variety of
potential effects on innate and adaptive immunity, including activated IFNγ-positive cytolytic and helper lymphocytes, dendritic cells, and
interferon gamma-induced protein 10 (IP-10) in the tumor microenvironment. Fluorescent biodistribution analysis showed that EDP1908 was
not detected outside the gastrointestinal tract. These data suggest that EDP1908 activated innate immunity locally on host immune cells in
the gut and triggered distal immune responses within the tumor microenvironment, with no apparent adverse safety or tolerability issues. We
believe that oral administration of EDP1908 has the potential to offer an improved safety profile compared to systemically - or intratumorally-
administered immunotherapy agents as well as broader potential for combination regimens with existing therapies.
Manufacturing
We have developed proprietary methods for the manufacture of pharmacologically active whole microbe and EVs that are scalable and
transferable to cGMP manufacturing facilities. Microbes are isolated, grown and purified in a manner analogous to the manufacture of
pharmaceutical drugs. The whole microbe and EV manufacturing process produces drug substance in a powder form that makes our product
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 our product candidates. We expect that these controlled
manufacturing processes and analytical methods will allow us to produce and release cGMP-compliant 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 contract manufacturing organizations (“CMOs”) 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
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conducted by our CMOs. Our agreements with CMOs include confidentiality and intellectual property provisions to protect our proprietary
rights to our SINTAX medicine candidates.
We expect our CMOs to meet manufacturing requirements and drug supply required by our clinical studies. In some instances, we have
reserved resources from CMOs for the development and manufacture of our product 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 CMOs at the appropriate time. In anticipation of a possible near-term need for commercial supplies of EDP1815, we
have established relationships with CMOs who have the capacity to rapidly scale the manufacturing of EDP1815.
Process development and manufacturing are critical for the development of whole microbe and EV product candidates. We believe our
internal expertise and external partnerships have allowed us to address unique challenges associated with whole microbe and EV
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 SINTAX medicines 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 robust manufacturing processes. We continue to optimize processes across a wide range of parameters in
fermentation and formulation.
Our 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
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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.
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 March 5, 2021, our patent portfolio consisted of twelve issued U.S. patents, one European patent, one
Singaporean patent, and 51 patent families, which include composition, method of use, formulation, and manufacturing process claims.
Additionally, a Notice of Allowance has been received for one application in the United States. Of the U.S. patents in our portfolio, seven are
owned by us, and five are exclusively licensed from the Mayo Clinic Foundation for Medical Education and Research, an affiliate of Mayo
Clinic, (the "Mayo Clinic"). The European patent is owned by us, and the Singaporean patent is exclusively licensed from the University of
Chicago. Of the patent families in our portfolio, 49 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:
•
Formulation platforms in which applications that issue as a patent are expected to expire in 2038 to 2041.
• Manufacturing platforms in which applications that issue as a patent are expected to expire in 2041.
• Modality platforms in which applications that issue as a patent are expected to expire in 2038 to 2041.
•
Inflammation portfolio:
▪
▪
▪
EDP1815, consisting of five issued U.S. patents in-licensed from the Mayo Clinic, covering compositions and methods of use
(the patents from the Mayo Clinic are expected to expire in 2030) and ten patent families we own directed to compositions,
methods of use, formulations and manufacturing processes. Any applications claiming priority to these applications we own
that issue as patents are expected to expire in 2040 to 2041;
EDP1867, consisting of six patent families we own directed to compositions, methods of use and formulations. Any
applications claiming priority to these applications that issue as patents are expected to expire in 2039 and 2041; and
EDP2939, 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 2038 and 2042.
• Oncology portfolio:
▪
EDP1908, 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 2041.
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▪
An oral oncology platform exclusively licensed from the University of Chicago, consisting of 24 pending applications and one
issued patent in Singapore. Patents in this family are expected to expire in 2036.
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 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. 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
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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.
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.
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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 reserved manufacturing resources for the manufacture of our drug substance according to a specified schedule of
manufacturing runs over a three-year period. We were 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 did not use committed manufacturing resources, we were required to pay Biose for
these resources unless Biose was able to re-sell unused runs.
In addition to manufacturing resources, this agreement included exclusivity provisions, which ensured that we were Biose’s exclusive
customer for the manufacture of certain microbial biotherapeutic products. We were required to pay annual fees in the mid six digits to Biose
in consideration for these exclusivity provisions.
The term of the agreement was three years from the effective date. We had the right to terminate the agreement at any time with prior
notice within a specified period to Biose, or if there was a change of control of Biose that adversely affected our interest. In the event that we
terminated at will, we were 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 had the right to terminate if the other party
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materially breached the agreement and did not cure such breach within a specified period or if either party became bankrupt or insolvent, or
was dissolved or liquidated. The agreement expired on February 15, 2021 in accordance with its terms.
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.
Cambrex Master Services Agreement
In December 2020, we entered into a development and clinical master services agreement with Halo Pharmaceutical, Inc. d/b/a
Cambrex Whippany (“Cambrex”). Pursuant to the agreement, Cambrex has agreed that it will perform manufacturing process development,
manufacturing, packaging, related analytical and storage services for us, as mutually agreed by the parties from time to time in work orders.
Under the terms of the agreement, we have agreed to pay service fees to Cambrex and to reimburse Cambrex for purchasing excipients,
components, consumables, raw materials, packaging and other items necessary for Cambrex to perform the services, as mutually agreed in
a work order. We will supply active pharmaceutical ingredients to Cambrex to enable it to perform the services.
At our request or upon expiration or termination of the agreement, Cambrex has agreed to provide technical assistance to us, at our
cost, to implement the technology transfer of the manufacturing processes developed by Cambrex under the agreement to us and of related
analytical testing methodologies to us or a third party designated by us.
Unless earlier terminated, the agreement will expire on the later of (i) five years from the effective date or (ii) six months after the
expiration or termination of all work orders. We may terminate the agreement or any work order at any time upon 60 days or 5 business days,
respectively, prior written notice to Cambrex. In addition, either party may terminate for an uncured material default or if the other party
becomes bankrupt or insolvent.
The agreement contains customary representations, warranties and covenants by Evelo, indemnification obligations of Evelo and
Cambrex, and other obligations of the parties.
Collaboration
Merck-MSD International GmbH
In November 2018, we entered into a clinical trial collaboration agreement with Merck under which we are sponsoring and conducting 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.
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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, TYK2, 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. In more mild disease segments, we may face competition from companies marketing or developing topical formulations of
small molecules for inflammatory skin diseases, including Pfizer Inc., Arcutis Biotherapeutics Inc., and Dermavant Sciences Ltd.
Significant competition exists in the immuno-oncology field, where we are developing product candidates. Although our SINTAX
medicine approach is unique from most other existing or investigational therapies in immuno-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 SINTAX medicines 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.
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
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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.
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;
approval by an institutional review board (“IRB”), or ethics committee at each clinical site before the clinical trial is commenced;
performance of adequate and well-controlled human clinical trials to establish the safety, purity and potency of the product candidate
for each proposed indication, conducted in accordance with the FDA’s good clinical practice ("GCP") requirements;
preparation and submission to the FDA of a BLA after completion of all pivotal trials;
satisfactory completion of an FDA Advisory Committee review, if applicable;
a determination by the FDA within 60 days of its receipt of a BLA to file the application for review;
satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product candidate is produced to
assess compliance with cGMP regulations, and to assure that the facilities, methods and controls are adequate to preserve the
biological product’s continued safety, purity and potency, and of selected clinical investigation sites to assess compliance with GCP;
and
•
FDA review and approval of the BLA prior to any commercial marketing, sale or shipment of the product.
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. An IND is a request for authorization from the FDA to administer an investigational new drug to
humans. The central focus of an IND submission is on the general investigational plan and the protocol(s) for clinical trials. 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. 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
clinical trials 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.
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Clinical trials involve the administration of the product candidate to human subjects under the supervision of qualified investigators in
accordance with GCPs, which include the requirement that all research subjects provide their informed consent for their participation in any
clinical trial. 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 IRB for each investigator site proposing to participate in a clinical trial must also review and approve the clinical trial and its
informed consent form 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 or that the trial is unlikely to meet its stated objectives. Some clinical trials also include oversight by an
independent group of qualified experts organized by the clinical trial sponsor, known as a data safety monitoring board, which provides
authorization for whether or not a trial may move forward at designated check points based on access to certain data from the trial and may
halt the clinical trial if it determines that there is an unacceptable safety risk for subjects or other grounds, such as no demonstration of
efficacy. There are also requirements governing the reporting of ongoing clinical trials and clinical trial results to public registries.
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 - the investigational product is initially introduced into healthy human subjects or patients with the target disease or
condition. These trials 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 - the investigational product is administered 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. Multiple
Phase 2 clinical trials may be conducted to obtain information prior to beginning larger and more expensive Phase 3 clinical trials.
Phase 3 - the investigational product is administered 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. Concurrent with clinical trials, biotechnology 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.
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.
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
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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, 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 BLAs designated 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. If
the FDA determines that the application, manufacturing process or manufacturing facilities are not acceptable, it will outline the deficiencies
in the submission and often will request additional testing or information. Notwithstanding the submission of any requested additional
information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.
After the FDA evaluates a BLA and conducts inspections of manufacturing facilities where the investigational product and/or its drug
substance will be produced, the FDA may issue an approval letter or a Complete Response Letter (“CRL”). An approval letter authorizes
commercial marketing of the product with specific prescribing information for specific indications. A CRL will describe all of the deficiencies
that the FDA has identified in the BLA, except that where the FDA determines that the data supporting the application are inadequate to
support approval, the FDA may issue the CRL without first conducting required inspections, testing submitted product lots, and/or reviewing
proposed labeling. In issuing the CRL, the FDA may recommend actions that the applicant might take to place the BLA in condition for
approval, including requests for additional information or clarification. The FDA may delay or refuse approval of a BLA if applicable regulatory
criteria are not satisfied, require additional testing or information and/or require post-marketing testing and surveillance to monitor safety or
efficacy of a product.
If regulatory approval of a product is granted, such approval will be granted for particular indications and may entail limitations on the
indicated uses for which such product may be marketed. For example, the FDA may approve the BLA with a Risk Evaluation and Mitigation
Strategy (“REMS”), to ensure the benefits of the product outweigh its risks. A REMS is a safety strategy implemented to manage a known or
potential serious risk associated with a product and to enable patients to have continued access to such medicines by managing their safe
use, and could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution
methods, patient registries and other risk minimization tools. The FDA also may condition approval on, among other things, changes to
proposed labeling or the development of adequate controls and specifications. Once approved, the FDA may withdraw the product approval
if compliance with pre- and post-marketing requirements is not maintained or if problems occur after the product reaches the marketplace.
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 of the product based on the results of these post-marketing studies.
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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.
For example, a product candidate 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 applies to
the combination of the product candidate and the specific indication for which it is being studied. 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 FDA may review portions of the marketing application before the sponsor submits the
complete application, if the sponsor provides a schedule for the submission of the sections of the BLA, the FDA agrees to accept sections of
the BLA and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of
the BLA.
In addition, a product candidate 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 product candidate 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 development program beginning as early as Phase 1, and FDA organizational commitment to expedited development,
including involvement of senior managers and experienced review staff in a cross-disciplinary review, where appropriate.
Any product candidate submitted to the FDA for approval, including a product candidate 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 BLA is eligible for Priority Review if the product candidate is designed to treat a serious or life-threatening
disease or condition, and if approved, would provide a significant improvement in safety or effectiveness in the treatment, diagnosis or
prevention of a serious disease or condition.
Additionally, product candidates studied for their safety and effectiveness in treating serious or life-threatening diseases or conditions
may receive 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. As a condition of accelerated approval, the FDA will
generally require the sponsor to perform adequate and well-controlled post-marketing clinical trials to verify and describe the anticipated
effect on irreversible morbidity or mortality or other clinical benefit. Products receiving accelerated approval may be subject to expedited
withdrawal procedures if the sponsor fails to conduct the required post-marketing clinical trials or if such trials fail to verify the predicted
clinical benefit. In addition, the FDA currently requires as a condition for accelerated approval pre-approval of promotional materials, which
could adversely impact the timing of the commercial launch of the product.
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.
Orphan drug designation and exclusivity
Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition,
defined as a disease or condition with a patient population of fewer than 200,000 individuals in the United States, or a patient population
greater than 200,000 individuals in the United States and when there is no reasonable expectation that the cost of developing and making
available the drug or biologic in the United States will be recovered from sales in the United States for that drug or biologic. Orphan drug
designation must be requested before submitting a BLA. After the FDA grants orphan drug designation, the generic identity of the therapeutic
agent and its potential orphan use are disclosed publicly by the FDA.
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If a product that has orphan drug designation subsequently receives the first FDA approval for a particular active ingredient for the
disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve
any other applications, including a full BLA, to market the same biologic for the same indication for seven years, except in limited
circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity or if the FDA finds that the holder of the
orphan drug exclusivity has not shown that it can assure the availability of sufficient quantities of the orphan drug to meet the needs of
patients with the disease or condition for which the drug was designated. Orphan drug exclusivity does not prevent the FDA from approving a
different drug or biologic for the same disease or condition, or the same drug or biologic for a different disease or condition. Among the other
benefits of orphan drug designation are tax credits for certain research and a waiver of the BLA application user fee.
A designated orphan drug many not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for
which it received orphan designation. In addition, orphan drug exclusive marketing rights in the United States may be lost if the FDA later
determines that the request for designation was materially defective or, as noted above, if a second applicant demonstrates that its product is
clinically superior to the approved product with orphan exclusivity or the manufacturer of the approved product is unable to assure sufficient
quantities of the product to meet the needs of patients with the rare disease or condition.
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 pursuant to FDA approvals remain 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 BLA sponsors and their 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, untitled 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;
• mandated modification of promotional materials and labeling and the issuance of corrective information;
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the issuance of safety alerts, Dear Healthcare Provider letters, press releases and other communications containing warnings or
other safety information about the product; or
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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. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the
best treatment for many patients in varied circumstances. 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.
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.
Biosimilarity, which requires that there be no clinically meaningful differences between the biological product and the reference product
in terms of safety, purity, and potency, can be shown through analytical studies, animal studies, and a clinical trial or trials. Interchangeability
requires that a product is biosimilar to the reference product and the product must demonstrate that it can be expected to produce the same
clinical results as the reference product in any given patient and, for products that are administered multiple times to an individual, the
biologic and the reference biologic may be alternated or switched after one has been previously administered without increasing safety risks
or risks of diminished efficacy relative to exclusive use of the reference biologic.
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. 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, a biological product can also obtain pediatric market exclusivity in the United States. Pediatric exclusivity, if granted, adds
six months to existing exclusivity periods and patent terms. This six-month exclusivity, which runs from the end of other exclusivity protection
or patent term, may be granted based on the voluntary completion of a pediatric clinical trial in accordance with an FDA-issued “Written
Request” for such a trial. The BPCIA is complex and continues to be interpreted and implemented by the FDA. In addition, government
proposals have sought to reduce the 12-year reference product exclusivity period. Other aspects of the BPCIA, some of which may impact
the BPCIA exclusivity provisions, have also been the subject of recent litigation. As a result, the ultimate impact, implementation, and impact
of the BPCIA is subject to significant uncertainty.
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.
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Centralized procedure-Under the centralized procedure, following the opining of the European Medicines Agency (“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:
• 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.
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
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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 (the
“EU”). Under this system, an applicant must obtain prior approval from the competent national authority of the 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 Member State and further detailed in applicable guidance
documents.
In April 2014, a new Clinical Trials Regulation, (EU) No 536/2014, (the “Clinical Trials Regulation”) was adopted. The Clinical Trial
Regulation is expected to enter into force by the end of 2021 but this could be delayed. The Clinical Trials Regulation is directly applicable in
all the European Union Member States and will supersede the Clinical Trials Directive 2001/20/EC. 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 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 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 related to payments and other transfer of value made to physicians and other healthcare providers, 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.
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,
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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. 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. The U.S. Supreme Court is currently
reviewing the case, although it is unclear how the Supreme Court will rule. It is also unclear how other efforts, if any, to challenge, repeal or
replace the ACA will impact the ACA.
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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, which will remain in effect through 2030 with the exception of a temporary suspension from May
1, 2020 through March 31, 2021, absent additional congressional action. In January 2013, the American Taxpayer Relief Act of 2012 was
signed into law, which, among other things, reduced Medicare payments to several providers, and increased the statute of limitations period
for the government to recover overpayments to providers from three to five years.
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, 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 $69.6 million and $63.1 million for the years ended December 31, 2020 and 2019 respectively. We anticipate that a
significant portion of our operating expenses will continue to be related to research and development in 2021 as we continue to advance our
product candidates through clinical development.
Employees
As of March 5, 2021, we had 90 full-time employees, including 40 with M.D. or Ph.D. degrees. Of those full-time employees, 67 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.
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Since inception, we have incurred significant operating losses. Our net loss was $93.7 million and $85.5 million for the years ended
December 31, 2020 and 2019, respectively. As of December 31, 2020, we had an accumulated deficit of $292.5 million. Through
December 31, 2020, we have financed our operations through proceeds from equity offerings of our common stock, private placements of
our preferred stock and borrowings under loan and security agreements. We have devoted substantially all of our financial resources and
efforts to developing our platform, identifying potential product candidates and conducting preclinical and clinical trials. We are in the early
stages of developing our product candidates, and we have not completed the development of any product candidate. 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:
•
•
•
•
seek to initiate more and larger clinical trials of our product candidates;
seek to enhance our 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
•
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 studies or clinical trials 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.
During the first quarter of 2021 we raised net proceeds of $82.2 million from the issuance of common stock exclusive of certain other
fees payable by us. We expect that our existing cash and cash equivalents as of
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December 31, 2020, together with the net proceeds raised in the first quarter of 2021 from the issuance of our common stock will enable us
to fund our planned operating expenses and capital expenditure requirements into the third quarter of 2022. 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:
•
•
•
•
•
•
•
•
•
the progress and results of any ongoing and future clinical trials;
the cost of manufacturing clinical supplies of our product candidates, including EDP1815, EDP1867, EDP2939 and EDP1908;
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. Additionally, market volatility resulting from the COVID-19 pandemic or other factors could
also adversely impact our ability to access capital as and when needed. 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 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 or cease our operations. 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.
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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 trial 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 dated July 19, 2019 (as amended, the “2019 Credit Facility”) with K2 Health Ventures LLC ("K2HV")
for $45.0 million 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, 2020, the outstanding principal balance under the 2019
Credit Facility was $30.0 million, resulting from the closing of the first tranche of funding which occurred on July 19, 2019 and second tranche
of funding which occurred on July 14, 2020. The third tranche expired on January 15, 2021. 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.
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 technology platform to harness the small intestinal axis, with an initial focus on developing therapies in
immunology, specifically inflammatory diseases, and also oncology. While we believe our preclinical studies and clinical trials 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 oral biologics, limited efficacy, unacceptable safety profiles or other characteristics that indicate that they
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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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•
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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 CMOs, or establishing our own, commercial manufacturing capabilities;
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•
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•
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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 designed 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, EDP1867, EDP2939 and EDP1908 have the potential to work by modulating
systemic responses via interactions with cells in the small intestine. 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 pharmaceutical preparations derived from single strains of microbes to
modulate the immune system and other systems has not yet been proven in humans.
Our product candidates are an unproven approach to therapeutic intervention.
All of our product candidates are based on targeting SINTAX. 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 product
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candidates 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 singe strains of microbes, 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 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, EDP1867, EDP2939 and EDP1908 are designed to work by modulating the immune
system. While we have observed in preclinical studies that our product candidates have limited systemic exposure, the pharmacological
immune effects we induce are systemic. Systemic immunomodulation from taking our product candidates 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 product candidates 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
bacteria. 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 our product candidates. 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, EU Competent Authorities or comparable foreign regulatory
authorities, the IRBs at the institutions in which our clinical trials are conducted, or ethics committees, or the data safety monitoring board
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
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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:
•
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 our product candidates, and may negatively impact regulatory approval of, or demand for, our potential
products.
Our 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 therapeutic microbes. 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 therapeutic
microbes, 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 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
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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 trials due to adverse safety profiles or lack of efficacy, notwithstanding promising results in earlier trials, 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. There can be no assurance that this trial 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 with respect to biological products in the United States, to market any of our product
candidates. Requirements for us to conduct more clinical trials than we anticipate for a given product candidate 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:
•
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 CROs, CMOs and other 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;
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•
•
•
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:
•
•
•
•
•
•
•
•
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;
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.
In addition, disruptions caused by the COVID-19 pandemic may increase the likelihood that we encounter such difficulties or delays
in initiating, enrolling, conducting or completing our planned and ongoing clinical trials.
Further, conducting clinical trials in foreign countries, as we may do for our product candidates, presents additional risks that may
delay completion of our clinical trials. These risks include the failure of enrolled patients in foreign countries to adhere to clinical protocol as a
result of differences in healthcare services or cultural customs, managing additional administrative burdens associated with foreign regulatory
schemes, as well as political and economic risks relevant to such foreign countries.
Our product development costs will increase if we experience delays in clinical testing or in obtaining marketing approvals. We do not
know whether any of our preclinical studies or clinical trials will begin as planned, will need to be restructured or will be completed on
schedule, or at all. 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. There are a limited number of patients from which to draw for clinical trials.
Patient enrollment is also affected by other factors including:
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•
•
•
•
•
•
•
•
•
•
the severity of the disease under investigation;
the patient eligibility criteria for the trial 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.
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.
The COVID-19 pandemic has adversely impacted and may continue to adversely impact our business, including our
preclinical studies and clinical trials, and finances.
In 2020, a strain of novel coronavirus disease, COVID-19, was declared a pandemic and spread across the world, including
throughout the United States, Europe and Asia. The pandemic and government measures taken in response have had and continue to have
a significant impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred, supply chains have been
disrupted, facilities and production have been suspended, and demand for certain goods and services, such as medical services and
supplies, has spiked, while demand for other goods and services, such as travel, has fallen. In response to the spread of COVID-19, we have
adopted and continue to employ several temporary business practices, including telecommuting and staggered work shifts in our
laboratories, to protect our employees while continuing business operations. In addition, due to the COVID-19 pandemic, enrollment of new
patients into, and the retention of existing patients in, our on-going clinical trials have been and continue to be impacted, due primarily to
lower patient participation. As a result of the COVID-19 pandemic, we may continue to experience disruptions and face new disruptions that
could severely impact our business, preclinical studies and clinical trials, and finances including:
•
•
•
•
•
•
delays in receiving approval from local regulatory authorities to initiate our planned clinical trials;
delays or difficulties in enrolling patients in our clinical trials;
delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff;
delays in clinical sites receiving the supplies and materials needed to conduct our clinical trials, including interruptions in global
shipping that may affect the transport of clinical trial materials;
changes in local regulations as part of a response to the COVID-19 pandemic which may require us to change the ways in which our
clinical trials are conducted, which may result in unexpected costs, or to discontinue such clinical trials altogether;
diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical
trial sites and hospital staff supporting the conduct of our clinical trials;
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•
•
•
•
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•
•
interruptions of key clinical trial activities, such as clinical trial site data monitoring, due to limitations on travel imposed or
recommended by governments, employers and others or interruption of clinical trial subject visits and study procedures (such as skin
biopsies that are deemed non-essential activities), which may impact the integrity of subject data and clinical trials endpoints;
risk that participants enrolled in our clinical trials will contract COVID-19 while the clinical trial is ongoing, which could impact the
results of the clinical trial, including by increasing the number of observed adverse events;
interruptions or delays in the operations of the FDA and EMA, which may impact review and approval timelines;
interruptions of, or delays in receiving, supplies of our product candidates from our CMOs due to staffing shortages, production
slowdowns or stoppages and disruptions in delivery systems;
limitations on employee resources that would otherwise be focused on the conduct of our preclinical studies and clinical trials,
including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people;
refusal of the FDA to accept data from clinical trials in affected geographies;
impacts from prolonged remote work arrangements, such as increased cybersecurity risks and strains on our business continuity
plans; and
delays or difficulties with equity offerings due to disruptions and uncertainties in securities markets.
The COVID-19 pandemic continues to evolve. The extent to which the outbreak impacts our business, preclinical studies and clinical
trials will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate
geographic spread of the disease, the duration of the pandemic, travel restrictions and social distancing in the United States and other
countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to
contain and treat the disease. While the potential economic impact brought by and the duration of the COVID-19 pandemic may be difficult to
assess or predict, the widespread pandemic has resulted in, and may continue to result in, significant disruption of global financial markets,
reducing our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction
resulting from the COVID-19 pandemic could materially affect our business.
We may conduct clinical trials for our product candidates in sites outside the United States, and the FDA may not accept data
from trials conducted in foreign locations.
We may in the future choose to conduct clinical trials outside the United States for our product candidates. Although the FDA may
accept data from clinical trials conducted outside the United States not conducted under IND, acceptance of this data is subject to certain
conditions imposed by the FDA. For example, the clinical trial must be conducted in accordance with GCP, and the FDA must also be able to
validate the data from the study through an on-site inspection if necessary. In general, the patient population for any clinical trials conducted
outside of the United States must be representative of the population for which we intend to seek approval for the product in the United
States. In addition, while these clinical trials are subject to the applicable local laws, FDA acceptance of the data will be dependent upon its
determination that the trials also complied with all applicable U.S. laws and regulations. There can be no assurance the FDA will accept data
from trials conducted outside of the United States. If the FDA does not accept the data from our clinical trials of our product candidates, it
would likely result in the need for additional trials, which would be costly and time-consuming and delay or permanently halt our development
of our product candidates.
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
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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 trials, 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 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, by the EU legislative bodies, 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 clinical trials than those conducted by a sponsor,
especially for novel product candidates such as our product candidates. 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
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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 would delay or prevent commercialization of our product
candidates and would materially adversely impact our business and prospects.
The development of SINTAX medicines 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 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.
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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.
Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could
hinder their ability to hire, retain or deploy key leadership and other personnel, or otherwise prevent new or modified products
from being developed, approved or commercialized in a timely manner or at all, which could negatively impact our business.
The ability of the FDA to review and or approve new products can be affected by a variety of factors, including government budget
and funding levels, statutory, regulatory, and policy changes, the FDA’s ability to hire and retain key personnel and accept the payment of
user fees, and other events that may otherwise affect the FDA’s ability to perform routine functions. Average review times at the agency have
fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development
activities is subject to the political process, which is inherently fluid and unpredictable. Disruptions at the FDA and other agencies may also
slow the time necessary for new drugs and biologics to be reviewed and/or approved by necessary government agencies, which would
adversely affect our business. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S.
government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees
and stop critical activities.
Separately, in response to the global pandemic of COVID-19, on March 10, 2020 the FDA temporarily postponed most foreign
inspections of manufacturing facilities and products. Subsequently, on July 10, 2020, the FDA announced its intention to resume certain on-
site inspections of domestic manufacturing facilities subject to a risk-based prioritization system. The FDA intends to use this risk-based
assessment system to identify the categories of regulatory activity that can occur within a given geographic area, ranging from mission critical
inspections to resumption of all regulatory activities. Regulatory authorities outside the United States may adopt similar restrictions or other
policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if global health concerns continue
to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities, it could
significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions, which could
have a material adverse effect on our business.
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 CROs, clinical data management organizations, medical institutions,
clinical investigators and potential pharmaceutical partners, to conduct and manage our clinical trials.
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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 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 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
•
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
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candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our
products. Some of 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 sources 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. Moreover, as a result of the COVID-19
pandemic, third-party manufacturers may be affected, which could disrupt their activities and, as a result, we could face difficulties and delays
in the manufacture of our product candidates, which may negatively affect our preclinical and clinical development activities.
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 clinical trials, 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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•
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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;
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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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our inability to recruit, train and retain an adequate number of effective sales and marketing personnel;
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.
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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 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.
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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;
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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.
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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.
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.
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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.
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;
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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;
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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.
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;
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. 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;
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
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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;
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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.
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, executive and Congressional challenges to certain aspects of the ACA. 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. The U.S. Supreme Court is currently reviewing the case, although it is unclear how the
Supreme Court will rule. It is also unclear how other efforts, if any, 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 2030, with the exception of a
temporary suspension from May 1, 2020 through March 31, 2021, 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 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
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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.
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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. 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. 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.
Although we have numerous patent applications pending, 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 issued 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 or may develop 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, the
standards that the USPTO and other jurisdictions use to grant patents are not always applied predictably or uniformly and can change.
Similarly, the ultimate degree of protection that will be afforded to biotechnology inventions, including ours, in the United States and other
jurisdictions, remains uncertain and is dependent upon the scope of the protection decided upon by patent offices, courts, and lawmakers.
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 the patent
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laws and/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 February
2021, the European Patent Office informed us of a notice of opposition by a third party for a patent issued to us. The patent at issue does not
relate to our current product candidates.
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:
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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;
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•
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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;
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•
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.
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. 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.
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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. 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 any of our trade secrets were to be disclosed to or independently developed by a competitor, our
competitive position would be harmed.
Changes in patent law in the United States and other jurisdictions could diminish the value of patents in general, thereby
impairing our ability to protect our 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. Patent reform legislation in the United States, including the Leahy-Smith America Invents Act (the"
Leahy-Smith Act"), signed into law on September 16, 2011, could increase those uncertainties and costs. The Leahy-Smith Act included a
number of significant changes to U.S. patent law. These included provisions that affect the way patent applications are prosecuted, redefine
prior art and provide more efficient and cost-effective avenues for competitors to challenge the validity of patents. In addition, the Leahy-
Smith Act transformed the U.S. patent system into a “first to file” system. The first-to-file provisions, however, only became effective on March
16, 2013. Accordingly, it is not yet clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the
Leahy-Smith Act and its
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implementation could make it more difficult to obtain patent protection for our inventions and 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 harm our business,
results of operations 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. Additionally, there have been recent proposals for additional changes to the patent laws of the United States and
other countries that, if adopted, could impact our ability to obtain patent protection for our proprietary technology or our ability to enforce our
proprietary technology.
The U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available
in certain circumstances or weakening the rights of patent owners in certain situations. For example, in Association for Molecular Pathology
v. Myriad Genetics, Inc., the Supreme 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. 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.
Depending on future actions by the U.S. Congress, the U.S. courts, the USPTO and the relevant law-making bodies in other countries, the
laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce
our existing patents and patents that we might obtain in the future.
Europe’s planned Unified Patent Court may particularly present uncertainties for our ability to protect and enforce our patent rights
against competitors in Europe. While that new court is being implemented to provide more certainty and efficiency to patent enforcement
throughout Europe, it will also provide our competitors with a new forum to use to centrally revoke our European patents. It will be several
years before we will understand the scope of patent rights that will be recognized and the strength of patent remedies that will be provided by
that court. We will have the right to opt our patents out of that system over the first seven years of the court, but doing so may preclude us
from realizing the benefits of the new unified court.
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
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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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cease developing, selling or otherwise commercializing our product candidates;
pay substantial damages for past use of the asserted intellectual property;
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.
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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 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 some 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
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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.
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.
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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:
• multiple, conflicting and changing laws and regulations, such as privacy regulations, tax laws, export and import restrictions,
employment laws, regulatory requirements and other governmental approvals, permits and licenses;
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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. the
COVID-19 pandemic), 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.
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Following a national referendum and enactment of legislation by the government of the United Kingdom, the United Kingdom formally
withdrew from the European Union and ratified a trade and cooperation agreement governing its future relationship with the European Union.
The agreement, which is being applied provisionally from January 1, 2021 until it is ratified by the European Parliament and the Council of
the European Union, addresses trade, economic arrangements, law enforcement, judicial cooperation and a governance framework including
procedures for dispute resolution, among other things. Because the agreement merely sets forth a framework in many respects and will
require complex additional bilateral negotiations between the United Kingdom and the European Union as both parties continue to work on
the rules for implementation, significant political and economic uncertainty remains about how the precise terms of the relationship between
the parties will differ from the terms before withdrawal.
These developments, or the perception that any related developments could occur, 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.
The uncertainty regarding new or modified arrangements between the United Kingdom and other countries following the withdrawal
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 us 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.
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
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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 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.
Risks associated with data privacy issues, including evolving laws, regulations and associated compliance efforts, may
adversely impact our business and financial results.
Legislation in various countries around the world with regard to cybersecurity, privacy and data protection is rapidly expanding and
creating a complex compliance environment. We are 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, the General Data Protection Regulation (the “GDPR”), which became
effective in May 2018, has caused more stringent data protection requirements in the EU and the EEA. The GDPR imposes onerous
accountability obligations requiring data controllers and processors to maintain a record of their data processing and implement policies as
part of its mandated privacy governance framework. It also requires data controllers to be transparent and disclose to data subjects how their
personal data is to be used; imposes limitations on retention of personal data; introduces mandatory data breach notification requirements;
and sets higher standards for data controllers to demonstrate that they have obtained valid consent for certain data
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processing activities. We are subject to the supervision of local data protection authorities in those EU jurisdictions where we have business
operations or are otherwise subject to the GDPR. Certain breaches of the GDPR requirements could result in substantial fines, which can be
up to four percent of worldwide revenue or 20 million Euros, whichever is greater. In addition to the foregoing, a breach of the GDPR could
result in regulatory investigations, reputational damage, orders to cease/change our use of data, enforcement notices, as well as potential
civil claims, including class action type litigation where individuals suffered harm. Relatedly, following the United Kingdom’s withdrawal from
the EEA and the EU, and the expiration of the transition period, from January 1, 2021, companies have to comply with both the GDPR and
the GDPR as incorporated into United Kingdom national law, the latter regime having the ability to separately fine up to the greater of £17.5
million or 4% of global turnover. On January 1, 2021, the United Kingdom became a third country for the purposes of the GDPR. Similarly,
California has 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. Additionally, the California Privacy Rights Act (the “CPRA”) was recently enacted in California. The CPRA will impose
additional data protection obligations on covered companies doing business in California, including additional consumer rights processes,
limitations on data uses, new audit requirements for higher risk data, and opt outs for certain uses of sensitive data. It will also create a new
California data protection agency authorized to issue substantive regulations and could result in increased privacy and information security
enforcement. The majority of the provisions will go into effect on January 1, 2023, and additional compliance investment and potential
business process changes may be required. The CCPA and CPRA 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.
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;
• market conditions in the pharmaceutical and biotechnology sectors;
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speculative trading in and short sales of our stock, as well as trading phenomena such as the “short squeeze”;
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 December 31, 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 65% 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 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, or December 31, 2023, (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:
•
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;
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•
•
•
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 of the Sarbanes-Oxley Act of 2002 ("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.
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.
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.
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;
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•
•
•
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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.
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.
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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 tax credits to offset future taxable income or tax
liabilities may be subject to certain limitations.
As of December 31, 2020, we had approximately $133.7 million and $129.4 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 $83.8 million which
carryforward indefinitely. The state NOLs expire at various dates through 2040. As of December 31, 2020, we had federal and state research
credits of $5.0 million and $2.6 million, respectively, which expire at various dates through 2040. A portion of these NOLs and the tax credit
carryforwards could expire unused and be unavailable to offset future income or tax liabilities, respectively. 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 tax liabilities. 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 tax 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 tax credits may also be impaired under state law. Our ability
to utilize our NOLs or tax credits is also conditioned upon our attaining profitability and generating U.S. federal and state taxable income. We
have incurred significant net losses since our inception; and therefore, we do not know whether or when we will generate the U.S. federal or
state taxable income necessary to utilize our NOLs or tax credits. Even if we were to generate net taxable income, the deductibility of federal
NOLs generated after December 31, 2017 is limited to 80% of taxable income with respect to taxable years beginning after December 31,
2020. Accordingly, we may not be able to utilize a material portion of our NOLs or tax credits, and we may be required to pay U.S. federal
income taxes due to the 80% limitation on deductibility of NOLs even if we have NOLs that are otherwise available for use.
General Risk Factors
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 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.
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Pursuant to 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 preclinical studies or clinical trials 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.
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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 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
From time to time, we may be involved in claims and proceedings arising in the course of our business. The outcome of any such claim
or proceeding, regardless of the merits, is inherently uncertain. We are not subject to any material legal proceedings.
On February 12, 2021, the European Patent Office issued a Communication of a Notice of Opposition for European patent EP
3223834, which is held by us. We are currently evaluating the options available to us and deciding next steps with respect to this matter. The
patent at issue does not relate to any of our current product candidates, and receipt of this communication and/or any subsequent
proceeding is not expected to affect any of our current development plans.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Market Information
Our common is traded on the Nasdaq Global Select Market under the symbol “EVLO.”
Holders of Record
As of March 5, 2021, there were approximately 31 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.
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Item 6. Selected Financial Data
We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, and are not required to provide this information.
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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 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 important factors, including
without limitation those set forth under “Summary Risk Factors” and 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.” A discussion of the year ended December 31, 2019 compared to the year ended
December 31, 2018, as well as a discussion of our 2018 fiscal year, specifically, has been reported previously in our Annual Report on Form
10-K for the year ended December 31, 2019, filed with the SEC on February 14, 2020, under the heading “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Overview
We are discovering and developing a new class of oral biologics that are intended to act on cells in the small intestine to produce
therapeutic effects throughout the body. The target cells in the small intestine play a central role in governing human immune, metabolic and
neurological systems. We refer to this biology as the small intestinal axis, or SINTAX . We have built a platform to discover and develop
novel oral medicines which target the small intestinal axis. By harnessing the small intestinal axis, we have the potential to transform
healthcare via medicines that have the potential to be effective, safe, convenient and affordable and to thereby treat patients at all stages of
diseases and to treat patients globally.
TM
Our first product candidates are orally delivered pharmaceutical preparations of naturally occurring, specific single strains of microbes.
In preclinical models, our product candidates engaged immune cells in the small intestine and drove changes in systemic biology without any
observed systemic exposure. We have observed in early clinical trials and preclinical studies that our approach led to modulated immune
responses throughout the body by acting on the small intestinal axis. Our most advanced product candidate, EDP1815 is being developed
for the treatment of inflammatory diseases and the hyperinflammatory response associated with COVID-19. Additional product candidates
include EDP1867 and EDP2939 for the treatment of inflammatory disease and EDP1908 for the treatment of cancer.
Impact of COVID-19
On March 11, 2020, the WHO declared the COVID-19 outbreak a pandemic. The outbreak has resulted in governments around the
world implementing stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home”
orders, travel restrictions, business closures and curtailments, and school closures.
The COVID-19 pandemic has had, and for an extended period of time is expected to have, negative impacts on our operations and
supply chain. Our ability to continue to operate without any significant negative impacts will, in part, depend on our ability to protect our
employees and our supply chain. We have endeavored to follow recommended actions of government and health authorities to protect our
employees with particular measures in place for those working in our laboratories, such as staggered work shifts and flexible schedules, and
telecommuting for office workers. We are working with our CMOs to minimize delays and disruptions to scheduled manufacturing batch runs
for our product candidates and to ensure conformity to product specifications.
The COVID-19 pandemic has impacted and continues to impact our enrollment of new patients into, and the retention of existing
patients in, our ongoing clinical trials, due primarily to lower patient participation. The pandemic likely will impact enrollment and retention of
patients in new and existing clinical trials. We continue to recruit individuals in line with the local and national guidelines of the clinical
research sites. We are keeping in close contact with our CROs and clinical sites to provide support and guidance to ensure the safety of the
patients in our clinical trials. We have prioritized our drug supply operations to secure the re-supply of patients currently enrolled in our
clinical trials.
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The extent to which the COVID-19 pandemic impacts our business and finances will depend on future developments, which are
highly uncertain and cannot be predicted with confidence, such as the duration of the pandemic, travel restrictions and social distancing in
the United States, the United Kingdom and other countries, business closures or business disruptions and the effectiveness of actions taken
in the United States, the United Kingdom and other countries to contain and treat the disease. See “Risk Factors — The COVID-19 pandemic
has adversely impacted and may continue to adversely impact our business, including our preclinical studies and clinical trials and finances.”
in Part I, Item 1A of this Annually Report on Form 10-K.
Clinical Programs
We are advancing SINTAX medicines 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 diseases.
EDP1815, a whole-microbe candidate for inflammatory diseases
EDP1815 is in clinical development for psoriasis, atopic dermatitis and COVID-19.
Psoriasis
Based on previously reported positive clinical data in two cohorts of individuals with mild and moderate psoriasis in a Phase 1b
clinical trial, we have advanced EDP1815 into a Phase 2 dose ranging trial, evaluating three doses of A' EDP1815 in capsules versus
placebo in approximately 225 individuals with mild and moderate psoriasis. The primary endpoint of the trial is the mean reduction in PASI
score at 16 weeks. Other clinical measures of psoriasis are also being evaluated. We initiated the Phase 2 clinical trial in October 2020 and
have completed enrollment and, therefore, now plan to report topline data in the third quarter of 2021. Clinical data from this trial, if positive,
may enable us to advance directly into Phase 3 registrational trials, subject to end of Phase 2 discussions with regulatory agencies.
We intend to evaluate EDP1815 in additional inflammatory disease indications, depending on the results from the Phase 2 trial.
Potential indications include psoriatic arthritis, axial spondylarthritis and rheumatoid arthritis.
Atopic Dermatitis
In November 2018, we initiated our ongoing Phase 1b double-blind placebo-controlled dose-escalating safety and tolerability trial of
EDP1815 in healthy volunteers and individuals with mild and moderate psoriasis or atopic dermatitis. The primary endpoint of the phase 1b
trial is safety and tolerability.
In December 2020 and January 2021, we reported positive clinical data from a cohort of patients with mild and moderate atopic
dermatitis (n=24), randomized 2:1 to receive EDP1815 in capsules or placebo for 56 days. Atopic dermatitis is the most common type of
eczema. EDP1815 was well-tolerated with no treatment-related adverse events of moderate or severe intensity, and no serious adverse
events. Secondary endpoints included a range of established markers of clinical efficacy in atopic dermatitis, such EASI, IGA* BSA, and
SCORAD scores.
The data showed consistent improvements in percentage change from baseline compared to placebo for all three clinical scores:
EASI, IGA*BSA, and SCORAD. In addition, 7 out of 16 (44%) patients treated with EDP1815 achieved an outcome of a 50% improvement
from baseline in EASI score by day 70, compared with 0% in the placebo group, showing sustained improvement in those patients
responding to EDP1815.
In addition to physician-reported clinical outcomes, this trial also assessed patient-reported outcomes. Treatment with EDP1815
resulted in clinically meaningful improvement in the DLQI and POEM. These patient-reported outcomes capture the important impact of the
disease on patients, including the domains of itch and sleep, both of which saw improvements in patients receiving EDP1815 in the trial. All
five measures of itch within the Pruritus-NRS, SCORAD, POEM, and DLQI showed greater improvements in the treated group at day 56
compared with placebo. These results provide further evidence that modulating SINTAX can drive significant clinical benefit without the need
for systemic exposure.
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Subject to regulatory approval, we anticipate initiation of a Phase 2 trial of EDP1815 in atopic dermatitis in the third quarter of 2021.
COVID-19
EDP1815 is being evaluated in two ongoing clinical trials for the treatment of hospitalized COVID-19 patients. The first is a Phase 2
double-blind, placebo-controlled clinical trial evaluating the safety and efficacy of EDP1815 for the treatment of individuals diagnosed with
COVID-19 early in the course of their disease. The clinical trial initially will evaluate 60 individuals to determine if early intervention with
EDP1815 can prevent the progression of COVID-19 symptoms and the development of COVID-Related complications. Individuals who have
presented at the emergency room within the last 36 hours and tested positive for SARS-CoV-2 are randomized 1:1 to receive the capsule
formulation of EDP1815 targeted for release in the small intestine or placebo for 14 days, along with the standard of care. The primary
endpoint is reduced requirements for oxygen therapy, as measured by the ratio of oxygen saturation (SpO2) / fraction of inspired oxygen
(FiO2). Key secondary endpoints include total symptom duration, progression along the WHO scale of disease severity, and mortality. The
trial is led by Reynold A. Panettieri, Jr., M.D., Vice Chancellor for Translational Medicine and Science at Rutgers Biomedical and Health
Sciences and Professor of Medicine at Rutgers Robert Wood Johnson Medical School.
EDP1815 is also included as a treatment arm in the TACTIC-E clinical trial. TACTIC-E is a Phase 2/3 randomized trial, sponsored by
Cambridge University Hospitals NHS Foundation Trust, that is expected to evaluate up to 469 patients per arm at Addenbrooke’s Hospital
and other leading clinical centers in the United Kingdom and select international sites. The trial is investigating the safety and efficacy of
certain experimental therapies in the prevention and treatment of life-threatening complications associated with COVID-19 in hospitalized
individuals at early stages of the disease. The trial is enrolling individuals with COVID-19 who have identified risk factors for developing
severe complications and are at risk of progression to the intensive care unit or death. The primary outcome measure of the trial is time to
incidence (up to day 14) of any one of the following: death, mechanical ventilation, extracorporeal membrane oxygenation, cardiovascular
organ support, renal failure, hemofiltration or dialysis. Secondary outcome measures include duration of stay in hospital, duration of oxygen
therapy, changes in biomarkers associated with COVID-19 progression, and time to clinical improvement.
As a result of the varying infection rates and resulting hospitalizations that have occurred with the pandemic, we experienced slower
than expected enrollment early on in both trials and now expect to report data from the clinical trial conducted at the Robert Wood Johnson
University Hospital and interim safety data and futility analysis from TACTIC-E in the second quarter of 2021. In order to expedite patient
recruitment and expand access to potential therapies for COVID-19, new trial sites have been opened for TACTIC-E, including in the United
Kingdom and Mexico.
Human Experimental Model of Inflammation
In addition to testing our product candidates in patients with inflammatory disease, we also have employed a human experimental
model of inflammation in healthy volunteers. This model is very similar in design to a standard preclinical model of T cell driven inflammation.
We have recently used this model to test two different concentrations of EDP1815 to investigate the relative effectiveness of the different
concentrations. A total of 32 volunteers were enrolled into the trial and treated with either EDP1815 (n=12 per formulation) or placebo (n=4
per formulation) daily for 28 days. The participants were immunized with an antigen used in preclinical inflammation experiments. After 28
days of daily oral dosing with EDP1815 or placebo, the participants were given a skin challenge with the same antigen, which causes
measurable skin inflammation a day later. Inflammation was determined by measuring five parameters in the skin at the challenge site.
The increased concentration of drug results from improvements made in the commercial-scale manufacturing process, referred to as
A2. This is the same active drug at four times the concentration compared to a prior manufacturing process, referred to as A'. Twelve
participants were dosed with A’ EDP1815. Another 12 participants were given the higher concentration A2 EDP185. Eight participants who
received a placebo were divided between the two treatment groups. The results are in the figure below.
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A2 EDP1815 is more effective than A’ at same total dose in human experimental model of inflammation
The higher concentration A2, given in fewer capsules, resulted in numerically superior reductions across the full range of skin scores
compared to A’ and placebo. A2 and A’ were given at the same total daily dose of drug. These results are consistent with preclinical data that
showed increased drug concentration resulted in increased activity. This is a key advance in our understanding of how to get more benefit
from SINTAX medicine candidates. We plan to evaluate tablets and capsules containing the higher concentration A2 EDP1815 in patients
with psoriasis in our on-going Phase 1b trial, and expect to report data in the third quarter of 2021. Results from the Phase 1b trial and our
on-going Phase 2 trial in psoriasis will position us to go forward into Phase 3 trials with an optimized dose and formulation of EDP1815,
which may further improve on the positive results already seen.
EDP1867- a whole-microbe candidate for inflammatory diseases
EDP1867 is an inactivated investigational oral biologic being developed for the treatment of 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 multiple pathways of inflammation. This observed activity suggests a number of possible initial clinical
indications for EDP1867, including TH2-dependent inflammation which underlies atopic diseases and a large spectrum of asthma. We
initiated our first Phase 1b clinical trial of EDP1867 in healthy volunteers and patients with moderate atopic dermatitis in February of 2021
and expect to report interim data in the fourth quarter of 2021.
EDP2939- an extracellular vesicle (EV) candidate for inflammatory diseases
EDP2939 is an EV investigational oral biologic being developed for the treatment of inflammatory diseases. EDP2939 is the first EV
product candidate we have nominated in our inflammation program and we anticipate initiation of clinical development in 2022.
EDP1908- an EV candidate for oncology
In December 2020, we announced EDP1908 as our lead candidate in oncology following presentation of preclinical data at the
Society for Immunotherapy for Cancer meeting in November 2020. Preclinical data presented showed that orally administered EDP1908, an
EV, resulted in superior tumor growth control versus the parent microbial strain or anti-PD-1 therapy, with an observed dose-dependent
reduction in tumor growth. We anticipate initiation of clinical development in 2022.
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
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primarily with proceeds from sales of common and convertible preferred stock to our equity investors and borrowings under loan and security
agreements with financial institutions.
Through December 31, 2020, we have received gross proceeds of $332.0 million through the issuance of our common stock,
convertible preferred stock and borrowings under our loan and security agreements.
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 was 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 borrowed $20.0 million, representing the first tranche
under the 2019 Credit Facility. On July 14, 2020, we drew down the second tranche of $10.0 million and availability of the third tranche
expired on January 15, 2021. Interest on the outstanding loan balance accrues 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. 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.
In June 2020, we sold 13,800,000 shares of our common stock in an underwritten public offering at a public offering price of $3.75 per
share, for gross proceeds of $51.8 million and net proceeds of $48.4 million, after deducting underwriting discounts and commission and
other offering expenses payable by us.
For the year ended December 31, 2020, pursuant to the June 2019 sales agreement with Cowen and Company, LLC, we sold
1,232,131 shares of our common stock, in “at-the-market” offerings under a registration statement on Form S-3 that we previously filed with
the SEC with offering prices ranging between $4.25 to $11.15 per share for gross proceeds of $6.8 million and net proceeds of $6.6 million,
after deducting commission and other offering expenses payable by us. In January 2021, we issued 139,734 additional shares of our
common stock with offering prices ranging between of $12.54 and $13.17 per share for gross proceeds of $1.8 million and net proceeds of
$1.7 million, after deducting commission and other offering expenses payable by us.
On February 2, 2021, we sold 5,175,000 shares of our common stock in an underwritten public offering at a public offering price of
$15.00 per share, including the underwriters' exercise of their option to purchase 675,000 shares to cover over-allotment, generating gross
proceeds of $77.6 million and net proceeds of $73.0 million, after deducting underwriting discounts and commissions, exclusive of other
offering expenses payable by us.
On January 28, 2021, we entered into a stock purchase agreement with ALJ Health Care & Life Sciences Company Limited ("ALJ"),
pursuant to which on February 2, 2021, ALJ purchased $7.5 million of our common stock in a private placement at a purchase price of
$15.00 per share. The sale of these 500,000 shares was not registered under the Securities Act.
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, 2020 and 2019 our net loss was $93.7 million and $85.5 million, respectively. As of December 31, 2020, we
had an accumulated deficit of $292.5 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 clinical trials for EDP1815 and EDP1867;
initiate additional clinical trials for EDP1815;
initiate or advance the clinical development of additional 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;
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• 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, 2020, our principal source of liquidity is cash and cash equivalents, which totaled approximately $68.9 million.
During the first quarter of 2021 we raised net proceeds of $82.2 million from the issuance of common stock exclusive of certain other fees
payable by us. We expect that our existing cash and cash equivalents as of December 31, 2020, together with the net proceeds raised in the
first quarter of 2021 from the issuance of our common stock, will enable us to fund our planned operating expenses and capital expenditure
requirements into the third quarter of 2022. 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."
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 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;
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•
•
•
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 EDP1867, initiate additional clinical trials of other
product candidates, including EDP2939 and EDP1908, continue to discover and develop additional product candidates, hire additional
research and development personnel, build manufacturing capabilities and expand into additional therapeutic areas.
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 IND-enabling toxicology studies;
our ability to establish and maintain agreements with CMOs 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;
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•
•
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 (Expense) Income, 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 (Expense) Income, Net
For the year ended December 31, 2020, other income (expense), net primarily consists of foreign currency gains and government
grants related to our operations in the United Kingdom.
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.
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Results of Operations
Comparison of Years Ended December 31, 2020 and 2019
The following table summarizes our results of operations for the years ended December 31, 2020 and 2019 (in thousands):
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other (expense) income:
Interest (expense) income, net
Other income, net
Other (expense) income, 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,
2020
2019
Increase/
(Decrease)
69,616 $
22,270
91,886
(91,886)
(2,109)
738
(1,371)
(93,257)
(409)
(93,666) $
63,128 $
23,229
86,357
(86,357)
1,049
26
1,075
(85,282)
(190)
(85,472) $
6,488
(959)
5,529
(5,529)
(3,158)
712
(2,446)
(7,975)
(219)
(8,194)
Year Ended December 31,
2020
2019
Increase/
(Decrease)
11,487 $
30,467
5,487
22,175
69,616 $
10,468 $
25,161
9,226
18,273
63,128 $
1,019
5,306
(3,739)
3,902
6,488
$
$
$
$
Research and development expenses were $69.6 million for the year ended December 31, 2020, compared to $63.1 million for the year
ended December 31, 2019. The increase of $6.5 million was primarily driven by a $5.3 million increase in inflammation program costs due to
the progression of EDP1815 to Phase 2, the addition of COVID-19 studies utilizing EDP-1815, and costs incurred in contract manufacturing
to enable EDP1867 Phase 1 clinical trials partially offset by the closeout of the EDP1066 program. In addition, personnel costs increased by
$3.9 million due to increases in clinical development and technical operations headcount to support increased clinical program activities.
Finally, there was a $1.0 million increase for platform expenses which is in line with our strategy to maximize the potential of our platform.
These increases were partially offset by a $3.7 million decrease in our oncology program costs, primarily related to the clinical trial stage and
the impact of the COVID-19 pandemic on patient recruitment. Overall, we expect that our research and development expenses will continue
to increase in the foreseeable future as we continue our clinical trials for our product candidates, including EDP1815 and EDP1867, initiate
new clinical trials, potentially expand into additional therapeutic areas, continue discovery and development efforts for additional product
candidates, hire additional research and development personnel, and seek to increase manufacturing capabilities.
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
$
12,261 $
5,513
4,496
22,270 $
12,345 $
6,725
4,159
23,229 $
(84)
(1,212)
337
(959)
Year Ended December 31,
2020
2019
Increase/
(Decrease)
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General and administrative expenses were $22.3 million for the year ended December 31, 2020, compared to $23.2 million for the year
ended December 31, 2019. The decrease of $1.0 million was primarily driven by $1.2 million lower cost associated with legal, consulting and
other professional fees, partially offset by higher IT, facilities and other office expenses costs. We expect this decrease to be temporary and
general and administrative expenses to increase due to higher personnel and related costs, professional, legal, and patent fees and
consulting expenses in support of our continued growth.
Other (Expense) Income, Net
Other income (expense), net for the year ended December 31, 2020 was expense of $1.4 million compared to income of $1.1 million for
the year ended December 31, 2019. This decrease was primarily driven by a decrease in interest income as a result of lower interest rates
and a lower cash and cash equivalent balance and an increase in interest expense as a result of a higher interest rate on a greater principal
balance from the 2019 Credit Facility, partially offset by foreign currency gains and a grant related to our operations in the United Kingdom.
Net Loss
Net loss was $93.7 million for the year ended December 31, 2020, compared to $85.5 million for the year ended December 31, 2019.
The increase of $8.2 million was primarily the result of the increase in research and development expenses and decrease in other income
(expense), net discussed above, partially offset by the decrease in general and administrative expenses discussed above.
Liquidity and Capital Resources
To date, we have financed our operations primarily with the proceeds from issuance of our common stock combined with proceeds from
previous sales of our convertible preferred stock to our equity investors and borrowings under loan and security agreements. From our
inception through December 31, 2020, we have received gross proceeds of $332.0 million from such transactions, including $30.0 million
borrowed under the 2019 Credit Facility. As of December 31, 2020, we had cash and cash equivalents of $68.9 million and an accumulated
deficit of $292.5 million. During the first quarter of 2021 we raised net proceeds of $82.2 million from the issuance of common stock exclusive
of certain other fees payable by us. We expect that our existing cash and cash equivalents as of December 31, 2020, together with the net
proceeds raised in the first quarter of 2021 from the issuance of our common stock, will enable us to fund our planned operating expenses
and capital expenditure requirements into the third quarter of 2022.
On June 3, 2019, we 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. We also simultaneously
entered into a sales agreement with Cowen and Company, LLC, as sales agent, providing for the offering, issuance and sale by us of up to
an aggregate $50.0 million of our common stock from time to time in “at-the-market” offerings under the Shelf. For the year ended
December 31, 2020, we had issued 1,232,131 shares of our common stock with offering prices ranging between $4.25 to $11.15 per share
for gross proceeds of $6.8 million and net proceeds of $6.6 million, after deducting commission and other offering expenses payable by us. In
January 2021, we issued 139,734 additional shares of our common stock with offering prices ranging between $12.54 and $13.17 per share
for gross proceeds of $1.8 million and net proceeds of $1.7 million, after deducting commission and other offering expenses payable by us.
On February 2, 2021, we sold 5,175,000 shares of our common stock in an underwritten public offering at a public offering price of
$15.00 per share, including the underwriters' exercise of their option to purchase 675,000 shares to cover over-allotment, generating gross
proceeds of $77.6 million and net proceeds of underwriting discounts and commission of $73.0 million, exclusive of certain other offering
expenses payable by us.
On January 28, 2021, we entered into a stock purchase agreement with ALJ, pursuant to which on February 2, 2021, ALJ purchased
$7.5 million of our common stock in a private placement at a purchase price of $15.00 per share. The sale of such shares will not be
registered under the Securities Act.
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 was 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 borrowed $20.0 million,
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representing the first tranche under the 2019 Credit Facility. On July 14, 2020, we drew down the second tranche of $10.0 million and
availability of the third tranche expired on January 15, 2021.
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.
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.
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 $93.7 million and $85.5 million for the years ended
December 31, 2020 and 2019, 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):
Cash used in operating activities
Cash (used in)/provided by investing activities
Cash provided by financing activities
Net decrease in cash, cash equivalents and restricted cash
Operating Activities
Year Ended December 31,
2019
2020
$
$
(73,063) $
(1,315)
65,465
(8,913) $
(71,980)
51,970
4,992
(15,018)
Net cash used in operating activities for the year ended December 31, 2020, was $73.1 million, primarily due to our net loss of $93.7
million. This was partially offset by non-cash charges, including stock-based compensation expense of $8.5 million, depreciation expense of
$2.0 million, lease expense of $2.0 million and reduction in working capital of $7.8 million.
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.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2020, was $1.3 million, primarily due to the purchase of capital
equipment.
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Net cash provided by 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 totaling $3.0 million during the year.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2020 was $65.5 million, primarily due to proceeds from
issuance of commons stock totaling $55.0 million, issuance of long-term debt under our 2019 Credit Facility totaling $10.0 million and
proceeds from the issuance of common stock in connection with the exercise of options totaling $0.5 million.
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 options totaling $0.5 million, partially offset by the repayment of our prior debt facility.
Funding Requirements
We have incurred losses and cumulative negative cash flows from operations since our inception. As of December 31, 2020, we had an
accumulated deficit of $292.5 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;
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.
During the first quarter of 2021 we raised net proceeds of $82.2 million from the issuance of common stock exclusive of certain other
fees payable by us. We expect that our cash and cash equivalents as of December 31, 2020 together with the net proceeds raised in the first
quarter of 2021 from the issuance of our common stock, will enable us to fund our planned operating expenses and capital expenditure
requirements into the third quarter of 2022. 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.
Because of the numerous risks and uncertainties associated with the development of EDP1815 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
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unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and
development of our 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 clinical studies of EDP1815 and EDP1867;
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. 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
We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, and are not required to provide this information.
Off-Balance Sheet Arrangements
As of December 31, 2020, 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.
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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;
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 of the grant. Compensation expense is recognized over the period during which services are rendered by such consultants and non-
employees until completed. Prior to January 1, 2020, we accounted for these awards in accordance with the provisions of ASC Subtopic 505-
50, Equity-Based Payments to Non-employees (“ASC 505-50”). Under ASC 505-50, share-based awards to nonemployees were subject to
periodic fair value re-measurement at the end of each financial reporting period prior to completion of the service.
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As discussed in Note 2 (Significant Accounting Policies) to our consolidated financial statements included elsewhere in this Annual
Report on Form 10-K under the heading “New Accounting Pronouncements - Adopted during the current period,” we adopted ASU No. 2018-
07, Stock-based Compensation: Improvements to Nonemployee Share-based Payment Accounting (Topic 718), on January 1, 2020. As a
result, our accounting for nonemployee awards is now generally consistent with that of employee awards. Beginning on January 1, 2020, the
measurement date for nonemployee awards is the date of grant without any subsequent changes in the fair value of the award.
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.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, and are not required to provide this information.
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, 2020, our disclosure controls and procedures as of such date were 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.
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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, 2020 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, 2020.
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.
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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 1: Election of Directors,” “Executive Officers” and
“Corporate Governance” of our proxy statement for our 2021 annual meeting of stockholders to be filed with the SEC within 120 days of the
fiscal year ended December 31, 2020, 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 2021 annual meeting of stockholders to be filed with the SEC within 120 days of the fiscal year ended
December 31, 2020, 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 2021 annual meeting of stockholders to be filed with the SEC within 120 days of the fiscal year ended
December 31, 2020, 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, 2020, 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 Incentive Award Plan, (the "2018 Plan"); and
(3) the Evelo Biosciences, Inc. 2018 Employee Stock Purchase Plan (the “ESPP”).
Plan category:
Equity compensation plans
approved by stockholders
2015 Plan (1)
2018 Plan (2)
ESPP (4)
Equity Compensation Plans not
approved by Stockholders
Total
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)
$
3,114,275
3,780,387 (3) $
$
—
—
6,894,662
$
$
4.05
8.77
—
—
6.64
—
951,621
307,753 (5)
—
1,259,374
(1) In connection with the initial public offering of shares of our common stock in May 2018 (the “IPO”), we adopted the 2018 Plan and will
not make future grants or awards under the 2015 Plan. As such, the 113,006 securities previously reserved under the 2015 Plan have been
excluded from the table above.
(2) Pursuant to the terms of the 2018 Plan, the number of shares of common stock available for issuance under the 2018 Plan
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) Includes 3,496,387 outstanding options to purchase stock under the 2018 Plan and 284,000 restricted stock units (RSUs) under the
2018 Plan.
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(4) Pursuant to the terms of the ESPP, the number of shares of common stock that may be issued under the 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.
(5) Includes 307,753 shares available for issuance under the ESPP, of which 27,587 were issued on January 31, 2021.
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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 2021 annual meeting of stockholders to be filed with the SEC within 120 days of the fiscal
year ended December 31, 2020, 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 2021 annual meeting of stockholders to be filed with the SEC within 120
days of the fiscal year ended December 31, 2020, and is incorporated into this Annual Report on Form 10-K by reference.
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.
PART IV
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#
10.3#
10.4#
10.5#
10.6#
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
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
2018 Employee Stock Purchase Plan, as amended
Non-Employee Director Compensation Program, as amended
Executive Severance Plan, as amended
Form of Indemnification Agreement for Directors and Officers
Sublease Agreement between Evelo Biosciences, Inc. and Bio-Rad Laboratories, Inc.,
dated December 27, 2017
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
Offer Letter between Evelo Biosciences, Inc. and Balkrishan (Simba) Gill, Ph.D., dated
June 25, 2015, as amended on April 26, 2018
93
Incorporated by Reference
Filing
date
Exhibit
File
No.
Filed
Herewith
Form
8-K
8-K
S-1/A
S-1/A
10-K
S-1/A
S-1/A
10-K
10-K
10-K
S-1/A
S-1/A
001-38473
001-38473
333-
224278
333-
224278
001-38473
333-
224278
333-
224278
001-38473
001-38473
001-38473
333-
224278
333-
224278
8-K
001-38473
S-1/A
333-
224278
3.1
3.2
4.1
4.2
10.3
10.1
10.2
10.3
10.4
10.5
10.6
10.8
10.1
5/11/18
5/11/18
4/30/18
4/30/18
2/14/2020
4/30/18
4/30/18
2/14/2020
2/14/2020
2/14/2020
4/30/18
4/30/18
4/25/19
10.11
4/30/18
Table of Contents
10.10#
10.11#
10.12#
10.13
10.14†
10.15†
10.16††
10.17††
10.18
10.19
10.20
21.1
23.1
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
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, as amended
Consulting Agreement, dated September 16, 2019, between Evelo Biosciences, Inc. and
David R. Epstein, as amended
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
Collaboration Agreement between Evelo Biosciences, Inc. and Sacco S.r.l. dated July 9,
2019
Development and Clinical Master Services Agreement between Evelo Biosciences, Inc. and
Halo Pharmaceutical, Inc. d/b/a Cambrex Whippany dated December 17, 2020
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
Second Amendment to Loan and Security Agreement dated as of May 15, 2020 by and
among Evelo Biosciences, Inc., the lenders party thereto and K2 HealthVentures LLC, as
administrative agent for such lenders.
Third Amendment to Loan and Security Agreement dated as of July 8, 2020 by and among
Evelo Biosciences, Inc., the lenders party thereto and K2 HealthVentures LLC, as
administrative agent for such lenders
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
Inline XBRL Instance Document - the Instance Document does not appear in the interactive
data file because its XBRL tags are embedded within the Inline XBRL document
Inline XBRL Taxonomy Extension Schema Document
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
Inline XBRL Taxonomy Extension Label Linkbase Document
Inline XBRL Taxonomy Extension Presentation Linkbase Document
94
S-1/A
333-
224278
10-Q
001-38473
10-Q
001-38473
10.10
4/30/18
10.2
10.3
10/30/20
10/30/20
10-K
001-38473
10.12
2/15/19
S-1/A
S-1/A
333-
224278
333-
224278
10.14
4/30/18
10.15
4/30/18
10-Q
001-38473
10.4
8/6/19
10-Q
001-38473
10.3
8/6/19
8-K
001-38473
10.1
5/18/20
10-Q
001-38473
10.2
7/31/20
10-K
001-38473
21.1
2/14/2020
*
*
*
*
**
**
*
*
*
*
*
*
Table of Contents
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* 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.
95
Table of Contents
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: March 9, 2021
EVELO BIOSCIENCES, INC.
By:
/s/ Balkrishan (Simba) Gill, Ph.D.
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.
/s/ Xiaoli (Jacqueline) Liu
Xiaoli (Jacqueline) Liu
/s/ David R. Epstein
David R. Epstein
/s/ Juan Andres
Juan Andres
/s/ Ara Darzi
Lord Ara Darzi
/s/ John A. Hohneker
John A. Hohneker, M.D.
/s/ Theodose Melas-Kyriazi
Theodose Melas-Kyriazi
/s/ David P. Perry
David P. Perry
/s/ Nancy A. Simonian
Nancy A. Simonian, M.D.
President, Chief Executive Officer and Director
(principal executive officer and principal financial officer)
March 9, 2021
VP of Finance and Controller
(principal accounting officer)
March 9, 2021
Chairman of the Board of Directors
March 9, 2021
March 9, 2021
March 9, 2021
March 9, 2021
March 9, 2021
March 9, 2021
March 9, 2021
Director
Director
Director
Director
Director
Director
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Table of Contents
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 Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
2
3
4
5
6
7
F-1
Table of Contents
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, 2020
and 2019, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the
two years in the period ended December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in
conformity with U.S. generally accepted accounting principles.
Adoption of ASU No. 2016-02
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in 2020 due
to the adoption of Accounting Standards Update (ASU) No. 2016-02 Leases (Topic 842), and the related amendments.
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
March 9, 2021
F-2
Table of Contents
Evelo Biosciences, Inc.
Consolidated Balance Sheets
(In thousands, except per share and share amounts)
Assets
Current assets:
Cash and cash equivalents
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Right of use asset - operating lease
Other assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Accrued expenses
Operating lease liability, current portion
Other current liabilities
Total current liabilities
Noncurrent liabilities:
Long-term debt
Operating lease liability, 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, 2020 and 2019, respectively
Common stock, $0.001 par value; 200,000,000 shares authorized; 47,488,505 and 32,232,258
shares issued and 47,470,119 and 32,170,605 shares outstanding at December 31, 2020 and
2019, respectively
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2020
2019
68,857 $
2,123
70,980
7,478
10,757
1,424
90,639 $
1,442 $
16,254
1,674
463
19,833
30,048
9,989
—
284
60,154
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
—
—
47
322,957
(292,519)
30,485
90,639 $
32
259,018
(198,853)
60,197
90,920
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
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 (expense) income:
Interest (expense) income, net
Other income, net
Other (expense) income, net
Loss before income taxes
Income tax expense
Net loss
Weighted-average number of common shares outstanding, basic and diluted
Net loss per share, basic and diluted
Comprehensive loss:
Net loss
Other comprehensive loss:
Unrealized gain on investments, net of tax of $0
Comprehensive loss
Year Ended December 31,
2019
2020
69,616 $
22,270
91,886
(91,886)
(2,109)
738
(1,371)
(93,257)
(409)
(93,666) $
63,128
23,229
86,357
(86,357)
1,049
26
1,075
(85,282)
(190)
(85,472)
39,479,197
32,031,862
(2.37) $
(2.67)
(93,666) $
(85,472)
—
(93,666) $
18
(85,454)
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
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Evelo Biosciences, Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands, except share amounts)
Balance-January 1, 2019
Vesting of restricted common stock
Exercise of stock options
Stock-based compensation expense
Unrealized gain on investments
Net loss
Balance-December 31, 2019
Issuance of common stock, net of fees
Vesting of restricted common stock
Issuance of common stock under the Employee
Stock Purchase Plan
Exercise of stock options
Stock-based compensation expense
Net loss
Balance-December 31, 2020
Common Stock
Amount
Shares
31,825,769 $
64,118
280,718
—
—
—
32,170,605 $
15,032,131
43,267
28,603
195,513
—
—
47,470,119 $
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
32 $
—
—
—
—
—
32 $
15
—
—
—
—
—
47 $
250,316 $
26
511
8,165
—
—
259,018 $
54,979
21
92
379
8,468
—
322,957 $
(18) $
—
—
—
18
—
— $
—
—
—
—
—
—
— $
(113,381) $
—
—
—
—
(85,472)
(198,853) $
—
—
—
—
—
(93,666)
(292,519) $
136,949
26
511
8,165
18
(85,472)
60,197
54,994
21
92
379
8,468
(93,666)
30,485
The accompanying notes are an integral part of these consolidated financial statements.
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Evelo Biosciences, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense
Depreciation expense
Net accretion of discount on marketable securities
Non-cash interest expense
Non-cash lease expense
Gain on sale of fixed assets
Prepaid expenses and other current assets
Accounts payable
Accrued expenses and other current liabilities
Operating lease liabilities
Other liabilities
Net cash used in operating activities
Investing activities
Proceeds from sales and maturities of investments
Purchases of property and equipment
Proceeds from the sale of fixed assets
Net cash (used in) provided by investing activities
Financing activities
Net proceeds from the issuance of common stock, net of issuance cost
Net proceeds from the issuance of long-term debt
Proceeds from issuance of common stock under employee stock purchase plan and the exercise of stock
options, restricted common stock
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
Cash paid for taxes
Noncash investing and financing activities
Property and equipment additions in accounts payable and accrued expenses
Public offering cost in accrued expenses
$
$
$
$
$
Year Ended December 31,
2019
2020
$
(93,666) $
(85,472)
8,468
2,026
—
374
1,976
(6)
1,503
837
7,438
(2,218)
205
(73,063)
—
(1,321)
6
(1,315)
54,994
10,000
471
—
65,465
(8,913)
79,333
70,420 $
2,172 $
20 $
178 $
111 $
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
—
246
—
The accompanying notes are an integral part of these consolidated financial statements.
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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.
To date, the Company has financed operations primarily with the proceeds from issuance of common stock combined with proceeds
from previous sales of convertible preferred stock to equity investors and debt financing.
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 its effectiveness on June 6, 2019. The Company also
simultaneously entered into a sales agreement (the "ATM") 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. For the year ended December 31, 2020, the Company sold 1,232,131 common shares under the ATM with offering prices
ranging between $4.25 to $11.15 per share for gross proceeds of $6.8 million and net proceeds of $6.6 million, after deducting commission
and other offering expenses payable by us. In January 2021, the Company issued 139,734 additional shares of common stock under the
ATM with offering prices ranging between $12.54 and $13.17 per share for gross proceeds of $1.8 million and net proceeds of $1.7 million,
after deducting commission and other offering expenses.
In June 2020, the Company sold 13,800,000 shares of its common stock in an underwritten public offering at a public offering price of
$3.75 per share, including the underwriters' exercise of their option to purchase 1,800,000 shares to cover over-allotment, generating gross
proceeds of $51.8 million and net proceeds of $48.4 million, after deducting underwriting discounts and commission and other offering
expenses payable by the Company.
On July 14, 2020, the Company drew down the second tranche of $10.0 million available under the 2019 Credit Facility. Refer to Note 7,
Loan and Security Agreement, to this Annual Report on Form 10-K for more information.
On February 2, 2021, the Company sold 5,175,000 shares of its common stock in an underwritten public offering at a public offering
price of $15.00 per share, including the underwriters' exercise of their option to purchase 675,000 shares to cover over-allotment, generating
gross proceeds of $77.6 million and net proceeds of underwriting discounts and commission of $73.0 million, exclusive of other offering
expenses payable by the Company.
On January 28, 2021, the Company entered into a stock purchase agreement with ALJ Health Care & Life Science Company Limited
("ALJ"), pursuant to which on February 2, 2021, ALJ purchased $7.5 million of our common stock in a private placement at a purchase price
of $15.00 per share, equal to the public offering price per share at which our common stock was sold to the public as referred above. The
sale of such shares will not be registered under the Securities Act.
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 recurring losses since its inception, including net losses of $93.7 million and $85.5 million for the years
ended December 31, 2020 and 2019, respectively. In addition, as of December 31, 2020, the
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Company had an accumulated deficit of $292.5 million. The Company expects to continue to generate operating losses for the foreseeable
future.
The Company previously identified conditions and events that raised substantial doubt about its ability to continue as a going concern.
During the first quarter of 2021 we raised net proceeds of $82.2 million from the issuance of common stock exclusive of certain other fees
payable by us. The Company expects that its cash and cash equivalents as of December 31, 2020 of $68.9 million together with the net
proceeds raised from the issuances of common stock in the first quarter of 2021, will be sufficient to fund the operating expenditures and
capital expenditure requirements necessary to advance its research efforts and clinical trials for at least one year from the date of issuance of
these consolidated financial statements. The future viability of the Company beyond one year from the date of issuance of these consolidated
financial statements is dependent on its ability to raise additional capital to finance its operations. The Company's inability to raise capital as
and when needed could have a negative impact on its financial condition and ability to pursue its business strategies. There can be no
assurance that the current operating plan will be achieved or that additional funding will be available on terms acceptable to the Company, or
at all.
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”).
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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 Note 16, Subsequent Event, to this Annual
Report on Form 10-K.
Emerging Growth Company Status
Evelo is an “emerging growth company,” as defined in 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 its 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 and cash
equivalents. The Company places its cash and cash equivalents in primarily two custodian accounts at accredited financial institutions. Such
deposits have and will continue to exceed federally insured limits.
As of December 31, 2020, and 2019, 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 that are excluded from net loss. The Company's only
element of other comprehensive loss is unrealized gains on available-for-sale
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investments. For the year ended December 31, 2020 comprehensive loss was equal to net loss. Comprehensive loss totaled $85.5 million for
the years ended December 31, 2019, and was not significantly different than net loss.
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. The Company’s restricted
cash consists of restricted cash in connection with a lease for the Company’s office and laboratory premises and deposits held in relation to
the Company's credit card facility. As of December 31, 2020 the Company had $0.3 million in current restricted cash within prepaid expenses
and other current assets in the consolidated balance sheet. The Company had no current restricted cash at December 31, 2019. As of
December 31, 2020 and 2019, the Company had noncurrent restricted cash of $1.3 million and $1.5 million, respectively, which were
included within other assets in the consolidated balance sheets. The following reconciles cash, cash equivalents and restricted cash as of
December 31, 2020 and 2019, as presented on the Company's consolidated statements of cash flows, to its related consolidated 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
Fair Value of Financial Instruments
December 31,
2020
2019
$
$
4,487 $
64,370
68,857
1,563
70,420 $
1,634
76,199
77,833
1,500
79,333
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;
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.
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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 (used/new)
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
3/5 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.
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
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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. Prior to January 1,
2020, we accounted for these awards in accordance with the provisions of ASC Subtopic 505-50, Equity-Based Payments to Non-employees
(“ASC 505-50”). Under ASC 505-50, share-based awards to nonemployees were subject to periodic fair value re-measurement at the end of
each financial reporting period prior to completion of the service.
As discussed in below under the heading “New Accounting Pronouncements - Adopted during the current period,” the Company adopted
ASU No. 2018-07, Stock-based Compensation: Improvements to Nonemployee Share-based Payment Accounting (Topic 718), on January 1,
2020. As a result, the Company’s accounting for nonemployee awards is now generally consistent with that of employee awards. Beginning
on January 1, 2020, the measurement date for nonemployee awards is the date of grant without any subsequent changes in the fair value of
the award.
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
Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding
during the period, without consideration for common stock equivalents. Diluted net loss per share 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 stock options, common stock from Employee Stock Purchase Plan (the “ESPP”) 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.
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New Accounting Pronouncements
Adopted during the current period
Leases
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 accounting guidance requires recognition of all long-term lease assets and lease liabilities by lessees and sets forth
new disclosure requirements for those lease assets and liabilities. It requires lessees to recognize right-of-use assets and lease liabilities on
the balance sheet using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements for
all leases with a term of greater than 12 months regardless of classification. Leases with a term of 12 months or less will be accounted for
similar to existing guidance for operating leases. The FASB subsequently issued several ASUs amending the new 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 adopted this new standard on January 1, 2020 using the required modified retrospective approach and utilizing the effective date
as its date of initial application. As a result, prior periods are presented in accordance with the previous guidance in ASC 840.
ASU 2016-02 provides a number of optional practical expedients in transition. The Company elected to adopt the 'package of
practical expedients', which permits the Company (i) not to reassess whether expired existing contracts are or contain leases, (ii) not to
reassess the classification of expired or existing leases, and (iii) not to reassess initial direct costs for any existing leases. The Company will
continue to differentiate between finance leases (previously referred to as capital leases) and operating leases using classification criteria
that are substantially similar to the previous guidance. Adoption of this standard resulted in the recognition of a right-of-use asset and a lease
liability on the Company’s January 1, 2020 consolidated balance sheet of $12.7 million and $13.9 million, respectively. There was no material
impact resulting from the adoption on the Company’s consolidated statement of operations for the year ended December 31, 2020. For
leases with terms greater than 12 months, the Company records the related right-of-use asset and lease liability at the present value of lease
payments over the term. As the Company’s leases do not provide readily determinable implicit interest rates, the Company utilized its
incremental borrowing rate, which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease
payments in the same currency, for a similar term, in a similar economic environment. In transition to ASC 842, the Company utilized the
remaining lease term of its leases in determining the appropriate incremental borrowing rates. The application of the new standard required
netting of unamortized balance of lease incentives and deferred lease obligation to the right-of-use asset at the adoption date. The
Company’s operating leases include rental escalation clauses that are factored into the determination of lease payments when appropriate.
The Company does not separate lease and non-lease components of contracts. Refer to Note 3, Leases, to this Annual Report on Form 10-K
for additional information.
Share-Based Compensation
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. Entities will apply the ASU by recognizing a
cumulative-effect adjustment, if any, to retained earnings as of the beginning of the annual period of adoption. The Company adopted ASU
2018-07 on January 1, 2020. The adoption of this standard did not have a material impact to this Annual Report on Form 10-K.
To be adopted in future periods
In December 2019, the FASB issued ASU No. 2019 -12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The
new standard includes several provisions which simplify accounting for income taxes by removing certain exceptions to the general principles
in Topic 740 and increasing consistency and clarity for the users of financial statements. This standard will be effective for the Company on
January 1, 2021. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s
financial position and results of operations.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326)—Measurement of Credit Losses
on Financial Instruments, which has been subsequently amended by ASU No.
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2018-19, ASU No. 2019-04, ASU No. 2019-05, ASU No. 2019-10, ASU No. 2019-11 and ASU No. 2020-03 (“ASU 2016-13”). The provisions
of ASU 2016-13 modify the impairment model to utilize an expected loss methodology in place of the currently used incurred loss
methodology and require a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU
2016-13 is effective for the Company on January 1, 2023, with early adoption permitted. The Company is currently evaluating the potential
impact that this standard may have on its financial position and results of operations, as well as the timing of its adoption of this standard.
On August 5, 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own
Equity (“ASU-2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including
convertible instruments and contracts on an entity’s own equity. ASU 2020-06 eliminates the beneficial conversion and cash conversion
accounting models in ASC 470-20 that require separate accounting for embedded conversion features from convertible instruments. As a
result, after adopting the ASU’s guidance, entities will not separately present in equity an embedded conversion feature in such debt.
Additionally, the guidance simplifies the evaluation of whether a contract in the issuer’s own equity can be classified in equity or an
embedded feature qualifies for the derivative scope exception. Although the guidance is not effective until 2022, early adoption of ASU 2020-
06 is permitted for all entities for fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of this new
guidance on the Company’s consolidated financial statements and related disclosures.
3. Leases
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 maintained an additional separate operating lease for office and laboratory space that expired in May 2020. The leases require
security deposits, which the Company has primarily met with letters of credit from a financial institution that is 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
expired in April 2020. The minimum rental payments received under this agreement totaled $0.2 million for the year ended December 31,
2020 and were equivalent to the minimum payments due from the Company to the landlord.
The Company recorded rent expense of $2.9 million for both years ended December 31, 2020 and 2019, which are net of sublease
rental income of $0.3 million and $0.5 million. Sublease rental income is inclusive of rental payments, taxes, and operating expenses.
The minimum aggregate future lease commitments at December 31, 2020, are as follows (in thousands):
2021
2022
2023
2024
2025
Total lease payments
Less imputed interest
Total
Other information:
Operating cash flows used for operating leases
Weighted-average remaining lease term (in years)
Weighted-average discount rate
F-14
$
$
$
Amount
2,727
3,062
3,154
3,249
2,491
14,683
(3,020)
11,663
3,334
5 years
9.5 %
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Under the prior lease accounting guidance, minimum rental commitments under non-cancelable leases as of December 31, 2019
were as follows (in thousands):
2021
2022
2023
2024
2025
Total lease payments
Amount
2,973
3,062
3,154
3,249
2,492
14,930
$
$
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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, 2020 and 2019 (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
Total
December 31,
2020
(Level 1)
(Level 2)
(Level 3)
64,370 $
64,370 $
64,370 $
64,370 $
— $
— $
December 31,
2019
(Level 1)
(Level 2)
(Level 3)
76,199 $
76,199 $
76,199 $
76,199 $
— $
— $
$
$
$
$
—
—
—
—
As of December 31, 2020 and 2019, the Company's cash equivalents 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,
2020
2019
$
$
8,831 $
2,157
822
230
3
1,078
13,121
(5,643)
7,478 $
7,479
2,014
750
204
9
1,594
12,050
(3,709)
8,341
The Company recognized $2.0 million and $1.8 million of depreciation expense for the years ended December 31, 2020 and 2019,
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-16
December 31,
2020
2019
$
$
9,394 $
5,620
604
636
16,254 $
4,583
3,149
659
367
8,758
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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. The
Company borrowed the entire $15.0 million available under the 2016 Credit Facility prior to its extinguishment in July 2019 as discussed in
further detail below.
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. As amended on May 15, 2020, the second tranche of $10.0 million was available to be funded between December 1, 2019 and
July 15, 2020 and was drawn down on July 14, 2020. The third tranche of $15.0 million expired on January 15, 2021. 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.
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, 2020, 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 on July 19, 2019 the full $15.0 million loan balance
outstanding under the 2016 Credit Facility .
The Company has the following minimum aggregate future loan payments at December 31, 2020 (in thousands):
2021
2022
2023
2024
Total minimum payments
Less amounts representing interest and discount
Long-term debt
Amount
2,631
11,603
13,387
10,259
37,880
(7,832)
30,048
$
$
$
Interest expense related to the Company's 2016 Credit Facility was approximately $0.5 million, for the year ended December 31, 2019.
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Interest expense related to the Company's 2019 Credit Facility was approximately $2.6 million and $0.8 million for the year ended
December 31, 2020 and 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 preferred stock that was
issued prior to the Company’s public offering and warrants which were issued in 2016 and exercised in 2018.
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 and (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 will pay 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, 2020, 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. As of December 31, 2020, the Company has incurred milestone payments to date totaling
approximately $0.4 million under the agreement of which no amounts are currently due.
9. Commitments and Contingencies
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 has incurred annual exclusivity fees to date totaling approximately
€1.2 million, and no amounts are currently due as of the year ended December 31, 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
agreed to exclusively manufacture certain microbial biotherapeutic products for the Company and reserved 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 those microbial biotherapeutics and for a set minimum number of
manufacturing
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runs per year. Exclusivity fees paid and any minimum commitments are expensed as incurred. At December 31, 2020, aggregate minimum
payments over the remaining contract life total approximately $0.7 million. The agreement expired on February 15, 2021 in accordance with
its terms.
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.
On February 12, 2021, the European Patent Office issued a Communication of a Notice of Opposition for European patent EP
3223834, which is held by the Company. The Company is currently evaluating its available options and deciding next steps with respect to
this matter. The patent at issue does not relate to any of the Company’s current product candidates, and receipt of this communication and/or
any subsequent proceeding is not expected to affect any of the Company’s current development plans.
10. Stockholders’ Equity
Common Stock
On June 3, 2019, the Company filed a 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 the ATM, 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. For the year
ended December 31, 2020, pursuant to the ATM, the Company sold 1,232,131 shares of its common stock, with offering prices ranging
between $4.25 to $11.15 per share for gross proceeds of $6.8 million and net proceeds of $6.6 million, after deducting commission and other
offering expenses payable by us.
In June 2020, the Company sold 13,800,000 shares of its common stock pursuant to the Shelf in an underwritten public offering at a
public offering price of $3.75 per share, for gross proceeds of $51.8 million and net proceeds of $48.4 million, after deducting underwriting
discounts and commission and other offering expenses payable by the Company.
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, 2021, 2020 and 2019 the number of shares authorized
for issuance under the 2018 Incentive Plan was increased by 1,898,805 shares, 1,286,824 shares and 1,273,031 shares, respectively. 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, 2020, equity-based incentive awards
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covering 4,376,182 options of the Company’s common stock and 284,000 restricted stock units have been issued under the 2018 Plan, of
which 875,155 options have been canceled and 4,640 options have been exercised. As of December 31, 2020, 951,621 shares of common
stock are available for future grant under the 2018 Plan, which includes 832,101 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, 2020, an aggregate of 5,758,518 options and other equity awards had been granted under the 2015 Plan, of which
1,376,141 have been exercised, 1,268,110 have been canceled and 18,468 have been repurchased as of December 31, 2020. 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
2020
$
$
4,487 $
3,981
8,468 $
3,648
4,517
8,165
A summary of the Company’s stock option activity and related information is as follows:
Options outstanding at December 31, 2019
Granted
Exercised
Canceled
Options outstanding at December 31, 2020
Exercisable at December 31, 2020
Vested and expected to vest as of December 31,
2020
Shares
5,691,474 $
2,161,356 $
(195,513) $
(1,046,655) $
6,610,662 $
3,671,175 $
6,610,662 $
Weighted
Average -
Exercise Price
Weighted
Average -
Remaining
Contractual Life
Aggregate
Intrinsic
Value(1)
(in thousands)
6.99
6.06
1.94
8.80
6.55
5.52
6.55
7.53 $
6.77 $
7.53 $
38,815
25,332
38,815
(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 2,957,873 unvested stock options outstanding as of December 31, 2020. The weighted-average fair value of options
granted during the years ended December 31, 2020 and 2019 was $4.14 and $7.46,
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respectively. The aggregate intrinsic value of options exercised during the years ended December 31, 2020 and 2019 was $0.9 million and
$1.8 million, respectively.
When utilizing the Black-Scholes option-pricing model to determine the grant date fair value of stock options granted to employees or
non-employees, the Company used the following weighted average, or ranges of, assumptions:
Employee option grants
Risk-free interest rate
Expected life (in years)
Volatility
Expected dividend rate
Year Ended December 31,
2019
2020
1.11 %
6.05
79.6 %
0.00 %
2.28 %
6.02
76.2 %
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.
Non-employee option grants
Risk-free interest rate
Expected life (in years)
Volatility
Expected dividend rate
Year Ended December 31,
2019
2020
0.38 %
5.21
78.9 %
0.00 %
1.98 %
7.63
76.0 %
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.
As of December 31, 2020, total unrecognized stock-based compensation expense relating to unvested stock options was $14.4 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 2.12 years.
On November 4, 2020, 284,000 RSUs were granted to certain employees of the Company under the 2018 Plan with a weighted
average grant date fair value of $4.41. Each award of RSUs vests as to 25% on the first anniversary of the grant date, 25% of the RSUs on
the second anniversary of the grant date and 50% of the RSUs on the third anniversary of the grant date, subject to the grantees continuing
service. As of December 31, 2020, none of the restricted stock units had vested. Stock-based compensation expense related to RSUs was
immaterial for the year ended December 31, 2020.
2018 Employee Stock Purchase Plan
The Company's board of directors adopted on April 18, 2018, and the Company’s stockholders approved, 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
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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. Accordingly, on January 1, 2021, the number of shares authorized for
issuance under the ESPP was increased by 474,701 shares.
The compensation expense recognized related to the ESPP for the year ended December 31, 2020 was $0.1 million. There was a total
of 28,603 shares purchased under the ESPP during the year ended December 31, 2020.
12. Income Taxes
The Company has recorded a tax provision of $0.4 million and $0.2 million for the year ended December 31, 2020 and 2019,
respectively. 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, 2020 and 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
Operating lease liability
Right of use asset - operating lease
Depreciation
Deferred tax assets before valuation allowance
Valuation allowance
Net deferred tax assets
December 31,
2020
2019
21.0 %
6.8 %
(1.0)%
(0.4)%
1.8 %
(28.6)%
— %
(0.4)%
21.0 %
7.0 %
(0.6)%
(0.4)%
1.6 %
(29.1)%
0.3 %
(0.2)%
December 31,
2020
2019
$
$
36,256 $
7,092
34,452
1,370
3,443
3,186
(2,939)
(208)
82,652
(82,652)
— $
25,895
4,856
22,101
1,006
2,335
—
—
(295)
55,898
(55,898)
—
As of December 31, 2020, the Company had approximately $133.7 million and $129.4 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 $83.8 million which
carryforward indefinitely. The state NOLs expire at various dates through 2040. As of December 31, 2020, the Company had federal and
state research credits of $5.0 million and $2.6 million, respectively, which expire at various dates through 2040.
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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 Code, 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 Federal 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 after 2020.
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, 2020 and 2019, respectively. The valuation allowance increased by $26.8 million in 2020 primarily due to
increases in net operating losses and research and development credits.
As of December 31, 2020 and 2019, 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, common stock from the ESPP and
restricted common stock, outstanding during the period determined using the 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:
Unvested common stock from early exercise of options
Stock options to purchase common stock
RSUs
Common stock from the ESPP
Total
14. Related Party Transactions
Year Ended December 31,
2019
2020
18,386
6,610,662
284,000
24,508
6,937,556
61,653
5,691,474
—
—
5,753,127
The Company receives clinical advisory services from Weatherden Ltd. (“Weatherden”) under agreements that were entered into during
2017 and 2018. Duncan McHale, the Company’s Chief Medical Officer is a part owner of Weatherden. During the years ended December 31,
2020 and 2019, the Company paid Weatherden $0.6 million and $1.0 million, respectively. As of December 31, 2020 an immaterial amount
was due to Weatherden. As of December 31, 2019, the amount due to Weatherden under the supply of service agreement totaled
approximately $0.2 million.
In June 2018, the Company entered into a subleasing arrangement with Ring Therapeutics, Inc. (formerly VL46, Inc.), an affiliate of one
of its stockholders, Flagship Venture Funds. Under the terms of the sublease, the Company invoiced Ring Therapeutics for an aggregate
$0.9 million in rent payments which were due during the period from July 1, 2018 through April 30, 2020, the sublease expiration date, plus
related taxes and lease operating costs. For the year ended December 31, 2020, $0.3 million related to this sublease, inclusive of rent
payments,
F-23
Table of Contents
taxes and operating expenses, has been recorded as an offset to operating expense within the consolidated statements of operations and
comprehensive loss.
The Company entered into a consulting agreement with David Epstein (as amended, 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. As amended on October 15, 2020, the Agreement will continue until June 30, 2021 unless terminated earlier 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, on September 16, 2019, 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 dates. 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 12 equal monthly installments following 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. On October 11, 2020, in connection with the commencement of his second year of
service as a consultant to the Company, Mr. Epstein was granted an annual equity award in the form of an option to purchase 44,743 shares
of the Company’s common stock, which award vests in nine equal monthly installments, in each case subject to his continued provision of
consulting services to the Company pursuant to the Consulting Agreement on the applicable vesting dates.
15. Defined Contribution Plan
The Company provides benefits under certain retirement benefit plans. The Company's most significant defined contribution plan is
in the United States, which is administered through a third-party administrator. Under the U.S. defined contribution plan employees may elect
to defer up to 85.0% of their compensation per year (subject to a maximum limit prescribed by federal tax law) and the Company matches a
portion of such employee contributions. For the years ended December 31, 2020 and 2019 the Company’s matching contribution expense
totaled $0.3 million and $0.2 million, respectively.
16. Subsequent Event
In January 2021, pursuant to the ATM, the Company issued 139,734 shares of its common stock in an “at-the-market” offering under the
Company’s previously filed Shelf, with offering prices ranging between $12.54 and $13.17 per share for gross proceeds of $1.8 million and
net proceeds of $1.7 million, after deducting commission and other offering expenses payable by the Company.
On February 2, 2021, the Company sold 5,175,000 shares of its common stock in an underwritten public offering at a public offering
price of $15.00 per share, including the underwriters' exercise of their option to purchase 675,000 shares to cover over-allotment, generating
gross proceeds of $77.6 million and net proceeds of underwriting discounts and commission of $73.0 million, exclusive of other offering
expenses payable by the Company.
On January 28, 2021, the Company entered into a stock purchase agreement with ALJ, pursuant to which on February 2, 2021, ALJ
purchased $7.5 million of our common stock in a private placement at a purchase price of $15.00 per share, equal to the public offering price
per share at which our common stock was sold to the public as referred above. The sale of such shares will not be registered under the
Securities Act.
F-24
Certain information marked as [***] has been excluded from this exhibit because it is both (i) not material and (ii) would be competitively
harmful if publicly disclosed
DEVELOPMENT AND CLINICAL MASTER SERVICES AGREEMENT
This Development and Clinical Master Services Agreement (this “Agreement”) is effective as of December 17, 2020 (the “Effective Date”)
by and between Halo Pharmaceutical, Inc. d/b/a Cambrex Whippany, a Delaware corporation (“Cambrex”), and Evelo Biosciences, Inc., a
Delaware corporation (“Client”).
Exhibit 10.17
A. Client develops, markets and sells pharmaceutical products.
RECITALS
B. Cambrex provides clinical development, manufacturing, packaging and related analytical services to the pharmaceutical industry on a
contract basis.
C. The parties entered into that certain partially binding Term Sheet as of August 14, 2020 (the “Term Sheet”) regarding a development and
commercial supply arrangement, which was binding with respect to Tech Transfer Activities (as defined therein) and the purchase of Client
Equipment.
D. Client now desires to engage Cambrex to provide certain services to Client as outlined in Proposal #1 and such future Proposals as the
parties may agree, and Cambrex desires to provide such services, on the terms and subject to the conditions set out below.
ARTICLE 1
DEFINITIONS
1.1. Glossary. The following capitalized terms have the indicated meanings, with grammatical variations having corresponding meanings:
“Affiliate” means, with respect to a person, any other person that directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with such person. For the purposes of this definition only, "control" and, the terms "controlled by"
and "under common control with", shall mean (a) the possession, directly or indirectly, of the power to direct the management or policies of a
person, whether through the ownership of voting securities, by contract or otherwise, or (b) the ownership, directly or indirectly, of more than
fifty percent (50%) of the voting securities or other ownership interest of a person.
“API” means the active pharmaceutical ingredient(s), whether chemical or biologic in nature, identified in a Proposal and provided by Client in
accordance with Section 2.5(b)(i) (Provision of Materials) for Cambrex’s use in connection with the Services.
“Applicable Law” means all laws, statutes, ordinances, regulations, rules, judgments, decrees or orders, as amended from time to time
during the Term, of any Authority: (a) with respect to Cambrex, in the United States or in any other jurisdiction in which Cambrex performs
Services; and (b) with respect to Client, in any jurisdiction in which Client operates or performs activities in respect of this Agreement or in
any jurisdiction in which API or Product is produced, marketed, distributed, made available, used or sold; it being understood, that cGMPs
shall not constitute Applicable Law in respect of the Services to the extent such Services are not required to be provided in accordance with
cGMPs pursuant to the applicable Proposal.
“Authority” means any governmental authority, department, body or agency or any court, tribunal, bureau, commission or other similar body,
whether international, supranational, federal, state, provincial, county or municipal.
“Batch” means a defined quantity of Product or Clinical Stage Product, as applicable, that has been or is being manufactured in accordance
with the Specifications.
“cGMPs” means current good manufacturing practices promulgated by Regulatory Authorities: (a) with respect to Cambrex, in the United
States or in any other jurisdiction in which Cambrex performs Services; and (b) with respect to Client, in any jurisdiction in which Client
operates or performs activities in respect of this Agreement or in any jurisdiction in which API or Product is produced, marketed, distributed,
made available, used or sold; in each case as amended from time to time during the Term. In the United States, cGMPs includes 21 C.F.R.
Parts 210 and 211.
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“Clinical Manufacturing Services” means manufacturing or packaging Services (and related testing Services) that Cambrex shall perform
to produce Clinical Stage Product.
“Clinical Stage Product” means finished or semi-finished Product that (i) is intended for use in human clinical trials or biostudies or (ii) is
necessary to support Client’s regulatory submissions for Product approvals by Regulatory Authorities.
“Components” means, collectively, all General-Supply Components and Product-Specific Components.
“Facility” means (i) in respect of manufacturing, testing and non-testing Services, the facility operated by Cambrex located at 30 North
Jefferson Road, Whippany, New Jersey, 07981, USA, (ii) in respect of testing Services, the facilities operated by an Affiliate of Cambrex
located at 3501 Tricenter Boulevard, Suite C, Durham, North Carolina, 27713, USA or at 104 Gold Street, Agawam, MA, 01001, USA, or (iii)
any other facility approved by Client in writing from time to time (including in a Proposal and pursuant to Section 2.8 (Approved
Subcontractors)).
“Fault” means a party’s recklessness, gross negligence, willful misconduct, fraud or violation of Applicable Law; and with respect to Clinical
Stage Product only, material breach of the Quality Agreement, or failure to follow any written manufacturing procedures (or deviations
therefrom) to which the parties have mutually agreed.
“FDA” means the United States Food and Drug Administration or any successor thereto.
“General-Supply Components” means all excipients, components, consumables, raw materials, packaging, and other items that (a) are
incorporated into or used to produce Product in accordance with each Proposal and (b) are not procured by Cambrex specifically for use in
the manufacture of Product with the prior approval of Client. For clarity, General-Supply Components do not include Client Equipment, API,
or other Client-Supplied Materials.
“Intellectual Property” means any and all intellectual property and embodiments thereof, including patents, patent applications, trademarks,
trademark applications, tradenames, copyrights, industrial designs, trade secrets, and know-how, together with any and all right, title and
interest therein and thereto.
“Invention” means any innovation, improvement, development, discovery, method, know-how, process, technique, work of authorship, or
similar invention, whether or not written or otherwise fixed in any form or medium and whether or not patentable or copyrightable, that is
generated, conceived, or reduced to practice by either party (or any of its employees, independent contractors, subcontractors or agents), or
jointly by the parties, in connection with this Agreement; and all Intellectual Property rights therein.
“Latent Defect” means any non-conformity that causes Clinical Stage Product to be Non-Conforming Product and that could not reasonably
be detected by visual inspection or the analytical methods used to characterize the Product at the time of release.
“Non-Conforming Product” means Clinical Stage Product resulting from Clinical Manufacturing Services hereunder that either (a) has been
delivered by Cambrex hereunder and fails to meet the warranty set forth in Section 6.3(e) (Cambrex Warranties), or (b) was not delivered by
Cambrex but would have failed to meet such warranty had it been so delivered.
“Product” means a pharmaceutical product containing the API or placebo, as identified in a Proposal, which is the subject of the Services.
The term Product includes Clinical Stage Product unless the context requires otherwise.
“Product-Specific Components” means all excipients, components, consumables, raw materials, packaging (including, as applicable,
syringes, cartons, labels, product inserts and containers), and other items that (a) are incorporated into or used to produce Product in
accordance with a Proposal, and (b) are procured by Cambrex specifically for use in the manufacture of Product with the prior approval of
Client. For clarity, Product-Specific Components do not include Client Equipment, API and other Client-Supplied Materials.
“Proposal” means a separate proposal that defines the scope of work to be performed by Cambrex and the responsibilities of the parties
with respect to such work, and that has been signed by both parties, as amended from time to time in accordance with this Agreement.
“Regulatory Authority” means any Authority responsible for granting marketing, distribution and related approvals for pharmaceutical,
medicinal or therapeutic device products intended for human use in the jurisdictions included in
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the definition of Applicable Law, as applicable to each party, with respect to the Products, the Services, and each party’s obligations
hereunder.
“Services” means all work that Cambrex performs pursuant to a Proposal, including analytical services, development services, Product
maintenance and testing services, pre-commercial/clinical manufacturing services or pre-commercial/clinical packaging services, and other
Product-related services as the parties may agree from time to time. The term Services includes Clinical Manufacturing Services unless the
context requires otherwise.
“Specifications” means, with respect to a Product, all written Product specifications agreed to by the parties in the applicable Proposal.
“Third Party” means any person or entity that is not a party to this Agreement or an Affiliate of a party to this Agreement.
1.2. Index. The following capitalized terms are defined in the section of this Agreement indicated below, with grammatical variations having
corresponding meanings:
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Term
Agreement
Cambrex
Cambrex Deficiency Notice
Cambrex Indemnitees
Cambrex Inventions
Change of Scope
Client
Client Equipment
Client Deficiency Notice
Client Indemnitees
Client Inventions
Client-Supplied Materials
Commercial Supply Option
Confidential Information
Dedicated Equipment
Deliverables
Disclosing Party
Dispute
Effective Date
Equipment
Facilitator
Indemnification Claim
Indemnification Claim Date
Initial Proposal
Losses
Proprietary IP
Quality Agreement
Recall
Receiving Party
Records
Representatives
Retain Samples
Term
Term Sheet
Third Party Claim
Section
Introductory paragraph
Introductory paragraph
Schedule A, 1(a)
7.2(b)
9.2(b)
2.2
Introductory paragraph
2.4(a)(iii)
Schedule A, 1(b)
7.2(a)
9.2(a)
2.5(b)(i)
2.9
8.1(a)(i)
2.4(a)(iii)
2.6(a)
8.1(a)(i)
10.1
Introductory paragraph
2.4(a)(iii)
10.1
7.2(c)
7.2(c)
2.1
7.2(a)
9.1
4.5
2.4(d)
8.1(a)(i)
4.2(a)
8.1(a)(i)
4.2(b)
5.1
Recitals
7.2(a)
ARTICLE 2
SERVICES
2.1 Proposals. From time to time during the Term, the parties may negotiate and enter into a Proposal. Each Proposal shall clearly define
the Services, the Product, and the responsibilities of the parties with respect to the project work, and will include a scope of work, pricing and,
if appropriate, payment schedule, Client-Supplied Materials, Components, and such other terms as the parties deem appropriate. Each
Proposal shall be subject to, and shall incorporate by reference, all of the terms and conditions of this Agreement. To the extent any terms or
conditions of a Proposal conflict with the terms and conditions of this Agreement, the terms and conditions of this Agreement shall control,
except to the extent that such Proposal expressly and specifically states an intent to supersede this Agreement on a specific matter. The
initial Proposal agreed by the parties is attached to this Agreement as Schedule B-1 (the “Initial Proposal”). For clarity, an initial draft of the
Initial Proposal was also
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attached to the Term Sheet, and this Agreement will supersede and replace the Term Sheet as to the performance of Services under the
Initial Proposal. For ease of administration, following signature, the parties shall append each subsequent Proposal to Schedule B of this
Agreement (e.g., as a successive Schedule B-2, B-3, etc.), provided, that the parties’ failure to so append any such Proposal that references
this Agreement shall not limit, negate or otherwise affect the effectiveness of such Proposal, which shall become effective upon signature by
the parties.
2.2. Changes to Services.
(a) Change of Scope. Any material change in the scope or details of a Proposal or the assumptions upon which a Proposal is
based (including (i) postponement of the agreed starting date for any Services or suspension of any Services by Client and (ii) changes to the
Specifications or master batch record applicable to such Proposal) shall require a written amendment to the Proposal (such written
amendment, a “Change of Scope”), regardless of whether the change requires any change in pricing or timelines. To the extent any Change
of Scope involves changes in the pricing or timelines under such Proposal, any such change in pricing or timelines shall be set forth in such
Change of Scope. Each Change of Scope will become effective when, and Cambrex shall not be obligated to perform any modified or
additional Services until, it has been signed by both parties. Cambrex will be given a reasonable period of time within which to implement the
changes. Both parties shall act promptly and in good faith when considering a Change of Scope requested by the other party. Where
changes are at Client’s request for the purpose of enabling Client to comply with its commitments to Regulatory Authorities relating to
submissions for Product approvals or required by Applicable Law, Cambrex shall not unreasonably withhold, condition or delay its consent to
such change. Where a Change of Scope involves changes to the Specifications or master batch record applicable to any Proposal, or any
other technical change, Section 2.2(b) (Specifications Amendments and Technical Changes) shall also apply.
(b) Specifications Amendments and Technical Changes. Without limiting Section 2.2 (Change of Scope), changes to a Product’s
Specifications or master batch record or to the Quality Agreement, and any other technical changes to Services, requested by either party
will be implemented only following a technical and cost review by the parties, and are subject to Client and Cambrex reaching agreement on
(i) appropriate revisions to prices and any other impacted fees under this Agreement and applicable Proposals due to increases or decreases
in Cambrex’s costs and (ii) a timeframe for implementation by Cambrex. The parties will memorialize such agreement by executing
appropriate Proposals, Changes of Scope or amendments to this Agreement, as applicable, in accordance with Section 11.5 (Entire
Agreement; Amendments; Waivers). Where changes are at Client’s request (including for the purpose of enabling Client to comply with its
commitments to Regulatory Authorities relating to submissions for Product approvals) or required by Applicable Law, Client shall purchase
from Cambrex (to the extent not yet paid for), and Cambrex shall (at Client’s election and at Client’s cost) deliver to Client or destroy, all
inventories of Product-Specific Components, finished or unusable work-in-process Product or other Product-specific items rendered obsolete
as a result of such amendment.
2.3. Development Activities; Approval Support; Regulatory Matters.
(a) Approval Support. Cambrex shall engage in various development activities and perform various tests as necessary for receipt
of Regulatory Authority approval for the development and manufacture of Products, including without limitation, being prepared for pre-
approval inspections by Regulatory Authorities and performing other development and regulatory activities; in each case as set forth in the
Initial Proposal or subsequent Proposals.
(b) Regulatory Filings. Client shall have the sole responsibility for filing all Product-specific documents with all Regulatory
Authorities and taking any other actions that may be required for the receipt or maintenance of Regulatory Authority approval for the
development and manufacture of Products. Cambrex shall have the sole responsibility for filing all documents with Regulatory Authorities and
taking any other actions that may be required for the receipt or maintenance of Regulatory Authority licensure of the Facility, subject to
reasonable consultation with Client with respect to the form and substance of such filings to the extent such filings are specific to or reference
Products. Cambrex shall be responsible for all costs and expenses related to the maintenance of the Facility in compliance with Applicable
Law. Cambrex shall manufacture the Product at the Facility, shall not change the location of the Facility, and shall not change any systems or
equipment involved in the manufacture of the Products or the provision of Services that, in each case, would require a change to the
Specifications or require Client to make any regulatory filing related to the Product, except with Client’s prior written consent.
(c) Assistance with Regulatory Filings. Cambrex shall provide Client with such information and assistance as Client may
reasonably require for purposes of applying for and maintaining all Regulatory Authority filings and approvals for the Products, including
without limitation, providing Client with all reports, authorizations, certificates, methodologies, specifications and other documentation in the
possession or under the control of
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Cambrex relating to the pharmaceutical/technical development and manufacture of Products or any component thereof needed for Client’s
filings. Cambrex reserves the right to require a new Proposal should the scope of requested activities exceed standard requests for
assistance with Regulatory Authority filings and approvals. Cambrex hereby grants Client an irrevocable, worldwide, paid-up license to use
such information or data and any Intellectual Property rights reflected in such documentation, solely for the purpose of obtaining and
maintaining all Regulatory Authority filings and approvals for the Products.
2.4. Cambrex Responsibilities. In consideration of Client’s payment of the fees due under, and the other terms and conditions of, this
Agreement, Cambrex shall perform the Services at the Facility in accordance with this Agreement (including the applicable Proposal). To this
end:
(a) Materials & Equipment.
(i) Client-Supplied Materials. Upon Client’s delivery of Client-Supplied Materials to Cambrex in accordance with Section 2.5(b)(i)
(Provision of Materials), Cambrex shall: (A) visually inspect Client-Supplied Materials upon receipt to verify their identity and quantity and to
identify any patent defects (i.e., defects that are not Latent Defects), (B) promptly test any Client-Supplied Material only to the extent
expressly required by the applicable Proposal or the Quality Agreement, (C) promptly notify Client if it detects a defect in Client-Supplied
Materials and follow Client’s reasonable written instructions in respect of return or disposal of defective Client-Supplied Materials, at Client’s
cost, (D) store Client-Supplied Materials at the Facility in consideration for the monthly fee agreed in each applicable Proposal, under suitable
conditions in accordance with the specifications therefor (as included in the Specifications or the Proposal, or otherwise agreed by the parties
in writing) and Applicable Law, (E) use Client-Supplied Materials only to provide the Services, and (F) use commercially reasonable efforts to
minimize the loss or waste of API and other Client-Supplied Materials. Cambrex shall not be liable for any defects in Client-Supplied
Materials, or in Services or Product as a result of defective Client-Supplied Materials, unless and to the extent Cambrex failed to properly
perform the foregoing obligations.
(ii) Components. Cambrex shall procure and purchase from reputable suppliers on behalf of and in the name of Client all
Components that are necessary for Cambrex to perform the Services. Cambrex shall test all such Components as set forth in the applicable
Proposal or Quality Agreement. Unless otherwise specified in a given Proposal, Cambrex shall charge through to Client its out-of-pocket
costs in connection with the purchase of Components (including taxes, shipping, insurance, etc. but excluding late payment or other vendor
fees arising from Cambrex’s wrongful act or omission vis-à-vis such vendor) at Cambrex’s actual cost plus, solely with respect to Product-
Specific Components, a [***] administrative fee. Cambrex shall test all Components after receipt at the Facility to the extent required by the
Proposal or the Quality Agreement. Without limiting any obligations of Cambrex with respect to quality of Components and conformance with
the Specifications, Cambrex will use commercially reasonable efforts to minimize the cost of Components procured by Cambrex pursuant to
this Section 2.4(a)(ii). From time to time, Client may suggest to Cambrex that it procure one or more Product-Specific Components from a
particular Third Party Component supplier, and in such event (A) Sections 2.2 (Changes to Service) and 3.1(b) (Changes to Pricing) shall
apply and (B) Client shall audit and qualify such Client-designated suppliers as necessary. At Client’s written request, Cambrex will perform
such audit and qualification activities and may charge Client the fees set forth on Schedule G in consideration for such services. Following
the initial qualification of any such supplier, Cambrex will procure the supply of the applicable Product-Specific Components from such
supplier on terms and conditions reasonably acceptable to Cambrex and will be responsible for the ongoing management of such supplier as
set forth in the Quality Agreement.
(iii) Equipment. Except as the parties may agree in a given Proposal or otherwise in writing from time to time, Cambrex shall
procure and provide at its cost all equipment needed to perform the Services. Any equipment dedicated to Client (“Dedicated Equipment”)
may be either (A) purchased by Cambrex at Cambrex’s actual cost plus a [***] administrative fee or (B) purchased directly by Client and
supplied to Cambrex DDP (Incoterms 2020) the Facility at Client’s sole cost. Client has procured and provided to Cambrex the equipment set
forth on Schedule D (the “Client Equipment,” and together with other Dedicated Equipment that may be purchased in the future, the
“Equipment”). Client shall retain title to the Equipment. Cambrex shall use the Equipment only for the purposes of providing the Services
hereunder to Client and shall be responsible for maintaining all Equipment in good working order, subject to customary wear and tear. Client
shall insure Client Equipment against loss and damage and shall be responsible for extraordinary repairs to Client Equipment not caused by
Cambrex’s fault.
(b) Clinical Supply. The following shall apply only in respect of Clinical Manufacturing Services:
(i) Batch Number. Cambrex will assign each Batch a unique batch number using Cambrex’s batch numbering system. This batch
number will appear on all documents relating to the particular Batch.
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(ii) Packaging. Cambrex shall package Clinical Stage Product as required in the Proposal. For clarity, packaging may be in bulk or
in primary or secondary packaging. Cambrex shall imprint or affix the batch number onto the Clinical Stage Product as described in the
Specifications and required by the Quality Agreement and cGMPs. Cambrex’s name shall not appear on any Clinical Stage Product
packaging except to the extent required by any Applicable Law or consented to in writing by Cambrex.
(iii) Quality Control. Cambrex shall perform quality control and quality assurance testing of Clinical Stage Product as and to the
extent required by the Quality Agreement (or, if there is no Quality Agreement, the Proposal). Batch review and release to Client shall be the
responsibility of Cambrex’s quality assurance group. Cambrex shall perform such Batch review and release responsibilities in accordance
with Cambrex’s standard operating procedures, except to the extent such procedures conflict with any procedures prescribed by the Quality
Agreement or the applicable Proposal. Unless prevented by significant deviations or failures, or agreed to in writing by Client, Cambrex will
complete its Batch review within three (3) calendar weeks following completion of Clinical Stage Product production. Client shall review and
respond to any Batch investigational report provided by Cambrex within ten (10) business days. Each time Cambrex delivers a Batch to
Client, Cambrex shall provide Client with a certificate of compliance and any other certificates required under the Quality Agreement, which
shall include, if Cambrex is responsible for Product testing, a certificate of analysis. At Client’s reasonable request and expense, Cambrex
will provide copies of additional Batch documentation, such as Batch manufacturing records, lot packaging records, equipment data printouts,
raw material data, and laboratory notebooks.
(c) Non-Conforming Services. Subject to Section 3.5 (Pre-Validation Batches), in the event of an error by Cambrex in performing
Clinical Manufacturing Services, the terms of Schedule A shall govern. In the event of a material error by Cambrex in performing any other
Services, Cambrex shall, in agreement with Client, repeat the relevant Services at Cambrex’s cost, and if such error is caused by Cambrex’s
Fault, then Cambrex will also reimburse Client for the cost of the necessary Client-Supplied Materials (subject, for the avoidance of doubt, to
Section 7.1(b) (API)).
(d) Stock Recovery & Recalls. Each party shall promptly notify the other party by telephone (confirmed by written notice) of any
information of which it becomes aware that might affect the safety, efficacy or marketability of any Clinical Stage Product or that could
reasonably be expected to result in the following: any Authority’s request or requirement of, or Client’s reasonable determination of the need
for (i) a stock recovery of Clinical Stage Product used in human clinical trials or biostudies or (ii) a recall of Clinical Stage Product sold
commercially under an Emergency Use Authorization (EUA) or other authorization for commercial sale (each of (i) and (ii), a “Recall”). The
conduct of and regulatory filings for any Recall shall be controlled, implemented and made by Client, and Cambrex will co-operate in such
Recall as reasonably requested by Client, having regard to all Applicable Law. Client shall provide Cambrex a reasonably detailed description
of those portions of any submission to a Regulatory Authority in respect of any Recall that could reasonably be expected to impact
Cambrex’s performance of the Services. Client shall bear the cost of any Recall and reimburse Cambrex for the expenses incurred by
Cambrex in connection with any Recall; unless such Recall is caused primarily by Cambrex’s gross negligence, recklessness, willful
misconduct, material breach of the Quality Agreement, failure to follow any written manufacturing procedures (or deviations therefrom) to
which the parties have mutually agreed, or violation of cGMPs (to the extent applicable), in which case Cambrex will reimburse Client for
Client’s reasonable, actual and documented out-of-pocket administrative and logistical expenses of conducting such Recall and will bear the
expenses incurred by Cambrex in connection with such Recall. For clarity, to the extent that a Recall involves Clinical Stage Product that is
alleged to be Non-Conforming Product, the parties’ respective rights and remedies with respect to such Clinical Stage Product shall be
governed by Schedule A.
2.5. Client Responsibilities. In support of Cambrex’s provision of the Services under this Agreement, Client shall provide certain
information, oversight and materials in accordance with this Agreement (including the applicable Proposal). To this end:
(a) Information & Oversight. Unless otherwise agreed by the parties in writing or in a given Proposal, Client shall (i) provide
complete and accurate scientific data regarding each project described in a Proposal and Client’s requirements for such project, including
test methods and development, formulation, fill and finish of the Product, if applicable, (ii) provide Cambrex with complete and accurate
information necessary to develop the Proposal, including scope of work and estimated or fixed costs, (iii) review and approve all
specifications and protocols for work and Product, and (iv) if applicable, review and approve all in-process and finished Product test results to
ensure conformity of such results with the Specifications.
(b) Client-Supplied Material.
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(i) Provision of Materials. Except as expressly set forth in a Proposal, Client will provide all samples, reference standards, API,
certificates of analysis and other materials (collectively, “Client-Supplied Materials”), as applicable, required for Cambrex to perform such
Proposal. Client shall, at its sole cost and expense, deliver all Client-Supplied Materials to Cambrex DDP (Incoterms 2020) the Facility in the
quantities and at the times specified in the Proposal or otherwise agreed in writing by the parties. Client shall be responsible at its expense
for securing any necessary export or import, or similar clearances or governmental permits required in respect of the provision of Client-
Supplied Materials to Cambrex. Title to and, subject only to Sections 2.4(a)(i) (Client-Supplied Materials), 2.4(c) (Non-Conforming Services),
and Schedule A (and then, for the avoidance of doubt, subject to Section 7.1(b) (API)), risk of loss of Client-Supplied Materials shall at all
times remain with Client, and Client will insure Client-Supplied Materials at Client’s cost. Client-Supplied Materials shall not include any
“controlled substances” within the meaning of Applicable Law.
(ii) Failure to Supply. If Client refuses or fails to timely supply conforming Client-Supplied Materials, Cambrex reserves the right, in
its reasonable discretion, to treat such failure as a postponement by Client of the affected part of the applicable Proposal under Section
3.1(c) (Cancellations and Postponements), which right Cambrex may exercise by providing written notice to Client of its election to treat such
refusal or failure as a postponement effective immediately upon Client’s receipt of such notice.
(iii) Safety Information. Prior to the signing of any Proposal, Client shall have provided Cambrex with all environmental, health and
safety information available to Client relating to Client-Supplied Materials or Product, including available material safety data sheets. Client
shall promptly provide Cambrex any updates to such documentation that become available for so long as Cambrex is performing Services
using such Client-Supplied Materials or Product.
(c) Clinical Supply. If requested by Client, upon successful completion of development work, including any applicable information or
technology transfer or setup, contemplated under the applicable Proposal(s) relating to Clinical Stage Product, Cambrex will provide Clinical
Manufacturing Services to Client with respect to that Product. The following shall apply only in respect of Clinical Manufacturing Services, to
the extent applicable:
(i) Packaging. Client shall be solely responsible for developing and providing to Cambrex all artwork, advertising and labeling in
connection with Clinical Stage Product packaging, including all associated content and Intellectual Property matters. Client may, in its sole
discretion and at its cost, make changes to Product packaging, including labels, inserts and cartons, subject to an appropriate Change of
Scope, as applicable.
(ii) Quality Control. As between the parties, Client shall have sole responsibility for the release of Clinical Stage Product to clinical
trial sites or other human use, and for handling clinical trial site and participant matters.
(iii) Commercial Use. Nothing herein shall prevent or prohibit Client from selling on a commercial basis any Clinical Stage Product
that has been approved for commercial sale under an Emergency Use Authorization (EUA) or other authorization for commercial sale by
Regulatory Authorities. For the avoidance of doubt, in the event Client receives such authorization, Cambrex shall continue to supply Clinical
Stage Product to Client for resale on a commercial basis according to the terms hereof until the earlier of (A) the expiration or termination of
this Agreement or (B) the date the parties execute a Commercial Manufacturing Services Agreement.
2.6. Shipment & Storage. Unless and to the extent otherwise specified in a given Proposal:
(a) Risk of Loss; Title. Cambrex shall deliver all data, results, reports, Product, samples, and other deliverables to be delivered
pursuant to a Proposal, including with each Batch delivery a certificate of compliance and any other certificates required under the Quality
Agreement, which shall include, if Cambrex is responsible for Product testing, a certificate of analysis (“Deliverables”) to Client or to one or
more secondary packagers or other Third Parties as may be designated by Client from time to time, Ex Works (Incoterms 2020) the Facility.
Risk of loss in Deliverables shall transfer to Client in accordance with such Incoterm. To the extent not already held by Client, title to
Deliverables shall transfer to Client concurrently with risk of loss.
(b) Packing and Transport. Cambrex shall pack and label shipping containers in accordance with Applicable Law and transport
guidelines, the Specifications, and Client’s written instructions (to the extent not inconsistent with any of the foregoing). Client shall arrange
for insurance and shall select the freight carrier to be used to ship Deliverables.
(c) Storage. At Client’s request, Cambrex will store Clinical Stage Product at the Facility for up to [***] following its release by
Cambrex’s quality group free of charge. If Client does not take delivery of Clinical Stage
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Product within such period, (i) Client shall pay Cambrex a monthly storage fee in respect of the period commencing after such [***] period at
Cambrex’s then-current standard rate or as otherwise set forth in the applicable Proposal and (ii) upon two (2) weeks’ written notice to Client,
Cambrex shall have the option to ship to Client, at Client’s cost, any Clinical Stage Product that is or contains a controlled substance or that
has been held by Cambrex in storage longer than [***].
2.7. Samples and Excess Materials. Following completion of each relevant phase of a Proposal, development samples (excluding
samples of Clinical Stage Products to be retained as required by Applicable Law, which shall be handled in accordance with Section 4.2(b)
(Retain Samples)) will be stored at the Facility for ninety (90) days. After the 90-day period, Cambrex may dispose of samples if, within thirty
(30) days following written notice to Client, Client has not provided written instructions for returning such samples to Client at Client’s cost.
Cambrex may also dispose of all unused Client-Supplied Materials and any Components paid for by Client pursuant to Section 2.4(a)(ii)
(Components) if, within thirty (30) days following written notice to Client, Client has not provided written instructions for returning such Client-
Supplied Materials and Components to Client at Client’s cost.
2.8. Cambrex Subcontractors. Cambrex may subcontract the performance of Services hereunder to Third Parties only with Client’s prior
written approval, which approval will not be unreasonably withheld. Client hereby grants its consent to the use of the subcontractors set forth
on Schedule E. Where such a subcontractor is being engaged for testing services, at Client’s request, Cambrex and Client will use
reasonable efforts to enter into a three-party agreement with such Third Party subcontractor pursuant to which Client will transfer necessary
technical know-how to the subcontractor and interface with such subcontractor to facilitate accurate testing, and Client may condition its
consent to Cambrex’s use of such subcontractor upon execution of such three-party agreement on reasonable terms satisfactory to Client.
Cambrex shall not be liable for any delay in performing Services arising as result of (a) the negotiation of any such three-party agreement
(excluding unreasonable delays by Cambrex during such negotiations) or (b) a technology transfer by Client.
2.9. Option for Commercial Supply. Client will have the option to engage Cambrex to manufacture and supply commercial quantities of
the Products (the “Commercial Supply Option”), which option Client may exercise by providing written notice to Cambrex of its election to
do so at any time during the Term of this Agreement. If Client exercises the Commercial Supply Option, then Cambrex and Client will, within
thirty (30) days following Client’s exercise of the Commercial Supply Option, negotiate in good faith and, if agreement is reached, promptly
execute, a mutually acceptable Commercial Manufacturing Services Agreement containing the terms and conditions set forth in Schedule F.
3.1. Fees.
ARTICLE 3
PRICING & PAYMENT
(a) Price; Price Adjustments. Client shall pay the prices for the Services as provided in this Agreement and each Proposal (as
modified by any Change of Scope), as adjusted pursuant to this Section 3.1 (Price; Price Adjustments). The parties will negotiate in good
faith an adjustment to the prices provided in a Proposal if and to the extent any assumptions underlying the prices in the Proposal change
materially as a result of the development work performed under this Agreement. In addition, the prices provided in a Proposal are subject to
annual review by the parties to address inflation or deflation, with any such change being calculated based on changes to the Producer Price
Index for prescription pharmaceuticals as reported by the Bureau of Labor Statistics (published at the end of the calendar year prior to the
calendar year in which such price adjustment is considered).
(b) Changes to Pricing. Pricing for Services will be subject to change in accordance with Section 2.2 (Changes to Services).
(c) Cancellations and Postponements. Client may cancel any Proposal in its entirety by terminating it in accordance with Section
5.2(c) (Convenience), subject to Sections 2.2(a) (Change of Scope) and 5.3 (Obligations on Termination). Client may cancel any Proposal in
part, or postpone any Proposal in its entirety or in part, upon [***] written notice to Cambrex, the effective date of such cancellation or
postponement to be the date that is five (5) business days after Cambrex’s receipt of such notice or, if later, such other date specified in such
notice; provided, that any such postponement or partial cancellation shall not relieve Client of its obligation to pay all costs or fees that have
accrued prior to such postponement or partial cancellation (including payment of amounts due pursuant to Section 2.4(a)(ii) (Components))
and the terms of Sections 2.7 (Samples and Excess Materials) and 5.3 (Obligations on Termination) shall apply as though the applicable
postponed or partially cancelled Services had been terminated. Client and Cambrex shall cooperate in good faith to reschedule any
postponed Services to a mutually acceptable date. Any Services that have not been rescheduled to commence within [***] following the
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originally (first) scheduled start date shall be subject to re-pricing by Cambrex to account for changes in the cost drivers contemplated by
Sections 3.1(a) (Price; Price Adjustments) and 3.1(b) (Changes to Pricing). In addition, Cambrex may cancel or terminate the applicable
Proposal upon [***] written notice to Client if any such Services have not been rescheduled within [***] following the originally (first) scheduled
start date, and subject to any incremental costs and fees that would have been payable had Client cancelled at the outset instead of
postponing.
(d) Retesting. Cambrex reserves the right to charge Client for retesting and required investigational studies performed that are not
directly due to Cambrex’s Fault. Any tests or investigations requested by Client that are not required pursuant to the Proposal or, if
applicable, the Quality Agreement will be charged to Client at Cambrex’s then-current standard rates.
3.2. Invoicing. The terms of this Section 3.2 (Invoicing) shall apply except to the extent otherwise expressly agreed in a Proposal:
Cambrex shall send invoices by email to such email address as Client may provide to Cambrex in writing from time to time. For Batch
manufacture or packaging (including Clinical Manufacturing Services), Cambrex shall invoice Client (a) for Clinical Stage Product, following
quality release of the Batch by Cambrex’s quality assurance department or (b) for Product that is not Clinical Stage Product, following
completion of the last step of actual manufacturing and packaging (as applicable) of such Product. Cambrex shall invoice Client for all other
fees due under this Agreement (including for Services not involving Batch manufacture, for obsolete items pursuant to Section 2.2(b)
(Specifications Amendments and Technical Changes), for Components pursuant to Section 2.4(a)(ii) (Components), for storage fees
pursuant to Section 2.6(c) (Storage), and for shipping charges pursuant to Section 2.7 (Samples and Excess Materials)) as and when earned
or accrued. Fees assessed on an annual basis, if any (such as GDUFA or annual product review fees, if applicable, or as may be agreed in a
Proposal), will be invoiced as of the first day of each calendar year. Each such invoice shall reference this Agreement and the applicable
Proposal, and identify in reasonable detail the nature of the charges therein. If the invoice includes fees for manufacturing or packaging
Clinical Stage Product, the invoice shall also identify the Batch number, Purchase Order number, and quantity of the applicable Clinical Stage
Product.
3.3. Payment Terms. Client shall pay all invoiced amounts that are not subject to a good faith dispute by Client in full within [***] following
Client’s receipt of each applicable invoice. Client shall make payment in the currency indicated in the applicable Proposal to the account
indicated in the applicable invoice. If any payment is neither received by Cambrex by its due date nor disputed in good faith by Client, then
Cambrex may, in addition to any other remedies available at law or in equity, take one or more of the following actions: (a) charge interest on
the outstanding sum from the due date (both before and after any judgment) at a monthly compounding rate equal to [***] per year (or, if less,
the maximum amount permitted by Applicable Law) until paid in full, plus all reasonable costs of collection of late payments, including
reasonable attorneys’ fees, incurred through the date of actual payment (but excluding court costs); (b) cease all work hereunder until all
Client accounts are brought current; (c) require Client to pre-pay all activities before Cambrex initiates work or procures Components in
connection with any Proposals; and (d) exercise its rights under Section 11.2(a) (Force Majeure).
3.4. Taxes. All taxes, duties and other amounts assessed by any Authority (excluding tax based on net income or real property and
franchise taxes) on Client-Supplied Materials, Product, Services or other amounts due hereunder are the responsibility of Client, and Client
shall reimburse Cambrex for all such taxes, duties and amounts required to be paid by Cambrex to any Authority (or such sums will be added
to invoices directed at Client, where applicable). Cambrex shall reasonably cooperate with Client to utilize any legally available reductions or
exemptions from any such taxes, duties or assessments.
3.5. Pre-Validation Batches. Client shall be responsible for the full cost of each Batch produced under this Agreement at the theoretical
quantities when priced on a per-unit basis (including Clinical Stage Batches and Batches necessary to support the validation portion of
Client’s submissions for Product approvals by Regulatory Authorities and any Batch manufactured following (a) a change in Specifications or
(b) a scale-up in the manufacturing process to produce greater quantities of Product), even if the Batch fails to meet the Specifications (and
in such case, Client shall also be responsible for the cost of destroying the out-of-Specification Batch and its components), until all
manufacturing, testing and storage methods and processes have been validated in accordance with industry standards (including production
of at least three (3) consecutive cGMP Batches of each strength and packaging configuration that meet the then-applicable Specifications);
provided, that the foregoing shall not apply to the extent such failure to meet the Specifications would not have occurred but for Cambrex’s
Fault, in which case Cambrex will be responsible for such costs. Cambrex and Client shall cooperate in good faith to determine and resolve
any problems causing the out-of-Specification Batch.
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4.1. Liaisons; Quarterly Review. Promptly following the signing of this Agreement, each party shall appoint one of its employees to be a
relationship manager responsible for liaising between the parties with respect to the Services. The relationship managers shall meet, either in
person or by teleconference, not less than quarterly to review the current status of the business relationship and manage any issues that
have arisen.
ARTICLE 4
COOPERATION
4.2. Records & Samples.
(a) Records. Unless the parties otherwise agree in writing, Cambrex shall, at its own cost and expense, keep materially complete
and accurate records with respect to the performance of the Services, including, without limitation, (i) Batch, laboratory data, reports and
other technical records, (ii) records of Cambrex’s purchases of Components and Dedicated Equipment sufficient to verify costs and to trace
the ownership and possession, (iii) records necessary to verify the accuracy of other charges invoiced to Client by Cambrex under this
Agreement, including pass-through charges (i.e., amounts invoiced by Third Parties) (provided, for the avoidance of doubt, that the foregoing
shall not be construed as giving Client a general right to audit Cambrex’s financial records), and (iv) all other records reasonably necessary
to document Cambrex’s performance of the Services in accordance with Applicable Law (collectively, “Records”). Copies of Records shall be
retained by Cambrex for a period of three (3) years following the date on which Cambrex completed the relevant Services, or longer if
required by Applicable Law. Before destroying Records, Cambrex will use its reasonable efforts to contact Client to offer Client the
opportunity to take delivery and possession of such Records at Client’s cost.
(b) Retain Samples. Unless the parties otherwise agree in writing, Cambrex shall, at its own cost and expense, keep materially
complete and accurate retain samples of Clinical Stage Product as necessary to comply with Applicable Law (“Retain Samples”). Retain
Samples shall be retained by Cambrex for a period of one (1) year following the date of Clinical Stage Product expiry, or longer if required by
Applicable Law. Before destroying Retain Samples, Cambrex will use its reasonable efforts to contact Client to offer Client the opportunity to
take delivery and possession of such Retain Samples Records at Client’s cost.
4.3. Client Inspections. Once every [***] during the Term (or, if for cause, more frequently as reasonably agreed by the parties), upon
reasonable (but no less than [***]) prior written notice, Cambrex shall grant Client access, during normal business hours, to areas of the
Facility in which Services are performed in order to verify that Cambrex is performing the Services (including, without limitation,
manufacturing, packaging, testing and storage activities) in accordance with any Specifications, the Proposal, and cGMPs or other regulatory
requirements (to the extent applicable). During any such inspection, Cambrex shall also permit Client to inspect Records, samples, and
reports relating to this Agreement. The parties’ relationship managers shall arrange such inspections. Cambrex’s quality assurance staff shall
cooperate with Client, as reasonably necessary, in any inspection conducted pursuant to this Section 4.3 (Client Inspections). Inspections
shall be designed to minimize disruption of operations at the Facility, and shall be limited to two (2) Client representatives for up to two (2)
consecutive days. A Cambrex representative shall be present at all times during each inspection. Client’s representatives shall comply with
the Facility’s rules. Client shall indemnify and hold harmless Cambrex for any act or omission of Client’s representatives while on Cambrex’s
premises. For the clarity, the foregoing inspections will not limit the quarterly meeting of relationship managers pursuant to Section 4.1
(Liaisons; Quarterly Review).
4.4 Regulatory Inspections. Each party shall promptly notify the other party of any planned or actual Facility inspection by any Regulatory
Authority specifically involving a Product, except for unannounced inspections. Client shall have the right to be present at the Facility during
any planned inspection, so long as Client provides (to the extent reasonably practicable) at least two (2) weeks’ notice of such desire. Client
acknowledges that it may not direct the manner in which Cambrex fulfills its obligations to permit inspection by and to communicate with
Regulatory Authorities. Cambrex shall notify Client of receipt of any Form 483s, warning letters, and inquiries by any Regulatory Authority or
other significant regulatory action that could reasonably be expected to impact the regulatory status of the Products or Cambrex’s ability to
perform the Services in accordance with the terms of this Agreement. Cambrex shall provide Client with copies of the sections of all Form
483s or comparable regulatory notices that are specific to any Product, redacted as necessary to preserve the confidentiality of Cambrex’s
other information. Likewise, Client shall provide Cambrex with a reasonably detailed description of those portions of any material
correspondence with any Regulatory Authority, including any FDA refusal to file, rejection or warning letters, in each case that could
reasonably be expected to impact Cambrex’s performance of Services and/or the timing and volume of Client’s purchases under this
Agreement. If an inspection by a Regulatory Authority is solely attributable to a Product or Proposal (such as a pre-approval inspection),
Client shall reimburse Cambrex for all reasonable and documented costs associated with such inspection.
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4.5. Quality Agreement. As soon as reasonably practicable after the signing of the Initial Proposal, and in any event prior to Cambrex’s
performance of any Services for any GMP grade Product, the parties shall negotiate in good faith and enter into an agreement setting out the
quality assurance standards and protocols applicable to the relevant Services under the Initial Proposal and each subsequent Proposal
hereunder and the parties’ responsibilities in respect thereof (each, a “Quality Agreement”). If the parties have signed a Quality Agreement
prior to the Effective Date, it is attached hereto as Schedule C. Unless otherwise expressly set forth in a new Quality Agreement entered into
by the parties to cover a specific Proposal, the first Quality Agreement entered into by the parties shall cover the Initial Proposal and each
subsequent Proposal hereunder. Following signature, the parties shall append each Quality Agreement as a successive Schedule C. No
Quality Agreement shall in any way determine liability or financial responsibility of the parties for the responsibilities set forth therein. In the
event of a conflict between any of the provisions of this Agreement and a Quality Agreement with respect to quality-related activities,
including compliance with cGMPs, the provisions of the Quality Agreement shall govern. In the event of a conflict between any of the
provisions of this Agreement and a Quality Agreement with respect to any commercial matters, including allocation of risk, liability and
financial responsibility, the provisions of this Agreement shall govern.
ARTICLE 5
TERM & TERMINATION
5.1. Term. This Agreement shall commence as of the Effective Date and shall expire on the later of (a) five (5) years thereafter or (b) six (6)
months after the expiration or termination of all the Proposals, unless earlier terminated in accordance with Section 5.2 (Termination) or the
parties otherwise agree to extend this Agreement (the “Term”).
5.2. Termination.
(a) Breach. Either party may terminate this Agreement or any Proposal upon written notice to the other party if the other party has
failed to remedy a material breach of this Agreement or such Proposal, as applicable, within sixty (60) days (or ten (10) days in respect of a
breach involving non-payment) following receipt of a written notice that describes the breach in reasonable detail and expressly states that it
is a notice under this Section 5.2(a) (Breach).
(b) Bankruptcy. Either party may terminate this Agreement immediately upon written notice to the other party in the event that (i)
the other party is declared insolvent or bankrupt by a court of competent jurisdiction, and such declaration or order remains in effect for a
period of sixty (60) days, (ii) a voluntary petition of bankruptcy is filed in any court of competent jurisdiction by such other party, or (iii) this
Agreement is assigned by such other party for the benefit of creditors; provided, that such written notice of termination shall not be required if
the giving of notice is prohibited or impaired by applicable bankruptcy laws, in which case termination shall be automatic without further
action by the terminating party.
(c) Convenience. Client may terminate this Agreement for any reason or no reason at any time on sixty (60) days’ prior written
notice to Cambrex; and may terminate any Proposal for any reason or no reason at any time on five (5) business days’ prior written notice to
Cambrex.
5.3. Obligations on Termination. Expiration or termination of this Agreement or any Proposal shall be without prejudice to any rights or
obligations that accrued to either party prior to such expiration or termination. Upon expiration or termination of this Agreement or any
Proposal, as applicable:
(a) Wind-Down. Cambrex will promptly cease or wind down, as appropriate, work under the terminated Proposal(s);
(b) Work In Process. At Client’s election, Cambrex shall either (i) complete any Clinical Stage Product that is a work in process,
which Clinical Stage Product shall be subject to Section 5.3(c) (Clinical Stage Product), or (ii) cease such work and transfer such work in
process into storage containers, and Client shall be obligated to pay Cambrex a pro rata amount of all work to date; it being understood that if
termination is by Cambrex under Section 5.2(a) (Breach) or 5.2(b) (Bankruptcy) or if Client fails to make such an election within one full
business day following the expiration or other termination of this Agreement or the applicable Proposal, clause (ii) above shall automatically
apply;
(c) Clinical Stage Product. Client shall take delivery of and pay for all completed, undelivered Clinical Stage Product that Cambrex
has produced pursuant to the terminated Proposal(s);
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(d) Inventory. Client shall purchase, at Cambrex’s cost (to the extent not already paid for by Client in accordance with Section
2.4(a)(ii) (Components) and ARTICLE 3 (Pricing & Payment)), all Product-Specific Components then in stock or later delivered by a Third
Party vendor pursuant to non-cancellable orders, in each case, that cannot be used by Cambrex for its other customers within ninety (90)
days of the applicable expiration or termination date hereunder, and shall reimburse Cambrex for any cancellation fees assessed by Third
Party vendors for orders that are cancellable;
(e) Client-Supplied Materials. Cambrex shall return to Client all unused Client-Supplied Materials and deliver to Client all
Components paid for by Client in accordance with Section 2.4(a)(ii) (Components) and ARTICLE 3 (Pricing & Payment) or paid for by Client
pursuant to Section 5.3(d) (Inventory);
(f) Records & Samples. Cambrex shall maintain Records and Retain Samples in accordance with Section 4.2 (Records and
Samples) and Applicable Law;
(g) Stability. At Client’s election, Cambrex shall either (i) continue to perform any ongoing stability testing or (ii) ship the stability
samples to Client; it being understood that if termination is by Cambrex under Section 5.2(a) (Breach) or 5.2(b) (Bankruptcy) or if Client fails
to make such an election within thirty (30) days following the expiration or other termination of this Agreement or the applicable Proposal,
clause (ii) above shall automatically apply; and
(h) Payment. Client shall pay Cambrex for all Services performed under the terminated Proposal(s) up to the effective date of
termination, plus any cancellation fees set forth in the terminated Proposal(s).
Any costs incurred by Cambrex to comply with the foregoing obligations, including shipping and related expenses, shall be borne by Client,
except if such termination of this Agreement is by Client for Cambrex’s uncured material breach under Section 5.2(a) (Breach) (in which case
Cambrex shall bear all such expenses (excluding fees under Section 5.3(g)(i) (Stability), which shall be borne by Client in all events) or to the
extent such costs result from Cambrex’s Fault in the performance of such obligations. In lieu of taking possession of any of the materials
described in this Section 5.3 (Obligations on Termination), Client may direct Cambrex to destroy such items, which Cambrex shall cause to
be done at Client’s cost.
5.4. Survival. Notwithstanding any expiration or termination of this Agreement for any reason, the parties’ rights and obligations under the
following provisions shall survive and continue in effect in accordance with their respective terms: Sections 2.4(d) (Stock Recovery &
Recalls), 2.5(c)(ii) (Quality Control), 2.6 (Shipment & Storage), 2.9 (Option for Commercial Supply), 3.1(c) (Cancellations and
Postponements), 3.3 (Payment Terms), 3.4 (Taxes), 4.2 (Records and Samples), 5.3 (Obligations on Termination), 5.4 (Survival), and 6.4
(Limited Warranty), and ARTICLE 7 (Indemnitees & Insurance) through ARTICLE 11 (Miscellaneous) inclusive. Any expiration or early
termination of this Agreement shall be without prejudice to the rights of either party against the other accrued or accruing under this
Agreement prior to termination. After the date of expiration or termination of this Agreement, Cambrex shall not further manufacture Product
or use any of Client’s Intellectual Property (including Client’s Proprietary IP and Client Inventions) for any reason whatsoever.
ARTICLE 6
REPRESENTATIONS & WARRANTIES
6.1. Authority. Each party represents, warrants and covenants to the other that (a) it has the full right and authority to enter into and
perform its obligations under this Agreement (including each Proposal), (b) it is in good standing in its jurisdiction of organization and all
jurisdictions in which it operates, (c) the execution and delivery of this Agreement and the performance of such its obligations hereunder (and
thereunder) do not conflict with, or constitute a default or require any consent under, any contractual obligation of such party, its charter
documents or bylaws, or any order, writ, injunction or decree of any applicable Authority, and (d) it will comply with all Applicable Law in
performing its obligations and activities under this Agreement.
6.2. Client Warranties. Except to the extent expressly otherwise provided in a given Proposal, Client covenants, represents and warrants
to Cambrex that:
(a) to Client’s knowledge, all Intellectual Property (other than Cambrex’s Intellectual Property) provided by Client to Cambrex for
use in connection with providing Services (i) may lawfully be used by Cambrex in connection with providing Services and (ii) so long as
Cambrex uses such Intellectual Property solely as
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contemplated by this Agreement, such use does not and will not infringe, violate or misuse any rights held by Third Parties;
(b) to Client’s knowledge, there are no rights held by Third Parties related to Client’s Intellectual Property that would be infringed,
violated or misused by Client’s performance of this Agreement, and as of the Effective Date, Client has no knowledge of any claims of
infringement that have been made by Third Parties against Client in connection with the Product;
(c) all artwork, the content of all labeling and packaging, and all other Specifications provided or approved by Client comply with
Applicable Law;
(d) all Client-Supplied Materials provided to Cambrex hereunder have been manufactured in accordance with Applicable Law,
including cGMPs (where applicable), and shall at the time of delivery to Cambrex meet all applicable Specifications and not be adulterated,
misbranded or mislabeled within the meaning of Applicable Law;
(e) all Deliverables provided to Client by Cambrex hereunder shall be held, stored, used and otherwise disposed of by or on behalf
of Client in accordance with all Applicable Law (including, in connection with any such items that are not labeled, 21 CFR § 201.150);
specifically, Client shall not permit the human consumption of any such items, except to the extent such consumption occurs in the course of
clinical studies that expressly permit such use and that have been approved by appropriate Authorities or if such consumption is otherwise
permitted by Applicable Law, including pursuant to any authorization for commercial sale under an Emergency Use Authorization (EUA) or
other authorization for commercial sale by Regulatory Authorities; and
(f) it will notify Cambrex in writing of any representation or warranty hereof ceasing to be true or correct.
6.3. Cambrex Warranties. Except to the extent expressly otherwise provided in a given Proposal, Cambrex covenants, represents and
warrants to Client that:
(a) to Cambrex’s knowledge, it owns or has the right to license or assign, as contemplated by the terms of this Agreement, any
Cambrex Intellectual Property rights (where applicable) used in the manufacture the Product;
(b) to Cambrex’s knowledge, use of Cambrex’s Proprietary IP by Cambrex in connection with the Services hereunder does not or
will not infringe, violate or misuse the Intellectual Property rights of any Third Party;
(c) it does not and will not use in the performance of its obligations under this Agreement the services of any person debarred or
suspended under 21 U.S.C. §335(a) or (b), or who is the subject of a conviction described in such sections; and Cambrex shall promptly
notify Client if Cambrex becomes aware of its breach, or of facts that could reasonably be expected to lead to its breach, of this Section
6.3(c) (Cambrex Warranties);
(d) it does not have and will not hire as an officer or employee any person who has been convicted of a felony under the laws of the
United States for conduct relating to the regulation of any drug product under the Federal Food, Drug, and Cosmetic Act;
(e) Cambrex shall perform the manufacturing of all Clinical Stage Product provided to Client hereunder in accordance with
Applicable Law (including cGMPs) and all Clinical Stage Product provided to Client hereunder shall at the time of delivery under Section
2.6(a) (Risk of Loss; Title) (i) meet all Specifications and (ii) not be adulterated, misbranded or mislabeled within the meaning of Applicable
Law; provided that Cambrex makes no representation or warranty with respect to any Product or circumstance that is expressly excluded
from liability under Section 3 of Schedule A;
(f) Cambrex shall maintain the Facility and shall conduct all manufacturing Services in compliance with all Applicable Laws,
including without limitation cGMPs (if applicable to the Services in question), at all times during the Term;
(g) upon delivery of Product to Client, Cambrex shall convey and Client shall have good and marketable title to such Product, free
and clear of any encumbrances imposed as a result of any act or omission of Cambrex; and
(e) it will notify Client in writing of any representation or warranty hereof ceasing to be true or correct.
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6.4. Limited Warranty. NEITHER PARTY MAKES ANY REPRESENTATION, WARRANTY OR GUARANTEE OF ANY KIND, EITHER
EXPRESS OR IMPLIED, BY FACT OR LAW, OTHER THAN THOSE EXPRESSLY SET FORTH IN THIS ARTICLE 6 (REPRESENTATIONS
& WARRANTIES) OR THE APPLICABLE PROPOSAL. CAMBREX EXPRESSLY DISCLAIMS THE IMPLIED WARRANTY OF FITNESS
FOR A PARTICULAR PURPOSE AND ANY WARRANTY OF MERCHANTABILITY WITH RESPECT TO THE PRODUCTS AND SERVICES.
7.1. Limitation of Liability.
ARTICLE 7
INDEMNITIES & INSURANCE
(a) No Consequential Damages. Neither party shall be liable to the other party in contract, tort, negligence, breach of statutory duty
or otherwise for (i) any loss of profits, revenues, production, anticipated savings, data, business or goodwill or (ii) any other liability, damage,
cost or expense of any kind incurred by the other party of an indirect, incidental, consequential, punitive or special nature, in each case, as a
result of any breach of this Agreement or arising in connection with this Agreement, regardless of any notice of the possibility of such
damages; provided, however, that such limitation shall not apply to Third Party Claims (as defined below) against the other party which are
indemnified under Section 7.2 (Indemnification) and are caused (directly or indirectly) by facts or circumstances constituting gross negligence
or willful misconduct by the indemnifying party.
(b) API. Except as expressly set forth in this Agreement or the applicable Proposal, Cambrex shall not be responsible for any loss
or damage to API; provided, that if any such loss or damage to API would not have occurred but for Cambrex’s Fault, then Cambrex shall be
liable for such loss or damage up to the lesser of (i) [***] per Proposal or (ii) the amount set forth in Section 7.1(c) (Maximum Liability),
subject to Section 7.1(d) (Exclusions).
(c) Maximum Liability. Cambrex’s maximum liability under this Agreement (in the aggregate and including any amounts payable
pursuant to Section 7.1(b) (API)) shall not exceed [***] (or, in the case of the indemnification obligations set forth in clause (i) of Section 7.2(a)
(By Cambrex), the lesser of [***] or [***]) the total fees paid to Cambrex by Client under the Proposal(s) giving rise to the applicable claim(s)
in the twelve (12) months prior to the date on which such claim(s) arise(s) (which date, in the case of Indemnification Claims, shall be the
Indemnification Claim Date, rather than the date on which the Third Party Claim arises); provided, that if the effective date of an applicable
Proposal was less than twelve (12) months prior to such claim, such liability shall not exceed [***] (or, in the case of the indemnification
obligations set forth in clause (i) of Section 7.2(a) (By Cambrex), the lesser of [***] or [***]) the sum of (i) the total fees paid to Cambrex by
Client under such Proposal since its effective date to the date of such claim (which date, in the case of Indemnification Claims, shall be the
Indemnification Claim Date, rather than the date on which the Third Party Claim arises) plus (ii) the total fees payable to Cambrex by Client
under such Proposal from the date of such claim (which date, in the case of Indemnification Claims, shall be the Indemnification Claim Date,
rather than the date on which the Third Party Claim arises) through the one (1) year anniversary of the effective date of such Proposal;
provided further, that the calculation of such fees (and amounts paid or payable) shall exclude all pass-through costs, such as Cambrex’s
out-of-pocket cost in connection with the purchase of Components and the cost of procuring any applicable comparator product.
(d) Exclusions. The foregoing Sections 7.1(a) (No Consequential Damages), 7.1(b) (API) and 7.1(c) (Maximum Liability) shall not
limit (i) damages arising from a party’s fraud, gross negligence, recklessness, or willful misconduct (including such party’s indemnification
obligations under Section 7.2 (Indemnification) for the same), (ii) the indemnification obligations set forth in clause (ii) of Section 7.2(a) (By
Cambrex) or clause (iii) of Section 7.2(b) (By Client), or (iii) damages arising from a party’s breach of ARTICLE 8 (Confidentiality).
7.2. Indemnification.
(a) By Cambrex. Cambrex shall defend, indemnify and hold harmless Client, its Affiliates, and its and their respective directors,
officers and employees (“Client Indemnitees”) from and against any and all losses, damages, costs, expenses (including reasonable
attorneys’ fees and reasonable investigative costs), judgments and liabilities (“Losses”) in connection with any suit, demand, claim or action
by any Third Party (“Third Party Claim”) arising or resulting from (i) a breach by Cambrex of any of its obligations, warranties, or
representations under this Agreement, (ii) an infringement or alleged infringement of the Intellectual Property rights of a Third Party arising
through Cambrex’s use of Cambrex’s Intellectual Property (including Cambrex’s Proprietary IP and Cambrex Inventions), or (iii) the gross
negligence, recklessness or willful misconduct of any Cambrex Indemnitee; in each case, except to the extent that such Losses arise or
result from the gross negligence, recklessness or willful misconduct of any Client Indemnitee.
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(b) By Client. Client shall defend, indemnify and hold harmless Cambrex, its Affiliates, and its and their respective directors, officers
and employees (“Cambrex Indemnitees”) from and against any and all Losses in connection with any Third Party Claim arising or resulting
from (i) a breach by Client of any of its obligations, warranties, or representations under this Agreement, (ii) the Fault of any Client
Indemnitee, (iii) any actual or alleged infringement, violation or misuse of any Intellectual Property rights held by Third Parties in respect of
any aspect of any Product (other than solely by reason of the use of Cambrex’s Intellectual Property (including Cambrex’s Proprietary IP and
Inventions generated, conceived or reduced to practice solely by Cambrex under this Agreement)), or (iv) any distribution or use of or
exposure to any API or Product, including the conduct of any clinical trial utilizing, or commercial sale of, any Clinical Stage Product that is
the subject of any Clinical Manufacturing Services; in each case, except to the extent that such Losses arise or result from the gross
negligence, recklessness or willful misconduct of any Cambrex Indemnitee. In addition, Client shall defend, indemnify and hold harmless the
Cambrex Indemnitees from and against any and all Losses resulting from or relating to any filings with any Regulatory Authority by or on
behalf of Client or any of its Affiliates or licensees, including filings under 21 U.S.C. 355 or Section 505 of the U.S. Food and Drug Act (or
non-U.S. equivalents) and related claims or proceedings (including Losses associated with Cambrex’s obligation to respond to Third Party
subpoenas); except to the extent that such Losses arise or result from the gross negligence, recklessness or willful misconduct of any
Cambrex Indemnitee.
(c) Procedure. In the event a party seeks indemnity under this Section 7.2 (Indemnification), it shall: (i) promptly notify the
indemnifying party in writing of the Third Party Claim subject to indemnification (an “Indemnification Claim”, and the date of such notice, the
“Indemnification Claim Date”); (ii) use commercially reasonable efforts to mitigate the effects of such Third Party Claim; (iii) reasonably
cooperate with the indemnifying party in the defense of such Third Party Claim; (iv) not settle or compromise such Third Party Claim or make
any admission relating thereto; and (v) permit the indemnifying party to control the defense and settlement of such Third Party Claim using
counsel selected in the indemnifying party’s reasonable discretion upon reasonable consultation with the indemnified party, all at the
indemnifying party’s cost and expense. The indemnified party may be represented by its own counsel in connection with such Third Party
Claim, and such representation shall be at the indemnified party’s own expense unless the indemnifying party fails to assume the defense of
such Third Party Claim as required hereunder. The indemnifying party shall have the right to settle any such Third Party Claim without the
consent of any indemnitee so long as such settlement does not admit to any wrongdoing by any indemnitee, does not impose any liability or
obligation (whether financial or otherwise) on any indemnitee and fully releases the indemnitees from liability in connection with such Third
Party Claim. The indemnified party’s consent to any other settlement shall be required. Notwithstanding the foregoing, if such Third Party
Claim seeks damages in an amount exceeding an applicable maximum liability set forth in Section 7.1(c) (Maximum Liability) for the
indemnifying party’s liability in respect of such indemnity, then, unless the indemnifying party waives its rights to any such limitation of liability
under Section 7.1(c) (Maximum Liability) with respect to such Third Party Claim and such indemnity, the indemnified party will have the first
right to control the defense and settlement of such Third Party Claim using counsel selected in the indemnified party’s sole discretion and at
the indemnifying party’s reasonable cost and expense. In such event, the indemnified party shall not settle any such Third Party Claim in a
manner that would result in liability for the indemnifying without the consent of the indemnifying party.
7.3. Insurance. During the Term and for at least [***] thereafter, each party shall obtain from and maintain with reputable and financially
secure insurance carriers prudent insurance coverage appropriate to cover its activities related to and obligations under this Agreement.
Each party shall provide to the other party a certificate evidencing such insurance upon the other party’s request.
7.4. Reasonable Allocation of Risk. The parties agree that (a) the provisions of this Agreement (including this ARTICLE 7 (Indemnitees &
Insurance)) are reasonable and create a reasonable allocation of risk having regard to the relative profits the parties respectively expect to
derive from the Products; (b) Cambrex, in consideration of its fees for the provision of the Services, has not accepted a greater degree of the
risks arising from the manufacture, distribution, sale and use of the Products based on the fact that Client has developed the Products and
requires Cambrex to manufacture and label the Products strictly in accordance with the Specifications; and (c) Client and not Cambrex is in a
position to inform and advise potential users of the Products as to the circumstances and manner of use of the Products.
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8.1. Confidentiality.
ARTICLE 8
CONFIDENTIALITY
(a) Information.
(i) Definitions. “Confidential Information” means any scientific, clinical, regulatory, marketing, business, operational, financial or
commercial information or data of a party (as such, the “Disclosing Party”) or any of its Affiliates that is disclosed by or on behalf of the
Disclosing Party to the other party (as such, the “Receiving Party”), any of its Affiliates or any of its or their respective directors, officers,
employees, independent contractors, accountants, attorneys, professional consultants and agents (such Affiliates and persons,
“Representatives”) in connection with this Agreement, any Proposal or the negotiation of any potential Proposal, (A) whether before, on or
after the Effective Date, (B) whether tangible or intangible, (C) whether written, electronic, oral, visual (e.g., obtained by observation at a site
visit) or in any other form or medium and (D) whether or not marked with a legend such as “Confidential” or “Proprietary.” For the avoidance
of doubt, the term Confidential Information shall be construed as “the Disclosing Party’s Confidential Information.” Notwithstanding the
foregoing, Client’s Confidential Information shall include Client’s Proprietary IP, all Client Inventions, and the data and information allocated to
Client under Section 9.4 (Ownership of Data), and Client shall be deemed the Disclosing Party thereof for purposes of this Agreement.
Likewise, Cambrex’s Confidential Information shall include Cambrex’s Proprietary IP, all Cambrex Inventions, all Cambrex standard operating
procedures, and all pricing under Proposals, and Cambrex shall be deemed the Disclosing Party thereof for purposes of this Agreement.
(ii) Inclusions. Confidential Information includes (A) any copies of Confidential Information, (B) those portions of any summaries
and other analyses prepared by or for the Receiving Party or its Representatives, to the extent containing, based upon or derived from other
Confidential Information, and (C) the existence and terms of this Agreement.
(iii) Exclusions. Confidential Information excludes information that:
(A) as documented by business records, is already known by the Receiving Party or any of its Representatives at the time of its
receipt, other than through a prior disclosure by the Disclosing Party or by a Third Party bound to the Disclosing Party by an obligation of
confidentiality with respect to such information;
(B) is at the time of disclosure or thereafter becomes available to the public or otherwise part of the public domain without breach of
this Agreement by the Receiving Party or any of its Representatives;
(C) is subsequently disclosed to the Receiving Party or any of its Representatives without any duty of confidentiality by a Third
Party who has the right to make such disclosure and who is not bound to the Disclosing Party by an obligation of confidentiality with respect
to such information; or
(D) is developed by or for the Receiving Party or any of its Representatives independently of Confidential Information or other
information received from the Disclosing Party, to the extent such independent development is properly documented by the Receiving Party
or such Representative.
For the avoidance of doubt, Confidential Information shall not be deemed to be in the public domain or in the prior possession of a person
where it is merely embraced by or contained in more general information that is in the public domain or in such person’s possession.
(b) Non-Disclosure and Non-Use. Each Receiving Party shall use Confidential Information only for performing its obligations and
exercising its rights as contemplated by this Agreement or the applicable Proposal, and shall not disclose such Confidential Information to
any Third Party or use such Confidential Information for any other purpose, except as otherwise permitted herein or with the prior consent of
the Disclosing Party. The disclosure of Confidential Information by the Disclosing Party does not, in itself, grant or imply any right or license to
use or practice any Intellectual Property of the Disclosing Party; it being agreed that the parties only grant such rights or licenses as
expressly set forth in this Agreement.
(c) Permitted Recipients. Each Receiving Party may disclose Confidential Information to those of its Representatives who (i) have a
need to know such information in connection with the Receiving Party performance of its obligations and the exercise of its rights under this
Agreement, (ii) have been advised of the Receiving Party’s obligations under this ARTICLE 8 (Confidentiality), and (iii) are bound to the
Receiving Party by obligations of confidentiality and non-use at least as stringent as those contained in this ARTICLE 8 (Confidentiality).
Each Receiving Party shall be responsible for any breach of this ARTICLE 8 (Confidentiality) caused by its
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Representatives, unless such Representative has entered into a confidentiality agreement directly with the Disclosing Party with respect to
the Confidential Information covered by this ARTICLE 8 (Confidentiality).
(d) Standard of Care. Each Receiving Party shall (i) protect Confidential Information with the same degree of care that it uses to
protect its own confidential information, but no less than a reasonable degree of care, and (ii) not remove or obscure any copyright or
trademark notice, proprietary legend, indication of confidentiality or other restrictive notation on any Confidential Information.
(e) Permitted Disclosure. Nothing herein shall be interpreted to prohibit Client from publishing the results of its studies in
accordance with industry practices, so long as it obtains Cambrex’s prior written consent before disclosing Cambrex’s Confidential
Information. In addition, nothing herein shall prohibit a Receiving Party hereto from disclosing the Disclosing Party’s Confidential Information
to governmental or other regulatory agencies to the extent reasonably necessary to obtain patents for its patentable Intellectual Property or to
gain approval to conduct clinical trials or to market Product, so long as it obtains the Disclosing Party’s prior written consent before disclosing
the Disclosing Party’s Confidential Information.
(d) Required Disclosure. Each Receiving Party and its Representatives may disclose such Confidential Information as is required
to be disclosed by law, regulation, court order or other legal process or by the rules of any public exchange on which the securities of such
party are listed, provided that (i) to the extent legally permissible and reasonably practicable, notice is promptly delivered to the Disclosing
Party in order to provide an opportunity for Disclosing Party to seek a protective order or other similar order with respect to such Confidential
Information, (ii) the Receiving Party or its Representative, as applicable, reasonably cooperates with the Disclosing Party in any such efforts,
at the Disclosing Party’s request and expense, and (iii) the Receiving Party or its Representative, as applicable, thereafter discloses only the
minimum information required to be disclosed in order to comply with the request, whether or not a protective order or other similar order is
obtained by the Disclosing Party.
(e) Return of Information. Upon expiration or termination of this Agreement, each Receiving Party shall immediately cease using all
Confidential Information (except as set forth in Section 9.3(b) (To Client) or any other provision herein granting Client a right to use
Cambrex’s Confidential Information, which grant expressly survives the expiration or termination of this Agreement). As directed by the
Disclosing Party in writing, the Receiving Party shall (to the extent legally permissible) promptly return to the Disclosing Party or, at the
Receiving Party’s election, destroy all Confidential Information in its possession (and upon a separate written request by the Disclosing Party,
shall confirm such destruction). Notwithstanding the foregoing, (i) each Receiving Party and its Representatives may retain a single copy of
Confidential Information in the secure files of its legal counsel or executive management for the purposes of proving what was disclosed and
complying with document retention policies, (ii) each Receiving Party is not required to return or destroy any Confidential Information if doing
so would violate (or result in the violation of) any Applicable Law, (iii) each Receiving Party shall not be required to expunge any minutes or
written consents of its board of directors (or equivalent governance body) or laboratory notebooks, and (iv) to the extent that a Receiving
Party’s computer back-up or archiving procedures create copies of Confidential Information, the Receiving Party may retain such copies for
the period it normally archives backed-up computer records, so long as such copies are not readily accessible and are not used or consulted
for any purpose other than disaster recovery or in connection with the circumstances contemplated by Section 8.1(f) (Required Disclosure)
(and then subject to the procedures set forth in such Section 8.1(f) (Required Disclosure)). Any Confidential Information retained pursuant to
the foregoing sentence shall remain subject to this ARTICLE 8 (Confidentiality) until the earliest of (A) its destruction, (B) the date that it is no
longer deemed Confidential Information based on Section 8.1(a)(iii) (Exclusions), and (C) the end of the period set forth in Section 8.1(h)
(Survival).
(h) Survival. The foregoing obligations shall survive the expiration or termination of this Agreement for a period of [***] thereafter.
8.2. Publicity. Neither party will use the other party’s name, logos or marks in any public context, on labeling or in advertising, or make any
press release or other public disclosure regarding this Agreement or the transactions contemplated hereby, including identifying the other
party as a business partner or in connection with any scholarly or industry publications or presentations, without the other party’s express
prior written consent, subject to Section 8.1(f) (Required Disclosure). Notwithstanding the foregoing, nothing herein shall prohibit Client from
identifying Cambrex as the manufacturer of the Products in accordance with regulatory requirements, subject to Section 8.1(f) (Required
Disclosure).
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ARTICLE 9
INTELLECTUAL PROPERTY
9.1. Proprietary Intellectual Property. For purposes of this Agreement, as between the parties: (a) all Intellectual Property owned by a
party or any of its Affiliates as of the Effective Date shall be deemed owned by such party; (b) all Intellectual Property licensed to a party or
any of its Affiliates by a Third Party at any time shall be deemed owned by such party; and (c) all Intellectual Property generated, conceived
or reduced to practice by or for a party or any of its Affiliates outside the scope of activities under this Agreement shall be deemed owned by
such party (collectively, such party’s “Proprietary IP”).
9.2. Inventions.
(a) Client Inventions. As between the parties, all Inventions to the extent (i) specific to the Product (or specific to pharmaceutical
preparations derived from [***]), or (ii) dependent on Client’s Proprietary IP (collectively, “Client Inventions”) shall be the exclusive property
of Client.
(b) Cambrex Inventions. As between the parties, all Inventions that (i) do not comprise Client Inventions and (ii) either (A) have
application to manufacturing or packaging processes for drug products or drug delivery systems generally or (B) are dependent on
Cambrex’s Proprietary IP (collectively, “Cambrex Inventions”) shall be the exclusive property of Cambrex.
(c) Disclosure. Cambrex shall promptly submit to Client a written description of all Inventions of which it becomes aware during the
Term. Client may disclose Cambrex Inventions in any patent application claiming Client’s Inventions, as Client may reasonably require to
support the claimed subject matter of such patent application, subject to Cambrex’s prior written approval, which shall not be unreasonably
withheld.
(d) Cooperation; Costs. Cambrex will, and hereby does, assign to Client all of its rights, title and interests in and to Client
Inventions; and Client will, and hereby does assign to Cambrex all of its rights, title and interests in and to the Cambrex Inventions. The
parties shall cooperate to achieve the allocation of rights to Inventions anticipated herein, including by executing documents confirming such
assignments and allocation of rights and providing good faith testimony by affidavit, by declaration, or in-person. In addition, each party shall
be solely responsible for the costs of filing, prosecution and maintenance of patents and patent applications on, and otherwise protecting, its
Inventions.
9.3. Licenses.
(a) To Cambrex. Client hereby grants to Cambrex a non-exclusive, paid-up, royalty-free, non-transferable, sublicenseable (solely to
Cambrex’s subcontractors approved by Client in accordance with Section 2.8 (Cambrex Subcontractors)) right and license during the Term to
use Client’s Proprietary IP (as Client may provide to Cambrex from time to time under this Agreement) and Client Inventions solely for the
purpose of performing Services for Client during the Term. Cambrex shall not, and shall ensure that any and all subcontractors do not, use
the Intellectual Property licensed hereunder for any purpose not expressly permitted by the foregoing license.
(b) To Client. Cambrex hereby grants to Client a perpetual, irrevocable, worldwide, non-exclusive, paid-up, royalty-free, non-
transferable right and license (with the right to sublicense through multiple tiers) to use (i) any of Cambrex’s Proprietary IP used by Cambrex
to manufacture or test Products and (ii) any Cambrex Inventions (in each case (i) or (ii)) solely to develop, manufacture, use, sell, offer for
sale, import, export and otherwise commercialize and exploit Products in accordance with Applicable Law. For the avoidance of doubt, the
foregoing license shall survive any expiration or termination of this Agreement or any Proposal. Client shall not, and shall ensure that any and
all sublicensees do not, use the Intellectual Property licensed hereunder for any purpose not expressly permitted by the foregoing license.
(c) No Other Rights. Neither party has, nor shall it acquire, any interest in any Intellectual Property of the other party, and neither
party shall use any Intellectual Property of the other party, except to the extent expressly permitted by this Section 9.3 (Licenses).
9.4. Ownership of Data. Except as set forth in Section 9.2(b) (Cambrex Inventions), all data and information resulting from the conduct of
the Services shall be the sole property of Client and shall be subject to Client’s exclusive use, commercial or otherwise.
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9.5. Technology Transfer. At Client’s request during the Term or in the event of the expiration or termination of this Agreement, Cambrex
shall provide reasonable technical assistance to Client to implement the technology transfer of (a) the process for manufacturing Products to
Client or one of its Affiliates, and (b) the analytical testing methodology of Products to Client, one of its Affiliates or a reasonably competent
Third Party. In addition, as part of such technology transfer, Cambrex will perform analytical testing services as reasonably requested by
Client to validate the transferred manufacturing process. Such activities shall be performed pursuant to a reasonable written proposal or
other agreement agreed by Client and Cambrex. Client will reimburse Cambrex for its reasonable costs and expenses incurred in performing
such technology transfer at Cambrex’s then-current standard rates, unless such transfer is requested following Cambrex’s material breach of
its obligations to manufacture and supply Clinical Stage Product pursuant to this Agreement and the applicable Proposal.
ARTICLE 10
DISPUTE RESOLUTION
10.1. Escalation. The parties shall try to resolve any dispute arising out of or in connection with this Agreement other than a dispute
determined in accordance with Schedule A (a “Dispute”) amicably between themselves before resorting to any formal dispute resolution
proceeding. To this end, either party may send a notice of Dispute to the other. Within ten (10) business days following the date of the
Dispute notice, each party shall appoint a single, senior representative with the full power and authority to resolve the Dispute (a
“Facilitator”). The Facilitators shall meet and discuss as necessary to try to resolve the Dispute as quickly as practicable. If a Dispute relates
exclusively to technical aspects of the Services, the Facilitators shall be competent to address the technical nature of the issues in question,
and may elect to engage an independent laboratory or expert to assist them in their discussions; however, the input of such laboratory or
expert shall not be binding on either party. If a party fails to timely appoint a Facilitator or if, despite their reasonable efforts, the Facilitators
have not resolved a Dispute within one (1) month from the date of the Dispute notice, either party may resort to a court of competent
jurisdiction, subject to Section 10.3 (Jurisdiction), or any other method of binding dispute resolution on which the parties may agree.
10.2 Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of New Jersey and the
laws of the United States applicable therein, without regard to any conflicts of law principles. The UN Convention on Contracts for the
International Sale of Goods shall not apply to this Agreement.
10.3. Jurisdiction. The parties irrevocably agree that the state and federal courts sitting in the Borough of Manhattan, City of New York,
State of New York shall have exclusive jurisdiction to deal with any Dispute and that venue is proper in such courts. Each party hereby
expressly consents and submits to the personal jurisdiction of such courts, waives any objection to the laying of venue in such courts, and
waives any claim that such courts constitute an inconvenient forum. Each party, to the extent permitted by law, knowingly, voluntarily and
intentionally waives its right to a trial by jury in any Dispute, regardless of the legal theory of the claims asserted in such Dispute. All
documents and proceedings in connection with any Dispute shall be in the English language.
ARTICLE 11
MISCELLANEOUS
11.1 Further Assurances. The parties agree to execute, acknowledge and deliver such further instruments and to take all such other
incidental acts as may be reasonably necessary or appropriate to carry out the purpose and intent of this Agreement.
11.2. Interruption in Performance.
(a) Force Majeure. Neither party shall be liable for the failure to perform its obligations under this Agreement if such failure is
occasioned by a cause or contingency beyond such party's reasonable control, including strikes or other labor disturbances, lockouts, riots,
quarantines, communicable disease outbreaks, wars, acts of terrorism, fires, floods, storms, interruption of or delay in transportation, lack of
or inability to obtain fuel, power, materials or components, or compliance with any order or regulation of any Authority acting within color of
right. A party claiming a right to excused performance under this Section 11.2(a) (Force Majeure) shall promptly notify the other party in
writing of the extent of its inability to perform and the nature of the force majeure event, shall use all commercially reasonable efforts to
mitigate the effects of the force majeure event, and shall keep the other party reasonably updated on its progress in mitigating the effects of
such force majeure event. Such excuse shall continue as long as the force majeure event continues. Upon cessation of such force majeure
event, the affected party shall promptly resume performance under this Agreement as soon as it is commercially reasonable for the
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party to do so. Neither party shall be entitled to rely on a force majeure event to relieve it from an obligation to pay money (including any
interest for delayed payment) that would otherwise be due and payable under this Agreement.
(b) COVID-19. In order to maintain a safe workplace, Cambrex has and will continue to implement federal, state and local
mandates and recommendations for social distancing, personal protection and disinfecting related to the COVID-19 pandemic ongoing as of
the Effective Date (the “COVID-19 Pandemic”), which may negatively impact productivity and timelines. Further, it is possible that
Components may be delayed or limited in supply as a result of the COVID-19 Pandemic; however, as of the Effective Date, Cambrex has no
knowledge that any Components are subject to any such delay. Cambrex shall not have any liability for any delays or failure to meet
prescribed timelines as a result of the COVID-19 Pandemic to the extent Cambrex has used all commercially reasonable efforts to mitigate
the effect of the COVID-19 Pandemic and such circumstances. Cambrex shall immediately notify Client if, by reason of the COVID-19
Pandemic, Cambrex is unable to meet any deadline or time for performance specified in a Proposal or this Agreement, and will keep Client
regularly informed as to its progress in overcoming or mitigating any such effect.
11.3. Notices. Any notice or other communication required or permitted by this Agreement shall be in writing and deemed given to the
other party (a) upon receipt if delivered personally, (b) upon receipt or refusal if sent by reputable overnight courier service or
registered/certified mail with tracking capability, postage prepaid, or (c) on the next business day if sent by email with electronic verification of
delivery, in each case to the mailing address or email address set forth below (or to such other contact information provided to the other party
in accordance with the terms of this Section 11.3 (Notices)):
To Client: Evelo Biosciences, Inc.
th
620 Memorial Drive, 5 Floor
Cambridge, MA 02139
Attention: [***]
Email: [***]
With copy to: Evelo Biosciences, Inc.
th
620 Memorial Drive, 5 Floor
Cambridge, MA 02139
Attention: [***]
Email: [***]
To Cambrex: Cambrex Whippany
30 North Jefferson Rd.
Whippany NJ 07981 USA
Attention: [***]
With copy to: Cambrex Corporation
One Meadowlands Plaza
East Rutherford, NJ 07073 USA
Attention: [***]
Facsimile: [***]
11.4. Assignment; No Third Party Beneficiaries. This Agreement shall be binding upon and inure to the benefit of the parties, their
successors and permitted assigns. Neither party may assign this Agreement, in whole or in part, without the prior written consent of the other
party, except that either party may, without the other party’s consent (but subject to prior written notice), assign this Agreement in its entirety
to an Affiliate or to a successor to substantially all of the business or assets of the assigning party or the assigning party’s business unit
responsible for performance under this Agreement. This Agreement shall not confer any rights or remedies upon any person or entity other
than the parties named herein and their respective successors and permitted assigns.
11.5. Entire Agreement; Amendments; Waivers. This Agreement, including all attached Schedules, Proposals and Changes of Scope,
together with the Quality Agreement, constitutes the entire and integrated agreement between the parties relating to the subject matter
hereof and supersedes all previous written or oral negotiations, commitments, agreements, transactions or understandings with respect to
the subject matter hereof, including the Term Sheet. Any modification, amendment or supplement to this Agreement must be in writing and
signed by both parties to be effective, except to the extent otherwise expressly provided in this Agreement. Either party’s delay or failure to
require the other party to comply with any provision of this Agreement shall not be deemed a waiver of such provision or any other provision
of this Agreement, or of any other breach of such provision.
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11.6. Conflicts. No terms, provisions or conditions of any purchase order, order acknowledgement, quote, proposal, invoice, or other
business form or written authorization used by Client or Cambrex will have any effect on the rights, duties or obligations of the parties under,
or otherwise modify, this Agreement, regardless of any failure of Client or Cambrex to object to such terms, provisions, or conditions, except
to the extent such document specifically refers to this Agreement, sets forth an express intent to override it, and is signed by both parties.
11.7. Construction.
(a) Independent Contractors. The parties are independent contractors to one another and this Agreement shall not be construed to
create between Cambrex and Client any other relationship such as, by way of example only, that of employer-employee, principal-agent,
joint-venturers, partners or any similar relationship, the existence of which is expressly denied by the parties. Neither party shall have the
power or authority to bind the other party or to assume or create any obligation, express or implied, on the other party’s behalf or in the other
party’s name, nor will it represent to any person or entity that it has such power or authority.
(b) Drafting Party. The language in this Agreement is to be construed in all cases according to its fair meaning. Cambrex and Client
acknowledge that each party and its counsel have reviewed and revised this Agreement and that any rule of construction, to the effect that
any ambiguities are to be resolved against the drafting party, is not to be employed in the interpretation of this Agreement.
(c) Severability. If any provision of this Agreement is determined by a court of competent jurisdiction to be invalid, illegal or
unenforceable in any respect, such determination shall not impair or affect the validity, legality or enforceability of the remaining provisions
hereof, and each provision is hereby declared to be separate, severable and distinct.
(d) Divisions. The division of this Agreement into Articles, Sections, subsections, clauses and Schedules and the insertion of
headings are for convenience of reference only and shall not affect the interpretation of this Agreement. Unless otherwise indicated, any
reference in this Agreement to an Article, Section or Schedule refers to the specified Article, Section or Schedule to this Agreement. In this
Agreement, the terms “this Agreement”, “hereof”, “herein”, “hereunder” and similar expressions refer to this Agreement as a whole (including
any Schedules hereto) and not to any particular Article, Section, Schedule or other provision hereof.
(e) Conventions. Whenever used in this Agreement, unless otherwise specified: (a) all monetary amounts are expressed in, and all
references to “$” or “dollars” mean, the lawful currency of the United States; (b) the word “including” (with its grammatical variations) means
“including without limitation,” “including but not limited to”, or words of similar import; (c) the word “days” means calendar days unless
otherwise specified as business days; (d) the words “copy” and “copies” include, to the extent available, electronic copies, files or databases
containing the information, files, items, documents or materials to which such words apply; (e) the word “or” will not be exclusive and will be
interpreted to mean “and/or;” (f) the words “hereof” and “hereunder” and words of similar import and will be construed to refer to this
Agreement in its entirety and not any particular provision hereof; (g) the word “will” will be construed to have the same meaning as the word
“shall;” and (h) all references to the singular shall include the plural and vice versa, as the context reasonably requires.
11.8. Counterparts. This Agreement may be executed in counterparts, by original, electronic or facsimile signature, each of which shall be
deemed an original, but all of which together shall constitute one and the same instrument. This Agreement may be delivered electronically
by email of a signed PDF copy.
Signature page follows
IN WITNESS WHEREOF, the duly authorized representatives of the parties have executed this Agreement as of the Effective Date.
HALO PHARMACEUTICAL, INC. D/B/A CAMBREX WHIPPANY
By _/s/ Troy Player____________
Name: Troy Player
Title: President, Drug Product
86274635_42
EVELO BIOSCIENCES, INC.
By _/s/ Daniel S. Char__________
Name: Daniel S. Char
Title: General Counsel & Secretary
SCHEDULES
Schedule A - Non-Conforming Product Procedures
Schedule B - Proposals
Schedule C - Quality Agreement
Schedule D - Client Equipment
Schedule E - Pre-Approved Subcontractors
Schedule F - Binding Term Sheet for Commercial Manufacturing Services Agreement
Schedule G - Additional Service Fees
SCHEDULE A
NON-CONFORMING PRODUCT PROCEDURES
The terms of this Schedule A shall apply in respect of Clinical Manufacturing Services:
1. Product Claims.
(a) Undelivered Non-Conforming Product.
(i) If Cambrex determines at any time during the performance of the Clinical Manufacturing Services (including in the
performance of its obligations under Section 2.4(b)(iii) (Quality Control)), but prior to its delivery of an applicable Batch to Client, that a Batch
(or any portion thereof) is Non-Conforming Product, then Cambrex shall give Client written notice thereof, including a statement as to the
nature of the non-conformity and whether (and if not, why) Cambrex believes that such non-conformity was not caused primarily by
Cambrex’s Fault, and a sample of the Non-Conforming Product (together, a “Cambrex Deficiency Notice”).
(ii) If Client disagrees with or desires to obtain additional information with respect to a Cambrex Deficiency Notice (i.e., with
respect to whether the non-conformity is caused primarily by Cambrex’s Fault), Client shall give Cambrex written notice thereof within thirty
(30) days after receiving the Cambrex Deficiency Notice. If, within thirty (30) days after Cambrex’s receipt of such notice, Cambrex and Client
fail to agree as to whether Cambrex’s Fault was the primary cause of the non-conformity, the parties shall mutually select an independent
laboratory or qualified person, as appropriate, to evaluate the cause of such non-conformity. The evaluation shall be binding on the parties. If
the evaluation confirms that the non-conformity in the subject Batch (or portion thereof) was caused primarily by Cambrex’s Fault, then (i)
Cambrex shall bear the cost of the evaluation, and (ii) the subject Batch (or portion thereof) shall be deemed Non-Conforming Product and
the non-conformity shall be deemed caused primarily by Cambrex’s Fault for purposes of clause (c) below. If the evaluation determines that
the non-conformity in the subject Batch (or portion thereof) was not caused primarily by Cambrex’s Fault (or if Client does not timely disagree
with a Cambrex Deficiency Notice’s assertion that Non-Conforming Product was not caused primarily by Cambrex’s Fault), then (x) Client
shall bear the cost of the evaluation, if applicable, and (y) the subject Batch (or portion thereof) shall not be deemed Non-Conforming Product
caused primarily by Cambrex’s Fault for purposes of clause (c) below.
(b) Delivered Non-Conforming Product.
(i) Subject to the terms and conditions of this Schedule A (including Sections 1(c), 2 and 4), Client has the right to reject any
portion of any shipment of Clinical Stage Product that it alleges to be Non-Conforming Product without invalidating any remainder of such
shipment. Upon receipt of each Product shipment under this Agreement, Client shall visually inspect each Batch and perform any testing that
the applicable Proposal or Quality Agreement requires Client to perform. Client shall give Cambrex written notice of any claim that a Batch
(or portion thereof) is Non-Conforming Product, including a statement as to the nature of the non-conformity and
86274635_42
whether (and if so, why) Client believes that such non-conformity was caused primarily by Cambrex’s Fault, and a sample of the allegedly
Non-Conforming Product (together, a “Client Deficiency Notice”) within thirty (30) days after Client’s receipt of such Batch or, in the case of
a Latent Defect, within fifteen (15) days after Client’s discovery of the Latent Defect, but in no event after the expiration date of the Batch in
question. If Client fails to timely provide Cambrex with a Client Deficiency Notice, the Batch shall be deemed accepted by Client as of the 30
day after delivery or 15 day after discovery, as applicable.
th
th
(ii) If Cambrex disagrees with a Client Deficiency Notice (i.e., with respect to whether the subject Batch (or portion thereof) is
Non-Conforming Product or whether the non-conformity is caused primarily by Cambrex’s Fault), Cambrex shall give Client written notice of
such disagreement within thirty (30) days after receiving the Client Deficiency Notice. If, within thirty (30) days after Client’s receipt of
Cambrex’s disagreement notice, Client and Cambrex fail to agree as to whether the subject Batch (or portion thereof) is Non-Conforming
Product and/or whether the non-conformity was caused primarily by Cambrex’s Fault, as applicable, the parties shall mutually select an
independent laboratory or qualified person, as appropriate, to evaluate whether the subject Batch (or portion thereof) is Non-Conforming
Product and/or the cause of such non-conformity, as applicable. The evaluation shall be binding on the parties. If Client has asserted in the
Client Deficiency Notice that a Batch (or a portion thereof) is Non-Conforming Product caused primarily by Cambrex’s Fault and the
evaluation confirms that the subject Batch (or portion thereof) is Non-Conforming Product and that the non-conformity was caused primarily
by Cambrex’s Fault (or if Cambrex does not timely disagree with a Client Deficiency Notice), then (i) the subject Batch (or portion thereof)
shall be deemed properly rejected under this Section 1(b) of Schedule A, (ii) Cambrex shall bear the cost of the evaluation, as applicable,
and (iii) the subject Batch (or portion thereof) shall be deemed Non-Conforming Product and the non-conformity shall be deemed caused
primarily by Cambrex’s Fault for purposes of clause (c). If Client has asserted in the Client Deficiency Notice that a Batch (or a portion
thereof) is Non-Conforming Product caused primarily by Cambrex’s Fault and the evaluation determines that the subject Batch (or portion
thereof) is Non-Conforming Product but that such non-conformity is not caused primarily by Cambrex’s Fault, then the subject Batch (or
portion thereof) shall be deemed Non-Conforming Product but not caused primarily by Cambrex’s Fault for purposes of clause (c). If the
evaluation determines that the subject Batch (or portion thereof) is not Non-Conforming Product, then (A) the subject Batch (or portion
thereof) shall be deemed accepted by Client as of the 45th day after delivery or discovery, as applicable, and (B) Client shall bear the cost of
the evaluation.
(c) Remedies. In respect of any Batch (or any portion thereof) agreed or determined to be Non-Conforming Product caused primarily
by Cambrex’s Fault under either Section 1(a) or 1(b) of this Schedule A, Cambrex will either (i) to the extent permitted by cGMPs and
reasonably approved by Client, rework or reprocess the subject Batch (or portion thereof) at Cambrex’s cost, and, where Section 1(b)(ii) of
this Schedule A applies, pay for the return shipping of the subject Batch (or portion thereof) to the Facility, or (ii) to the extent such reworking
or reprocessing is not permitted by cGMPs or not approved by Client (which approval shall not be unreasonably withheld, conditioned or
delayed), replace the subject Batch (or portion thereof) at Cambrex’s cost, so long as Client provides the necessary Client-Supplied Materials
at Cambrex’s cost (subject, for the avoidance of doubt, to Section 7.1(b) (API)). In respect of any Batch (or any portion thereof) agreed or
determined either not to be Non-Conforming Product or to be Non-Conforming Product but not caused primarily by Cambrex’s Fault under
either Section 1(a) or 1(b) of this Schedule A, Client will be responsible for the cost of such Batch (or portion thereof).
2. Disposition of Product. Client shall not use or permit the use of any Clinical Stage Product that does not, or that Client has reason to
believe does not, meet the Specifications or comply with Applicable Law. Client shall not, without Cambrex’s prior written consent, destroy or
otherwise dispose of any Non-Conforming Products in relation to which it intends to assert a claim against Cambrex. Cambrex shall bear the
cost of destroying any Batch (or any portion thereof) agreed or determined to be Non-Conforming Product caused primarily by Cambrex’s
Fault under either Section 1(a)(ii) or 1(b)(ii) of this Schedule A. In all other circumstances, Client shall bear the cost of such destruction.
3. Limitations. For the avoidance of doubt, Cambrex shall have no obligation for Clinical Stage Product if any deficiencies in, or other
liabilities associated with, such Clinical Stage Product (a) are caused by incorrect, unlawful or deficient Specifications (including artwork and
labeling), by the safety, efficacy or marketability of API or Clinical Stage Product, or by any distribution of the Clinical Stage Product, in each
case to the extent not resulting from Cambrex’s Fault, (b) result from any defect in Client-Supplied Materials that Cambrex could not
reasonably discover by visual inspection or testing as required under Section 2.4(a)(i) (Client-Supplied Materials), (c) are caused by actions
of Third Parties occurring after Clinical Stage Product is tendered for delivery by Cambrex pursuant to Section 2.6(a) (Risk of Loss; Title), or
(d) are caused by any breach of Client’s obligations, representations, warranties or covenants under this Agreement.
86274635_42
4. Sole Remedy. In addition to the remedies set forth in Section 2.4(d) (Stock Recovery & Recalls) and indemnification obligations and rights
set forth in Section 7.2(a) (By Cambrex), the remedies described in this Schedule A shall be Cambrex’s sole liability and Client’s sole remedy
for Non-Conforming Product.
SCHEDULE B
PROPOSALS
[To be attached successively following signing by the parties.]
86274635_42
SCHEDULE B-1
PROPOSAL #1
[See attached.]
86274635_42
SCHEDULE C
QUALITY AGREEMENTS
[See attached.]
86274635_42
Equipment / Change Parts
Price Estimate
SCHEDULE D
CLIENT EQUIPMENT
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
86274635_42
In addition to any subcontractors expressly identified in the Quality Agreement:
PRE-APPROVED SUBCONTRACTORS
SCHEDULE E
SUBCONTRACTOR
LOCATION
SERVICES
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
86274635_42
SCHEDULE F
BINDING TERM SHEET FOR
COMMERCIAL MANUFACTURING SERVICES AGREEMENT
The Commercial Manufacturing Services Agreement will reflect the terms and conditions described below, as well as other terms and
conditions standard and customary for these types of agreements as the parties may agree in connection with the negotiation of the
Commercial Manufacturing Services Agreement. Capitalized terms used and not otherwise defined in this Binding Term Sheet have the
meanings ascribed to them in the Development and Clinical Master Services Agreement to which this Binding Term Sheet is attached (the
“DCMSA”). For the avoidance of doubt, while the provisions of this Binding Term Sheet are intended to be binding as it relates to the parties’
negotiation of a Commercial Manufacturing Services Agreement, neither party shall have any obligation to purchase or supply Product for
commercial sale unless and until a Commercial Manufacturing Services Agreement has been executed.
Materials: Client will provide Cambrex with conforming API and certificates of analysis at Client’s cost, DDP (Incoterms 2020) the
Facility. Cambrex will procure and purchase on behalf of Client, and test in accordance with the Quality Agreement entered
into by the parties, all Components required to supply the quantities of Product specified for delivery during the first [***] of
each Rolling Forecast (as defined below). The cost of Components will be included in the price of Product and not separately
charged to Client; provided, that Client will be responsible for the costs of (i) Product-specific consumables and standards
necessary for analytical testing of Product plus a [***] administrative fee thereon, and (ii) Product-Specific Components that
become obsolete or expire while in Cambrex’s stock.
Equipment: The Commercial Manufacturing Services Agreement will reflect the terms set out in Section 2.4(a)(iii) (Equipment) and Schedule
D of the DCMSA.
Forecast: On a [***] basis, Client will deliver to Cambrex a rolling forecast of the quantities of Product which Client reasonably anticipates it
will order during the subsequent [***] (the “Rolling Forecast”). For each Rolling Forecast, the amounts specified for delivery
during the first [***] will be binding on Client (the “Commitment”).
Capacity: Cambrex will guarantee that it will at all times maintain manufacturing, supply and testing capacity necessary to timely satisfy any
purchase orders for Product submitted by Client for quantities of Product equal to at least [***] of the most recent Rolling
Forecast quantities. Cambrex shall not at any time enter into any agreement or other arrangement with any Third Party that
could reasonably be expected to render Cambrex unable to (y) meet Client’s demand for the quantities of Product set forth in
the most recent Rolling Forecast or (z) otherwise perform the Services. Cambrex shall promptly notify Client by telephone
(confirmed by written notice) if Cambrex at any time anticipates that it may not have such capacity necessary to timely satisfy
purchase orders submitted by Client for [***] of the most recent Rolling Forecast, and upon such notice, the parties will
promptly meet, either in person or by teleconference, to discuss how to thereafter supply Client’s Product requirements in a
timely manner.
Orders: Client will submit purchase orders for Product volumes reflected in the Commitment. Client may submit purchase orders for
additional Product volumes subject to an agreed lead time. Cambrex must, as a binding obligation of Cambrex, accept all
properly submitted purchase orders for Product volumes up to [***] of the Rolling Forecast quantities and will use
commercially best efforts to accept and fulfill all properly submitted purchase orders for Product volumes in excess of [***] of
the Rolling Forecast quantities. Cambrex will confirm each purchase order in a signed writing delivered to Client within five
(5) business days of receipt. If Cambrex is unable to meet the delivery date requested by Client in its purchase order,
Cambrex shall notify Client of such in Cambrex’s confirmation writing and provide Client an alternative delivery date, which
such alternative delivery date will not be more than [***] earlier or later than the requested delivery date. If Client does not
submit purchase orders for Commitment volumes, it will nonetheless pay for unordered quantities on a take-or-pay basis.
Price: Client shall pay the per-unit prices for the commercial supply of Product (the “Prices”) (which Prices include the cost of all
Components and shall constitute Client’s sole liability for the cost of General-Supply Components) and provision of other
Services to be provided by Cambrex under the
86274635_42
Commercial Manufacturing Services Agreement, as set forth in Attachment 1 to this Schedule F, and subject only to the
adjustments described in this paragraph or as the parties may otherwise agree in a signed writing. The Prices (except as
they relate to the cost of Components) will be subject to annual review and negotiation by the parties to address inflation or
deflation, which adjustment shall be calculated based on changes to the United States Producers Price Index for
Pharmaceutical Preparations (PPI), published by the United States Department of Labor, Bureau of Labor Statistics
published at the end of the calendar year prior to the calendar year in which such Price adjustment is considered.
Additionally, the Prices will be subject to adjustments negotiated by the parties in good faith in the event and to the extent of
material changes in the assumptions underlying the Prices as a result of the development work performed under the
DCMSA. For the avoidance of doubt, any change to the preliminary Specifications provided by Client constitute a “material
change” for purposes of the foregoing sentence. Finally, the Prices will be subject to adjustments in the event and to the
extent of increases and decreases in the actual cost of Components by at least [***] above or below, respectively, the costs
on which the then-current Price is based; it being understood that Cambrex will provide reasonable supporting
documentation of such increases or decreases.
Invoicing: Cambrex will invoice for Product at the time of quality release or transfer into storage, as applicable. The Commercial
Manufacturing Services Agreement will reflect the payment terms and remedies set out in Section 3.3 (Payment Terms) of
the DCMSA, revised as appropriate for the context of commercial supply.
Storage: At Client’s request, Cambrex will store Product at the Facility for up to [***] following its release by Cambrex’s quality group free of
charge. If Client does not take delivery of Product within such period, (i) Client shall pay Cambrex a monthly storage fee in
respect of the period commencing after such period at the rate set forth in Schedule G of the DCMSA or, if not so set forth
therein, at Cambrex’s then-current standard rate, and (ii) upon two (2) weeks’ written notice to Client, Cambrex shall have
the option to ship to Client, at Client’s cost, (A) any Product that is or contains a controlled substance or that has been held
by Cambrex in storage longer than [***] and (B) any Product-Specific Components or API that have been held by Cambrex in
inventory longer than [***] and that are not reasonably expected to be needed for Cambrex to manufacture Product based on
Client’s then-current Rolling Forecast.
Shipping: All shipments of Product will be Ex Works (Incoterms 2020) the Facility. The Commercial Manufacturing Services Agreement will
otherwise reflect the terms set out in Sections 2.6(a) (Risk of Loss; Title) and 2.6(b) (Packing and Transport) of the DCMSA,
revised as appropriate for the context of commercial supply.
Quality: cGMP compliance and regulatory activities will be detailed in a quality agreement. On the parties’ agreement, such quality
agreement may be the Quality Agreement entered into by the parties pursuant to Section 4.5 (Quality Agreement) of the
DCMSA.
Regulatory: The Commercial Manufacturing Services Agreement will reflect the terms set out in ARTICLE 4 (Cooperation) of the DCMSA,
revised as appropriate for the context of commercial supply.
Subcontractors: The Commercial Manufacturing Services Agreement will reflect the terms set out in Section 2.8 (Cambrex Subcontractors) of
the DCMSA.
IP: The Commercial Manufacturing Services Agreement will reflect the terms set out in ARTICLE 9 (Intellectual Property) of the DCMSA.
Reps/Warranties:The Commercial Manufacturing Services Agreement will reflect the terms set out in ARTICLE 6 (Representations &
Warranties) of the DCMSA, revised as appropriate and customary for the context of commercial supply.
Non-Conforming
Product & Fault: The Commercial Manufacturing Services Agreement will reflect the terms set out in Section 2.4(c) (Non-Conforming
Services), Section 2.4(d) (Stock Recovery & Recalls), and Schedule A of the DCMSA, revised as appropriate for the context
of commercial supply.
86274635_42
Liability Limits
& Indemnity: The Commercial Manufacturing Services Agreement will reflect the terms set out in ARTICLE 7 (Indemnities & Insurance) of
the DCMSA, revised as appropriate and customary for the context of commercial supply, including (in particular and without
limitation) that Cambrex’s liability for Indemnification Claims arising or resulting from a breach by Cambrex of any of its
obligations, warranties, or representations under the Commercial Manufacturing Services Agreement will be subject to a
maximum liability cap equal to:
(a) for Indemnification Claims with an Indemnification Claim Date within the period from the effective date of the Commercial
Manufacturing Services Agreement to the earlier of the first anniversary thereof (the “First Year”) or the date on which
clause (c) comes into effect, the lesser of (i) [***] the total Prices paid to Cambrex by Client within the period from the
effective date of the Commercial Manufacturing Services Agreement to the Indemnification Claim Date, plus the total Prices
that would be payable to Cambrex by Client within the First Year under all purchase orders accepted (or deemed accepted)
as of the Indemnification Claim Date and all purchase orders that Client must submit through the end of the First Year to fulfill
the applicable portion of the Commitment, or (ii) [***];
or
(b) for Indemnification Claims with an Indemnification Claim Date after the First Year but prior to the date on which clause (c)
below comes into effect, the lesser of (i) [***] the total Prices paid to Cambrex by Client in the twelve (12) months prior to the
Indemnification Claim Date, or (ii) [***];
or
(c) for Indemnification Claims with an Indemnification Claim Date after the date on which Client has paid to Cambrex
aggregate Prices of [***] for the purchase of Products under the Commercial Manufacturing Services Agreement, the lesser
of (i) [***] the total Prices paid to Cambrex by Client in the twelve (12) months prior to the Indemnification Claim Date, or (ii)
[***].
Term: The initial term of the Commercial Manufacturing Services Agreement will be from its execution until ten (10) years thereafter. The
Commercial Manufacturing Services Agreement will automatically extend for successive five (5) year renewal terms unless
either party gives the other party written notice of its intent not to renew at least eighteen (18) months’ prior to the end of the
then-current term. Except with respect to the terms set out in Section 5.1 (Term) of the DCMSA, the Commercial
Manufacturing Services Agreement will otherwise reflect the terms set out in ARTICLE 5 (Term & Termination) of the
DCMSA, revised as appropriate for the context of commercial supply.
Confidentiality: The Commercial Manufacturing Services Agreement will reflect the terms set out in ARTICLE 8 (Confidentiality) of the
DCMSA.
Disputes: The Commercial Manufacturing Services Agreement will reflect the terms set out in ARTICLE 10 (Dispute Resolution) of the
DCMSA.
Miscellaneous: The Commercial Manufacturing Services Agreement will reflect the terms set out in ARTICLE 11 (Miscellaneous) of the
DCMSA.
Attachment 1 to Schedule F shall be subject to the terms and conditions of this Schedule F (Binding Term Sheet for Commercial
Manufacturing Services Agreement). To the extent any terms or conditions of Attachment 1 to Schedule F conflict with the terms and
conditions of this Schedule F (Binding Term Sheet for Commercial Manufacturing Services Agreement), the terms and conditions of this
Schedule F (Binding Term Sheet for Commercial Manufacturing Services Agreement) shall control.
86274635_42
ATTACHMENT 1 TO SCHEDULE F
COMMERCIAL PRICING ESTIMATES
[See attached.]
86274635_42
SCHEDULE G
ADDITIONAL SERVICE FEES
Activity
Annual Product Review*
Quality Audit Fees
Post Market Stability Studies*
Artwork Change*
Storage
Personnel Hourly Rate (non-
specialist)
Fees
[***]
[***]
[***]
[***]
[***]
[***]
* Applicable under Commercial Manufacturing Supply Agreement only
** Travel, accommodations and meal expenses are in addition to the audit fees listed.
86274635_42
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-3 No. 333-231911) of Evelo Biosciences, Inc., and
(2) Registration Statement (Form S-8 No. 333-224841) of Evelo Biosciences, Inc.
of our report dated March 9, 2021, with respect to the consolidated financial statements of Evelo Biosciences, Inc. included in this Annual
Report (Form 10-K) of Evelo Biosciences, Inc. for the year ended December 31, 2020.
Exhibit 23.1
Boston, MA
March 9, 2021
Exhibit 31.1
CERTIFICATION 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
I, Balkrishan (Simba) Gill, Ph.D., certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2020 of Evelo Biosciences, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 9, 2021
By:
/s/ Balkrishan (Simba) Gill, Ph.D.
Balkrishan (Simba) Gill, Ph.D.
President and Chief Executive Officer
(Principal Executive Officer and Principal
Financial Officer)
Exhibit 31.2
CERTIFICATION 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
I, Xiaoli (Jacqueline) Liu, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2020 of Evelo Biosciences, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 9, 2021
By:
/s/ Xiaoli (Jacqueline) Liu
Xiaoli (Jacqueline) Liu
VP of Finance and Controller
(Principal Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
I, Balkrishan (Simba) Gill, Ph.D., President and Chief Executive Officer of Evelo Biosciences, Inc. (the “Company”), hereby certify,
pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “Report”) fully complies with the
requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 9, 2021
By:
/s/ Balkrishan (Simba) Gill, Ph.D.
Balkrishan (Simba) Gill, Ph.D.
President and Chief Executive Officer
(Principal Executive Officer and Principal
Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
I, Xiaoli (Jacqueline) Liu, VP of Finance and Controller of Evelo Biosciences, Inc. (the “Company”), hereby certify, pursuant to 18 U.S.C.
§ 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “Report”) fully complies with the
requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 9, 2021
By:
/s/ Xiaoli (Jacqueline) Liu
Xiaoli (Jacqueline) Liu
VP of Finance and Controller
(Principal Accounting Officer)