UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-38958
Karuna Therapeutics, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
33 Arch Street, Suite 3110
Boston, Massachusetts
(Address of principal executive offices)
27-0605902
(I.R.S. Employer
Identification Number)
02110
(Zip Code)
(857) 449-2244
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.0001 Par Value
Trading Symbol(s)
KRTX
Name of exchange on which registered
The Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the registrant’s common stock, $0.0001 par value per share, held by non-affiliates of the registrant, based on the last sale price of the
Common Stock at the close of business on June 28, 2019, was $197.0 million. For purposes of foregoing calculation only, all directors and executive officers of the registrant are
assumed to be affiliates of the registrant.
As of March 13, 2020, there were 26,082,710 shares of the registrant’s Common Stock, $0.0001 par value per share, outstanding.
Portions of the registrant’s Proxy Statement for its 2020 Annual Meeting of Stockholders, which the registrant intends to file with the Securities and Exchange
Commission not later than 120 days after the registrant’s fiscal year ended December 31, 2019, are incorporated by reference into Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
Item 1. Business
Item 1A. Risk Factors
Item 2. Properties
Item 3.
Legal Proceedings
Karuna Therapeutics, Inc.
Index
PART I
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Consolidated Financial Statements and Supplementary Data
Item 9A. Controls and Procedures
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits, Financial Statement Schedules
Signatures
PART IV
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K of Karuna Therapeutics, Inc. contains or incorporates statements that constitute
forward-looking statements within the meaning of the federal securities laws. Any express or implied statements that do not
relate to historical or current facts or matters are forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as “may,” “will,” “could,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “projects,” “seeks,” “endeavor,” “potential,” “continue” or the negative of these terms or other comparable
terminology.
These forward-looking statements include, among other things, statements about:
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the timing, progress and results of preclinical studies and clinical trials for KarXT in our current indications and other
product candidates we may develop, including statements regarding the timing of initiation and completion of studies
or trials and related preparatory work and the period during which the results of the trials will become available;
our research and development plans, including our plans to explore the therapeutic potential of KarXT in additional
indications;
our plans to develop and commercialize KarXT and other product candidates;
the timing of and our ability to obtain and maintain marketing approvals for our product candidates;
the rate and degree of market acceptance and clinical utility of any product candidates for which we receive marketing
approval;
our commercialization, marketing and manufacturing capabilities and strategy;
our intellectual property position and strategy;
our ability to identify additional product candidates with significant commercial potential;
our plans to enter into collaborations for the development and commercialization of product candidates;
the potential benefits of any future collaboration;
our expectations related to the use of proceeds from this offering;
our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
our ability to raise additional capital in sufficient amounts or on terms acceptable to us;
our ability to retain the continued service of our key professionals and to identify, hire and retain additional qualified
professionals;
developments relating to our competitors and our industry; and
the impact of government laws and regulations.
Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements
relate to our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of
management and expected market growth, and involve known and unknown risks, uncertainties and other factors that may
cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels
of activity, performance or achievements expressed or implied by these forward-looking statements. You are urged to carefully
review the disclosures we make concerning these risks and other factors that may affect our business and operating results
under “Item 1A. Risk Factors” in this Annual Report on Form 10-K, as well as our other reports filed with the Securities and
Exchange Commission. Any public statements or disclosures by us following this Annual Report on Form 10-K that modify or
impact any of the forward-looking statements contained in this Annual Report on Form 10-K will be deemed to modify or
supersede such statements in this Annual Report on Form 10-K. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this document. The Company does not intend, and undertakes
no obligation, to update any forward-looking information to reflect events or circumstances after the date of this document or to
reflect the occurrence of unanticipated events, unless required by law to do so.
3
Except where the context otherwise requires or where otherwise indicated, the terms “Karuna,” “we,” “us,” “our,” “our
company,” “the company,” and “our business” refer to Karuna Therapeutics, Inc. and its consolidated subsidiary.
PART I
ITEM 1.
BUSINESS
Overview
We are an innovative clinical-stage biopharmaceutical company committed to developing novel therapies with the potential
to transform the lives of people with disabling and potentially fatal neuropsychiatric disorders and pain. Our pipeline is built on
the broad therapeutic potential of our lead product candidate, KarXT, an oral modulator of muscarinic receptors that are located
both in the central nervous system, or CNS, and various peripheral tissues. KarXT is our proprietary product candidate that
combines xanomeline, a novel muscarinic agonist, with trospium, an approved muscarinic antagonist, to preferentially stimulate
muscarinic receptors in the CNS. We recently completed a Phase 2 clinical trial of KarXT for the treatment of acute psychosis in
patients with schizophrenia, in which KarXT met the trial’s primary endpoint and was observed to be well tolerated. We are also
developing KarXT as a potential treatment for dementia-related psychosis, or DRP, and pain. In the fourth quarter of 2019, we
initiated two Phase 1b clinical trials of KarXT. One trial is evaluating the safety and tolerability of KarXT in healthy elderly
volunteers in order to select the most appropriate dose for future KarXT trials to assess efficacy and safety in a DRP patient
population. The second trial is evaluating the effect of KarXT on experimentally induced pain in healthy volunteers. We have
assembled a team whose members have extensive expertise in the research, development and commercialization of numerous
CNS agents, as well as deep familiarity with the biology of neuropsychiatric disorders, such as schizophrenia and DRP, including
the role of muscarinic receptors in potential treatment of these diseases. We plan to leverage this expertise to develop a pipeline
of product candidates targeting a broad range of psychiatric and neurological conditions.
Psychosis is a prominent and debilitating symptom that occurs in many neuropsychiatric disorders, including
schizophrenia, dementia, bipolar disorder, major depressive disorder and inflammatory neurological diseases, such as multiple
sclerosis. Patients with schizophrenia experience psychotic symptoms, also known as positive symptoms, such as hallucinations
and delusions. Schizophrenia is a chronic disabling disorder that is typically diagnosed in the late teenage years or early
adulthood and is characterized by recurring episodes of psychosis requiring long-term treatment with antipsychotic drugs in
most patients. The World Health Organization ranks psychosis as the third-most disabling medical condition in the world. In
2017, an estimated 2.7 million Americans, or approximately 0.5% to 1.0% of the United States population, had schizophrenia.
Dementia will affect an estimated 8.4 million in the United States in 2020 and including subtypes of patients suffering from
Alzheimer’s disease, dementia with Lewy Body, Vascular dementia, frontotemporal dementia and Parkinson’s disease dementia.
Alzheimer’s disease, or AD, is the most prevalent cause of dementia, accounting for an estimated 60% to 80% of all cases. DRP
rates vary by dementia subtype, and it is estimated that up to 50% of patients with AD in the United States experience psychosis
at some point during the course of their disease, which often leads to institutional care in a hospital or nursing home.
Worldwide sales of antipsychotic drugs exceeded $11 billion in 2015 and are expected to exceed $14 billion by 2025,
despite a highly generic market. Several branded market-leading antipsychotic medicines have each achieved worldwide annual
sales in excess of $5 billion. Despite the large number of antipsychotic drugs developed over the last 20 years, current
medicines have undergone only modest innovation relative to first generation drugs developed in the 1950s. In many patients,
current antipsychotics are hampered by modest efficacy and significant side effects. At least half of patients fail to adequately
respond to antipsychotic drugs. Additionally, in many patients, these treatments are associated with severe side effects including
sedation, extrapyramidal side effects, such as motor rigidity, tremors and slurred speech, and significant weight gain resulting in
the complications of diabetes, hyperlipidemia, hypertension and cardiovascular disease. The clinical benefit of current
antipsychotics is further limited by poor adherence. In a 1,493-patient clinical trial funded by the National Institutes of Health,
approximately 75% of patients reported discontinuing their antipsychotic medication within 18 months of starting treatment.
4
Current antipsychotic treatments work primarily by inhibiting D2 dopamine receptors and frequently 5HT-2A serotonin
receptors and are often used by physicians to address a wide range of disorders in addition to schizophrenia, including bipolar
disorder and psychotic depression, as well as psychosis and agitation in elderly patients with dementia. Muscarinic receptor
agonists emerged in the 1990s as a potential alternative approach for treating psychosis. There are five distinct muscarinic
receptors, M1 through M5, which are found in the brain as well as various peripheral tissues. The link between muscarinic
receptor stimulation in the CNS, particularly stimulation of M1 and M4 receptors, and the reduction of psychotic symptoms and
cognitive impairment, has been well studied and is supported by data from preclinical studies and two third-party clinical trials
published in peer reviewed journals. However, the successful development of a therapeutic agent targeting muscarinic receptors
has been limited by undesirable side effects that are believed to arise primarily as a result of stimulation of muscarinic receptors
in peripheral tissues. We believe a therapeutic agent that can preferentially target and stimulate muscarinic receptors in the
CNS, but not in peripheral tissues, has the potential to treat psychosis in schizophrenia and DRP, including the associated
agitation in patients with DRP. We also believe the preferential stimulation of M1 and M4 muscarinic receptors in the CNS may
address the negative symptoms of schizophrenia, such as apathy, reduced social drive and loss of motivation, as well as
cognitive deficits in working memory and attention, all of which currently lack any approved treatments. This approach has the
potential to produce a differentiated therapy relative to current D2 dopamine and 5HT-2A serotonin receptor-based antipsychotic
drugs and to beneficially impact the lives of millions of patients with schizophrenia and other psychotic and cognitive disorders.
We are initially developing our lead product candidate, KarXT, for the treatment of acute psychosis in patients with
schizophrenia. KarXT combines xanomeline, a muscarinic receptor agonist that preferentially stimulates M1 and M4 muscarinic
receptors, and trospium, an approved muscarinic receptor antagonist that does not measurably cross the blood-brain barrier,
confining its effects to peripheral tissues. M1 and M4 muscarinic receptors are the receptor subtypes believed to mediate the
antipsychotic, procognitive and analgesic effects of xanomeline and other muscarinic agonists. Results from preclinical studies
and clinical trials conducted by third parties support the hypothesis that xanomeline can reduce psychosis and improve
cognition. Like all muscarinic receptor agonists studied to date, however, xanomeline’s tolerability has been limited by side
effects arising from muscarinic receptor stimulation in peripheral tissues, leading to nausea, vomiting, diarrhea and increased
salivation and sweating, collectively referred to as cholinergic adverse events. Trospium is a muscarinic receptor antagonist
approved in the United States and Europe for the treatment of overactive bladder that inhibits all five muscarinic receptor
subtypes in peripheral tissues. We believe that a combination therapy of xanomeline and trospium has the potential to
preferentially stimulate M1 and M4 muscarinic receptors in the brain without stimulating muscarinic receptors in peripheral
tissues in order to achieve meaningful therapeutic benefit in patients with psychotic and cognitive disorders.
In our initial Phase 1 clinical trial, we observed that in healthy volunteers the combination of xanomeline and trospium was
associated with 46% fewer cholinergic adverse events as compared to xanomeline administered with placebo. Additionally, we
have completed a randomized, double-blind, placebo-controlled multiple ascending dose Phase 1 clinical trial in healthy
volunteers, in which we examined various doses of our proprietary KarXT co-formulation and determined the dosing to be
further examined in our recently completed Phase 2 clinical trial. Our Phase 2 clinical trial was designed to assess the safety
and efficacy of KarXT in patients with schizophrenia experiencing acute psychosis. In this trial, KarXT demonstrated a
statistically significant (p<0.0001) and clinically meaningful reduction in Positive and Negative Syndrome Scale, or PANSS,
scores over placebo. KarXT was observed to be well tolerated. Cholinergic adverse events were mild or moderate in severity
and did not lead to any discontinuations. We intend to hold an End-of-Phase 2 meeting with the FDA in the second quarter of
2020 to discuss our planned Phase 3 clinical trial development plan. Subject to FDA feedback, we anticipate initiating a Phase 3
clinical trial for the treatment of psychosis in patients with schizophrenia by the end of 2020. Based on our clinical data with
KarXT and third-party published clinical data with xanomeline, we believe that KarXT has the potential to have therapeutic
benefit in multiple CNS disorders, including the treatment of positive, negative and cognitive symptoms of schizophrenia and
psychosis, as well as agitation associated with AD and other forms of dementia. In December 2019, we initiated a Phase 1b
clinical trial to assess the safety and tolerability of KarXT in healthy elderly volunteers in order to select the most appropriate
dose for future KarXT trials to assess efficacy and safety in a DRP population, and expect topline results from this trial in the
second half of 2020. In addition, we believe published third-party preclinical data support the development of KarXT as a novel
non-opioid therapeutic for various forms of post-operative, inflammatory and neuropathic pain. As such, we initiated a Phase 1b
clinical trial in healthy volunteers for the treatment of experimentally induced pain in December 2019 and expect topline results
from this trial in mid-2020.
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Our co-founder and Chief Operating Officer, Andrew Miller, Ph.D., was responsible for identifying, developing and testing
the initial hypothesis supporting a combination of xanomeline and trospium. We have since assembled a team of employees and
advisors who have expertise and extensive experience in developing psychiatric and neurological drugs, including several
former scientists at Eli Lilly and Company, or Eli Lilly, who were actively involved in xanomeline’s initial development. Steven
Paul, M.D., our Chief Executive Officer, President and Chairman, was formerly the Executive Vice President for Science and
Technology and President of the Lilly Research Laboratories at Eli Lilly, where he helped develop the antipsychotic drug Zyprexa
and the antidepressant Cymbalta. Dr. Paul was the senior author of the initial publication evaluating xanomeline’s effects in
treating psychosis and agitation in patients with AD. Stephen Brannan, M.D., our Chief Medical Officer, was previously the
Therapeutic Head of Neuroscience at Takeda Pharmaceutical Company Ltd. Alan Breier, M.D., our Chief Clinical Advisor and
Chair of our Scientific Advisory Board, was previously Chief Medical Officer at Eli Lilly.
We are advancing a pipeline of therapeutic programs to address the positive, negative and cognitive symptoms associated
with schizophrenia and DRP, as well as various forms of pain. We are leveraging our expertise and experience to explore the
development of KarXT for additional CNS disorders, as well as advance other muscarinic-targeted drug candidates.
Pipeline
Muscarinic Receptor Biology in the Nervous System
Neurotransmitters are chemical messengers secreted by neurons, or nerve cells, to facilitate information flow and
communication with other cells, such as muscle or similar nerve cells, in both the central and peripheral nervous systems. As a
result, stimulating or inhibiting neurotransmission can have a profound effect on the overall function of an organism. There are
many identified neurotransmitters with a variety of structures and functions. One of the key neurotransmitters in the brain is
acetylcholine, for which there are two different receptor classes: ion channel-gated nicotinic receptors, and G protein-coupled
muscarinic receptors. Within the muscarinic receptor family, there are five subtypes, M1 through M5, all of which are expressed
in the brain and in peripheral tissues.
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Muscarinic receptors serve a number of key physiological roles including in cognitive, behavioral, sensory, motor and
autonomic processes. Disruption of muscarinic receptor signaling is believed to contribute to psychosis and cognitive
impairment in a wide variety of diseases, including schizophrenia and AD. Conversely, third-party preclinical and clinical data
suggest that the enhancement of muscarinic receptor signaling leads to improvement in these same symptoms. M1 and M4
muscarinic receptors in particular have been reported to be under-expressed in the brains of patients with schizophrenia. In
animal behavioral models, drug candidates that selectively stimulated M1 and M4 muscarinic receptors have demonstrated
improvements in psychosis and cognition. Third-party clinical data suggest that stimulation of M1 and M4 muscarinic receptors
may similarly be therapeutically beneficial for the treatment of patients with these symptoms. Conversely, inhibition of these
receptors has been observed to disrupt memory and cognition, as well as to exacerbate psychosis in patients with
schizophrenia.
Muscarinic receptors are also believed to play an important role in processing the sensation of pain. In particular,
muscarinic receptors are abundant in pain centers of the brain, and the stimulation of M1, M2 and M4 muscarinic receptors has
been associated with analgesia and the suppression of painful stimuli in a variety of acute, inflammatory and neuropathic animal
models of pain.
The stimulation of muscarinic receptors in peripheral tissues can have significant physiological consequences. In
peripheral tissues, such as the gastrointestinal and genitourinary tracts, and salivary and sweat glands, M2 and M3 muscarinic
receptors are prominently expressed and have specialized functions. In the gastrointestinal tract, muscarinic receptors play a
significant role in regulating gastrointestinal motility. Dosing with agonists that stimulate these muscarinic receptors can lead to
diarrhea and increased motility, while dosing with muscarinic antagonists can lead to constipation and decreased motility. In the
bladder, stimulation or inhibition of muscarinic receptors modulates bladder contraction leading to increases or decreases in
urinary frequency, respectively. Similarly, stimulation of muscarinic receptors in salivary glands and sweat glands can lead to
increased salivation and sweating, respectively.
Background and Rationale For KarXT
We have designed our lead product candidate, KarXT, to preferentially stimulate M1 and M4 receptors in the brain, without
stimulating muscarinic receptors in peripheral tissues outside the CNS. We assessed the potential of over 7,000 possible
combinations of muscarinic receptor agonists and antagonists to find an optimized combination that could preferentially
stimulate muscarinic receptors in the CNS to improve the symptoms of psychosis, while avoiding stimulation of muscarinic
receptors in the peripheral tissues and the associated side effects. As a result of our research, we identified xanomeline and
trospium as the most promising pairing for development. Trospium is a potent and effective muscarinic receptor antagonist that
does not measurably cross the blood-brain barrier, confining its effects to peripheral tissues. We believe that the combination of
xanomeline, a centrally-acting muscarinic agonist, and trospium, a peripherally-acting muscarinic antagonist, will have the
therapeutic benefits of xanomeline but with markedly reduced side effects. Based on our clinical data with KarXT, either co-
administered or co-formulated, and clinical data of xanomeline published by third parties, we believe that KarXT has potential
therapeutic benefit in multiple CNS disorders, including the treatment of the positive, negative and cognitive symptoms of
schizophrenia, psychosis and agitation associated with dementia, including AD, and as a novel non-opioid therapeutic for
various forms of post-operative, inflammatory and neuropathic pain.
Xanomeline Background
Xanomeline as a treatment for psychosis and related neuropsychiatric disorders has been examined in clinicals trials
enrolling over 1,000 subjects or patients conducted by us and third parties, with 68 patients being dosed for at least one year
and a maximum treatment duration of almost four years. We believe that the results from these clinical trials, as well as results
from numerous preclinical studies, supports the further development of xanomeline, in the form of KarXT, as an antipsychotic
and procognitive therapeutic agent.
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Xanomeline for the Treatment of Psychotic Symptoms and Agitation in AD
Eli Lilly conducted a 343-patient, randomized, double-blind, placebo-controlled Phase 2 clinical trial of xanomeline in
patients with mild to moderate AD, administering up to 225 mg of xanomeline daily (75 mg three times a day, or TID), for 24
weeks. In this clinical trial, 87 patients received placebo, while 85, 83 and 87 patients received 75-150-225 mg xanomeline,
respectively. One patient who entered the trial was assigned a group but never received study drug or placebo. As shown in the
figure below, patients on xanomeline were observed to have dose-dependent decreases in multiple psychotic symptoms and
related behaviors, including hallucinations, delusions and agitation, as compared to patients on placebo. For instance, one of the
17 patients (6%) in the placebo arm who presented with hallucinations at baseline had a remission of symptoms while receiving
treatment, compared to nine of the 17 patients (53%) in the high-dose xanomeline arm (p=0.003). These responses were seen
as early as two to three weeks after commencement of dosing with xanomeline. Xanomeline was also observed to reduce the
emergence of psychotic symptoms over the course of the six-month trial in patients who did not have psychotic symptoms at the
initiation of the trial. For example, 32% of patients in the placebo arm developed delusions during the trial compared to only 7%
in the high-dose xanomeline treatment arm (p=0.001). A dose-response analysis across the 75-150-225 mg xanomeline dose
levels reported increasing effects of xanomeline for several symptoms (P<0.05), suggesting that exploration of xanomeline
doses above 75 mg TID has the potential for additional therapeutic benefits.
Effects of Xanomeline on Psychotic and Related Behavioral Symptoms in AD
p-value represents the comparison of the 225 mg xanomeline arm compared to placebo and, in the case of the p-value in parenthesis, the dose-response analysis.
Effects of Xanomeline on Emergence of Psychosis and Related Behaviors in AD Over Six Months
p-value represents the comparison of the 225 mg xanomeline arm compared to placebo and, in the case of the p-value in parenthesis, the dose-response analysis.
8
In this same trial, cognitive symptoms of patients with AD treated with xanomeline also showed improvements compared
to placebo as measured by both the ADAS-Cog and the CIBIC+, suggesting that xanomeline may also improve cognition. The
Alzheimer’s Disease Assessment Scale-Cognitive Subscale, or ADAS-Cog, is one of the most frequently used tests to measure
cognition while the Clinician Interview-Based Impression of Change plus caregiver interview, or CIBIC+, examines disease
severity and changes in behavior, cognition and overall function on a scale of 1 to 7, where 1 means markedly improved and 7
means markedly worse. There were high rates of patient discontinuation in the mid-dose (48%) and high-dose (59%)
xanomeline cohorts driven in part by side effects, compared to discontinuation rates of 35% and 19% for the placebo and low-
dose xanomeline groups, respectively. This high discontinuation rate led to a substantial reduction of statistical power in this
trial. Despite this reduction in statistical power, patients in the mid-dose cohort showed a statistically significant benefit on the
CIBIC+ as compared to placebo (p=0.02, 4.11 vs. 4.34, respectively). An analysis of patients who completed the trial identified a
mean benefit of 2.84 units on the ADAS-Cog for the 225 mg xanomeline arm over placebo (p<0.05), which is similar to the effect
seen with donepezil, an approved treatment for the cognitive impairment associated with AD.
Xanomeline for the Treatment of Psychotic Symptoms in Schizophrenia
A randomized, double-blind, placebo-controlled, small Phase 2 trial of xanomeline was conducted in 20 patients with
schizophrenia with acute psychosis, as a collaboration between Eli Lilly and the Indiana University School of Medicine. This
monotherapy trial used the Positive and Negative Syndrome Scale, or PANSS, as a primary endpoint. The PANSS is a set of
measurements used for evaluating symptom severity in patients with schizophrenia and the change in PANSS score has been
used as the primary endpoint in many registrational trials of antipsychotic medicines. As depicted in the figure below, a clinically
meaningful and statistically significant 24-point PANSS score difference was observed between xanomeline and placebo after
18 days of treatment, which was the pre-specified analysis time point. By comparison, meta-analyses of published clinicals trials
of currently approved antipsychotic medicines report an average difference of nine to ten points in PANSS score versus placebo.
Historically, changes as small as five points have supported the approval of current antipsychotics. While this xanomeline trial
was designed primarily to evaluate changes in positive symptoms, a six-point improvement in negative symptoms, as measured
by the PANSS-negative subscale, was also observed in patients treated with xanomeline as compared to placebo.
Improvements in cognitive symptoms including list learning (p<0.05), story recall (p<0.01), delayed memory (p<0.05) and digit
span tests were also observed in patients treated with xanomeline as compared to placebo.
Effects of Xanomeline on Psychotic Symptoms in Patients with Schizophrenia
9
Effects of Xanomeline on Cognition in Patients with Schizophrenia
Limitations of Xanomeline
Despite xanomeline’s promising therapeutic benefit in treating psychosis and related behavioral symptoms in patients with
schizophrenia and AD, its potential has been limited by cholinergic side effects, which are believed to result from the stimulation
of muscarinic receptors in peripheral tissues. These side effects led to a 59% dropout rate in the high-dose xanomeline group
compared to 35% on placebo in Eli Lilly’s six-month AD trial. Syncope, which is a temporary loss of consciousness, was
observed in the AD trial (12.6% on high dose xanomeline versus 4.6% on placebo), but not in the schizophrenia trial, in which
patients are generally much younger than patients in the AD trial and therefore less prone to syncope. Xanomeline treatment
was also associated with transient increases in heart rate and liver function tests, both of which returned to baseline with
continued treatment. Electrocardiograms showed no meaningful changes in cardiac conductivity, including QTc interval.
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Our KarXT Programs
We specifically designed KarXT, a proprietary combination of xanomeline and trospium, to unlock the therapeutic potential
of xanomeline by overcoming its limiting side effects resulting from the stimulation of muscarinic receptors in peripheral tissues.
We believe that the results of two third-party, randomized, double-blind, placebo-controlled clinical trials of xanomeline, as well
as the results of a wide variety of preclinical studies conducted by third parties, support the further development of xanomeline,
in the form of KarXT, as an antipsychotic and procognitive therapeutic agent. We selected trospium to counteract xanomeline’s
undesirable peripheral side effects for a number of reasons, but importantly because trospium does not measurably cross the
blood-brain barrier and therefore would not be expected to negate the therapeutic benefits of xanomeline in the CNS. Trospium
is generically available in the United States and European Union for the treatment of overactive bladder and is well-tolerated
with limited side effects, that include dry mouth and constipation. Since xanomeline and trospium compete for the same
muscarinic receptors in peripheral tissues, but with opposing effects, we believe their combination has the potential to reduce
the cholinergic side effects of xanomeline. We believe that there are no overlaps in the drug metabolism pathways of
xanomeline and trospium and therefore we do not anticipate any significant adverse drug-drug interactions with the combination.
Our Phase 1 clinical trial data suggests that each of xanomeline and trospium do not affect the other’s pharmacokinetics or
systemic exposure.
We believe that the novel mechanism of KarXT has the potential to provide meaningfully better outcomes for patients
suffering from schizophrenia and other neuropsychiatric conditions without the debilitating side effects of current D2 dopamine
receptor-based therapies, including sedation, extrapyramidal side effects, such as motor rigidity, tremors and slurred speech,
and significant weight gain resulting in the complications of diabetes, hyperlipidemia, hypertension and cardiovascular disease.
We obtained an exclusive license to xanomeline from Eli Lilly along with a large database of preclinical and clinical data
generated by Eli Lilly supporting xanomeline’s development. Our team of employees and advisors includes several former
scientists at Eli Lilly who were actively involved in xanomeline’s preclinical and clinical development to help us advance the
development of KarXT.
11
Proof of Concept of KarXT
Phase 1 Clinical Trials
We observed KarXT’s ability to ameliorate the side effects of xanomeline in our randomized, double-blind, placebo-
controlled, Phase 1 clinical trial in 70 healthy volunteers conducted under our investigational new drug application. In this trial,
we compared the tolerability profile and pharmacokinetics of xanomeline administered with placebo against KarXT co-
administered as xanomeline in combination with trospium. Volunteers in this trial first received 40 mg (20 mg twice a day, or BID)
of either trospium or placebo for two days, and then received 225 mg of xanomeline (75 mg TID) in addition to their existing
regimen of trospium or placebo for seven days. We selected the 225-mg (75 mg TID) dose for evaluation in our trial due to the
results of this dose in Eli Lilly’s schizophrenia and AD trials of xanomeline. As depicted in the table below, we observed that the
addition of trospium to xanomeline was associated with clinically meaningful reductions in the rate of the most common
treatment-emergent cholinergic adverse events, or ChAEs, than reported with xanomeline plus placebo, including nausea,
vomiting, diarrhea and excess sweating and salivation. The overall ChAE rate was 64% on xanomeline plus placebo compared
to 34% on KarXT (p=0.016). The rate of ChAEs for volunteers receiving KarXT (34%) was similar to the rate observed in
volunteers receiving placebo during the lead-in period (32%), suggesting that the tolerability of KarXT was more similar to the
placebo lead-in period than to treatment with xanomeline plus placebo.
ChAE Incidence Rates
Any Cholinergic AE (p=0.016)
Nausea
Vomiting
Diarrhea
Sweating
Salivation
Xanomeline+
placebo
N=33
KarXT
N=35
64%
24%
15%
21%
49%
36%
% Reduction in
Incidence Rates
46%
29%
62%
73%
59%
29%
34%
17%
6%
6%
20%
26%
We observed no meaningful differences between the KarXT and xanomeline plus placebo treatment groups in heart rate,
blood pressure or any electrocardiogram parameters. Only one volunteer discontinued treatment due to treatment emergent
adverse events in the KarXT arm, and this discontinuation was voluntary, not at the discretion of the investigator. Two episodes
of syncope were observed on xanomeline plus placebo while none were observed with KarXT. We did not observe syncope in
the KarXT arm of this trial (or in any other subject treated with KarXT in any of our trials, representing over 140 patients). Rates
of postural dizziness were reduced by approximately 57% in patients treated with KarXT as compared to patients treated with
xanomeline plus placebo. Overall, we considered treatment with xanomeline 225 mg combined with trospium 40 mg
administered over seven days to be well-tolerated.
Phase 1 Multiple Ascending Dose Clinical Trial
We have also completed a randomized, double-blind, placebo-controlled multiple ascending dose Phase 1 clinical trial of
KarXT. This trial evaluated BID dosing of our proprietary KarXT co-formulation containing fixed ratios of xanomeline and
trospium, rather than the TID dosing previously used with xanomeline. We designed our Phase 1 clinical trial based on the
improved tolerability of KarXT over xanomeline plus placebo observed in our prior Phase 1 clinical trial and the dose-dependent
clinical activity observed in the Eli Lilly AD trial of xanomeline. In particular, Eli Lilly observed that the antipsychotic effect of
xanomeline improved when the dose was increased from 25 mg to 50 mg to 75 mg, all administered TID, suggesting that the
dose response may extend beyond 75 mg TID and that doses of xanomeline higher than 75 mg TID may lead to additional
therapeutic benefit. Based on these observations, we set out to (i) test our co-formulation using BID dosing, (ii) explore higher
doses of xanomeline and (iii) optimize the ratio of xanomeline and trospium. Healthy volunteers enrolled in this trial received 50
mg of xanomeline plus 20 mg of trospium (50/20 mg) both BID, on days one and two. From days three to seven, volunteers
received BID doses of xanomeline and trospium in ratios of either 100/20 mg, 125/40 mg, 150/20 mg or 150/40 mg
(xanomeline/trospium) in different dosing cohorts. The trial was designed to randomize up to 24 volunteers in each of the four
cohorts, with a 3:1 randomization of KarXT to placebo.
12
In this trial, administration of KarXT co-formulation provided robust xanomeline and trospium exposures as measured by
plasma levels. In particular, KarXT containing xanomeline 100 mg BID provided drug exposures equivalent to, or higher than, 75
mg of xanomeline TID when administered alone. KarXT was also well-tolerated in volunteers at dose levels of 100 mg and 125
mg of xanomeline BID when paired with 20 mg and 40 mg of trospium, respectively.
Eighteen volunteers received KarXT in the 100/20 mg cohort. In this group, 16 volunteers experienced either no ChAEs
(n=11; 61%) or mild, transient ChAEs (n=5; 28%). The majority of ChAEs were reported for less than one hour over the seven
days of treatment and the longest duration reported was a total of 15 hours over the course of treatment. Two volunteers (11%)
experienced transient ChAEs that were rated as moderate, with the longest ChAE lasting a total of approximately 11 hours over
the course of treatment. Given the transient and generally mild nature of the ChAEs, we considered the 100/20 mg dose level of
KarXT well tolerated. Eighteen volunteers were given the 125/40 mg dose level of KarXT, of which 11 volunteers (61%) reported
no ChAEs and seven volunteers (39%) reported mild, transient ChAEs. These mild ChAEs lasted less than three hours over the
course of the seven-day treatment period. The increased dose of trospium (40 mg BID) was associated with reports of mild
anticholinergic adverse events, including dry mouth, constipation, blurred vision and urinary hesitancy, suggesting a decreased
trospium dose level may be more appropriate to pair with 125 mg BID of xanomeline. Xanomeline doses of 150 mg in KarXT led
to increased reporting of moderate ChAEs and were therefore less well-tolerated than either the 100 or 125 mg xanomeline
doses.
In this Phase 1 clinical trial, we observed that KarXT doses containing either 100 mg or 125 mg of xanomeline
administered BID were well-tolerated when paired with trospium. Importantly, the 100 mg BID dose level administered in our co-
formulation provided blood exposures equal to or greater than those observed by us and Eli Lilly with 75 mg TID xanomeline,
which was observed to have beneficial effects on psychosis and cognition in both schizophrenia and AD. While a minority of
patients still experienced ChAEs, these were predominately mild and transient in nature. We believe this tolerability profile has
the potential to provide a substantial improvement over current antipsychotic medicines, which are often not tested at
therapeutic doses in healthy volunteers due to their poor tolerability. Based on the results of this trial, we identified 100/20 mg
and 125/30 mg BID as the doses and ratios of xanomeline to trospium to evaluate in our Phase 2 clinical trial of KarXT for acute
psychosis in patients with schizophrenia.
We submitted an Investigational New Drug application to the U.S. Food and Drug Administration, or the FDA, for KarXT for
the treatment of schizophrenia, which went into effect in August 2016.
KarXT for the Treatment of Acute Psychosis in Patients with Schizophrenia
Schizophrenia is a chronic, severe and disabling brain disorder. In 2017, an estimated 2.7 million Americans, or
approximately 0.5% to 1.0% of the U.S. population, had schizophrenia. Worldwide, it is estimated that schizophrenia affects over
21 million people. People with schizophrenia have a 10 to 15-year reduction in life expectancy compared to the general
population, struggle to maintain employment or live independently and are often unable to maintain meaningful interpersonal
relationships.
Psychosis is a prominent and debilitating symptom that occurs in schizophrenia. Psychotic symptoms, also known as
positive symptoms, include hallucinations and delusions. Patients with schizophrenia also experience negative symptoms, such
as apathy, reduced social drive, loss of motivation and lack of social interest. Schizophrenia is also often associated with
significant cognitive impairment, which further limits a patient’s ability to be gainfully employed and maintain relationships.
Worldwide sales of antipsychotic drugs exceeded $11 billion in 2015 and are expected to exceed $14 billion by 2025,
despite a highly generic market. Several branded market leading antipsychotic medicines have each achieved worldwide annual
sales in excess of $5 billion. Despite the large number of antipsychotic drugs developed over the last 20 years, current
medicines have undergone only modest innovation relative to first generation drugs developed in the 1950s.
13
Current antipsychotics have modest efficacy in many patients and significant side effects. At least half of patients fail to
adequately respond to current antipsychotic drugs. Additionally, current treatments are often associated with severe side effects,
including sedation, extrapyramidal side effects such as motor rigidity, tremors and slurred speech, and significant weight gain
resulting in the complications of diabetes, hyperlipidemia, hypertension and cardiovascular disease. The clinical benefit of
current antipsychotics is further limited by poor adherence. In a 1,493-patient clinical trial funded by the National Institutes of
Health, approximately 75% of patients reported discontinuing their antipsychotic medication within 18 months of starting
treatment.
Current antipsychotic treatments work primarily by inhibiting D2 dopamine receptors and are often used by physicians to
address a wide range of disorders in addition to schizophrenia, including bipolar disorder and psychotic depression, as well as
psychosis and agitation in elderly patients with dementia. These treatments are approved for the treatment of positive symptoms
of schizophrenia, such as hallucinations and delusions, but there are no approved therapies for the treatment of negative and
cognitive symptoms of schizophrenia. We believe there is a substantial need for a new antipsychotic drug that has an improved
efficacy and side effect profile, and for a drug that can treat the negative and cognitive symptoms of the disease.
The regulatory requirements, including clinical trial design and primary endpoints, for approval of antipsychotic drugs for
this indication are well understood and defined. Similarly, third-party clinical trial operators and contract research organizations
have extensive experience conducting drug trials in schizophrenia. Finally, patients with schizophrenia in clinical trials are
generally younger than patients suffering psychosis from other CNS disorders such as DRP, which reduces the risk of
comorbidities, and patients with schizophrenia also tend to have higher drug tolerability due to their prior treatment with
antipsychotic drugs. We believe that these factors will help us to efficiently progress KarXT in this indication.
Our Phase 2 Clinical Trial for the Treatment of Acute Psychosis
In September 2018, we initiated a multi-site, double-blind, placebo-controlled, five-week, inpatient Phase 2 clinical trial of
KarXT in patients with schizophrenia with acute psychosis. We enrolled 182 patients in this trial and patients were randomized
1:1 to receive either KarXT or placebo. Patients were washed out of any existing antipsychotic medications before entering the
five-week active treatment or placebo phase. After the wash-out period, patients began with either placebo or KarXT containing
50 mg xanomeline and 20 mg trospium (50/20 mg) BID. Patients receiving KarXT then increased their dose to 100/20 mg BID
on day three and then physicians had the option to escalate to 125/30 mg BID starting on day eight if the 100/20 mg BID dose
was well-tolerated. The primary endpoint in this trial was the change from baseline in PANSS total scores for KarXT versus
placebo treated patients at week five. Our trial had the same fundamental design and primary endpoint as the previous
xanomeline trial in psychosis in schizophrenia, which is also the design that has been used in pivotal trials for several currently
approved antipsychotic medicines. Additional endpoints of our trial included changes in PANSS Marder Factor score (including
the negative symptom factor), a cognitive battery and the clinical global impression (CGI-S).
In November 2019, we announced topline results from our Phase 2 clinical trial of KarXT for the treatment of acute
psychosis in patients with schizophrenia, in which KarXT met the trial’s primary endpoint with a statistically significant
(p<0.0001) and clinically meaningful 11.6 point mean reduction in total PANSS scores over placebo at week 5 (-17.4 KarXT vs.
-5.9 placebo). We also observed a statistically significant 3.2 point mean reduction from baseline in the PANSS-positive
subscale (-5.6 KarXT v. -2.4 placebo) and a statistically significant 2.3 point mean reduction from baseline in the PANSS-
negative subscale (-3.2 KarXT v. -0.9 placebo) at week five (p<0.0001 and p<0.001, respectively). The total PANSS, PANSS-
positive subscale, and the PANSS-negative subscale had statistically significant separation at every assessment throughout the
trial.
In addition, we analyzed additional pre-specified secondary endpoints, including PANSS-Marder factor score, change in
CGI-S and percentage of CGI-S responders, defined as a CGI-S rating of either 1 or 2 at week five. We observed a statistically
significant 2.5 point mean reduction from baseline in the PANSS Marder factor score (-3.9 KarXT v. -1.3 placebo) at week five
(p<0.001). The PANSS Marder factor score had statistically significant separation at every assessment point through the trial.
We also observed statistically significant improvement in CGI-S over placebo at week five (p<0.001). A 4:1 ratio of CGI-S
responders (5.6% KarXT v. 1.4% placebo) was also observed, however this result was not statistically significant (p=0.151).
14
Effect of KarXT on Total PANSS
Effect of KarXT on Positive PANSS
15
Effect of KarXT on Negative PANSS
Effect of KarXT on PANSS Marder factor
16
CGI-S distribution at baseline
1 = normal, 2 = borderline ill, 3 = mildly ill, 4 = moderately ill, 5 = markedly ill, 6 = severely ill, 7 = extremely ill
CGI-S distribution at week 5
1 = normal, 2 = borderline ill, 3 = mildly ill, 4 = moderately ill, 5 = markedly ill, 6 = severely ill, 7 = extremely ill
KarXT was observed to be well tolerated in this Phase 2 trial. The overall discontinuation rate in the KarXT treatment arm
was similar to placebo (20% on KarXT vs. 21% on placebo) and the number of discontinuations due to treatment emergent
adverse events was equal in the two arms (n=2 on KarXT and n=2 on placebo). No patients discontinued treatment due to
cholinergic adverse events in either arm of the study. 91% of patients treated with KarXT escalated to the high dose of KarXT as
part of the flexible dose design, where the choice to escalate was made by the site physician based on the tolerability of KarXT
on an individual patient basis. 97% of placebo patients were dose escalated. There was also the option to de-escalate back to
100/20 mg BID KarXT dose if any tolerability issues emerged, and only 4% of patients were de-escalated in the KarXT arm
compared to 1% on placebo.
17
The overall treatment emergent adverse event rate was 54% on KarXT and 43% on placebo. Occurrences of drowsiness,
extrapyramidal side effects, such as tremors or slurred speech, or weight gain, which are adverse effects generally associated
with current antipsychotic drugs, were similar to placebo. The most common adverse events were constipation, nausea, dry
mouth, abdominal discomfort, and vomiting, all of which were mild or moderate in severity. There was no syncope, and there
was no mean change in blood pressure. One patient in the KarXT group discontinued due to elevated gamma-glutamyl
transferase. There was a 5.5 beats per minute peak mean placebo adjusted resting heart rate increase in the KarXT group, with
a downward trend after week 2. One serious adverse event was observed in the KarXT treatment group, in which a patient
discontinued and sought hospital care for worsening psychosis, meeting the regulatory definition of serious adverse event. The
clinical trial administrator was not able to rule out that the serious adverse event was drug related, and as such, the serious
adverse event was classified as being “possibly-drug related.” All other treatment emergent adverse events were mild or
moderate.
Our Planned Clinical Trials for the Treatment of Acute Psychosis
We plan to initiate a Phase 3 clinical trial assessing KarXT for the treatment of acute psychosis in schizophrenia. We
intend to hold an End-of-Phase 2 meeting with the FDA in the second quarter of 2020 to discuss our planned Phase 3 clinical
trial development plan. Subject to FDA feedback, we expect to initiate a Phase 3 clinical trial for the treatment of psychosis in
patients with schizophrenia by the end of 2020, with a trial design that is substantially similar to that of our recently completed
Phase 2 trial.
Our Planned Clinical Trials for the Negative and Cognitive Symptoms of Schizophrenia
We plan to utilize the data from our Phase 2 clinical trial of KarXT for the treatment of psychosis in schizophrenia to help
us guide KarXT’s future development for negative and cognitive symptoms of schizophrenia, for which there are currently no
approved treatments. We anticipate initiating a Phase 1b clinical trial to assess the safety and tolerability of KarXT for the
treatment of the cognitive symptoms and negative symptoms in the first half of 2020.
KarXT for the Treatment of Dementia-Related Psychosis
Approximately 8.4 million people in the United States are living with dementia of which approximately 40% are diagnosed
with the disease. The prevalence of psychosis in diagnosed dementia patients varies by dementia subtypes between 10% and
70% and in total an estimated 1.2 million dementia patients exhibit psychiatric symptoms. Patients with DRP share many
characteristics and often exhibit similar psychiatric symptoms irrespective of their underlying neurodegenerative disease. AD is
the most common form of dementia and represents between 60% and 80% of dementia patients. AD is an irreversible,
progressive neurodegenerative brain disorder that slowly destroys memory and cognition and, eventually, the ability to carry out
even the simplest of tasks. In the large and growing AD population, up to 50% of patients will experience psychosis and related
behavioral symptoms at some point during the course of their disease, which often leads to institutional care in a hospital or
nursing home. Based on third-party clinical trials with xanomeline and xanomeline’s mechanisms of action, we believe KarXT
has therapeutic potential to treat DRP. To date, the FDA has not approved any drug to treat the psychotic or behavioral
symptoms of DRP. As symptoms progress and become more severe, physicians often resort to off-label use of antipsychotic
medications to treat these patients. Current antipsychotic drugs are associated with a number of side effects including potentially
irreversible movement disorders, weight gain, metabolic dysfunction and sedation, which can be more problematic in elderly
patients with DRP. In addition, antipsychotic drugs all have a “boxed warning” for increased mortality in the elderly and may
exacerbate the cognitive impairment associated with DRP. Accordingly, there remains a large unmet medical need in psychosis
and the associated behavioral symptoms of patients with DRP.
18
Our Phase 1b Healthy Elderly Volunteer Clinical Trial
Based on Eli Lilly’s Phase 2 clinical trial of xanomeline in patients with AD, and the improved tolerability profile of KarXT as
compared to xanomeline, in December 2019, we initiated a Phase 1b clinical trial to assess the safety and tolerability of KarXT
in healthy elderly volunteers in order to select the most appropriate dose for future KarXT trials to assess efficacy and safety in a
DRP patient population. We expect topline results of this study in the second half of 2020. Previously, xanomeline-alone was
studied in an Alzheimer’s disease population with psychotic symptoms and demonstrated a dose-dependent therapeutic benefit
on psychotic symptoms. We intend to use the data from our Phase 1b healthy elderly volunteer trial, in conjunction with the data
collected in our Phase 2 clinical trial for the treatment of acute psychosis in schizophrenia to inform our future trials in DRP.
KarXT for Pain
A substantial body of literature shows that muscarinic receptor agonists inhibit the response to painful stimuli in a diverse
set of animal pain models that are designed to be representative of post-operative, inflammatory and neuropathic pain. In
several preclinical models of pain, treatment with xanomeline was observed to reduce pain in a dose-dependent manner.
Confirmatory experiments demonstrated that the action of xanomeline in these pain models is attributable to its stimulation of
M1 and M4 muscarinic receptors in the CNS and not to stimulation of muscarinic receptors in peripheral tissues. Importantly,
these studies also showed that opiate receptors do not mediate the analgesic actions of xanomeline and therefore xanomeline
and KarXT may be free of the abuse-liability of opioid-based pain medicines.
Effect of Xanomeline in Mouse Models of Pain
The figure in the left depicts the effect of increasing doses of xanomeline on the time it takes a mouse to withdraw its tail from a stimulus model of inflammatory
pain. The figure on the right depicts the effect of increasing doses of xanomeline on the frequency of withdrawal from a skin stimulus in a model of neuropathic
pain. Results are expressed as mean ± SEM. *P ≤ 0.05, ***P ≤ 0.001 (compared with vehicle-treated group).
We believe that these preclinical data of xanomeline in various animal pain models and other published results linking
stimulation of muscarinic receptors to analgesia highlight the potential for KarXT to have therapeutic benefit in patients
experiencing various types of pain including post-operative, inflammatory and neuropathic pain.
We initiated a Phase 1b randomized, double-blind, placebo-controlled clinical trial in healthy volunteers to evaluate the
effect of KarXT on experimentally induced pain in December 2019. This trial is evaluating laser-induced pain in healthy
volunteers with data collection to include both self-reported pain and measurement of pain responses via quantitative-EEG. This
experimental model of pain has been validated with well-known analgesic drugs and the trial is expected to generate data about
the potential analgesic effect of KarXT for post-operative, inflammatory, and neuropathic pain. We plan to use this data to help
us refine the optimal pain indication and dose for subsequent Phase 2 clinical trials. We expect topline data from this Phase 1b
trial in mid-2020.
19
Planned Additional Formulations of KarXT
We believe that additional formulations of KarXT have the potential to further improve the therapeutic window of KarXT
and offer patient compliance advantages through decreased dosing frequency. Our ongoing research efforts include the
development of advanced oral, long-acting injectable, transdermal and buccal formulations. We plan to have an additional
formulation of KarXT in clinical trials in 2021.
Other Research Programs
We continue to build our early stage pipeline. We currently have a novel series of compounds focused on muscarinic
receptor targets. In particular, we have synthesized lead compounds for further development as potential therapeutic agents in
several CNS disorders, including schizophrenia, DRP-, as well various forms of pain. We have completed in vitro screening for
several compounds and advanced these lead compounds for further preclinical development. In vivo evaluation of these
compounds in rodents is ongoing for these indications, and we expect to initiate IND-enabling studies in 2020. We believe we
can optimize these compounds and advance their development through preclinical studies and into clinical development, given
our expertise in this space. In February 2020 we announced a drug discovery partnership with Charles River Laboratories to
accommodate continued growth in our drug discovery efforts. We continue to evaluate other opportunities focused on
muscarinic and non-muscarinic targets for CNS disorders.
Manufacturing and Supply
We do not own or operate, and currently have no plans to establish, any manufacturing facilities. We currently source all of
our nonclinical and clinical compound supply through third-party contract manufacturing organizations, or CMOs.
For clinical supply, we use CMOs who act in accordance with the FDA’s good laboratory practices, or GLP, and current
good manufacturing practices, cGMP, for the manufacture of drug substance and product. Currently, we contract with Neuland
Laboratories Limited and Regis Technologies, Inc., for the manufacture of xanomeline and source trospium from Procos, S.p.A.
We expect to rely on third parties for our manufacturing processes and the production of all clinical supply drug substance and
drug product. We use additional contract manufacturers to fill, label, package, store and distribute investigational drug products.
It is our intent to identify and qualify additional manufacturers to provide active pharmaceutical ingredient and fill-and-finish
services prior to submission of a new drug application to the FDA for any product candidates that complete clinical development.
Competition
The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense
competition and a strong emphasis on proprietary products. We face potential competition from many different sources,
including pharmaceutical and biotechnology companies, academic institutions and governmental agencies as well as public and
private research institutions. Any product candidates that we successfully develop and commercialize, including KarXT, may
compete with existing therapies and new therapies that may become available in the future.
Our competitors may have significantly greater financial resources, established presence in the market, expertise in
research and development, manufacturing, preclinical and clinical testing, obtaining regulatory approvals and reimbursement
and marketing approved products than we do. These competitors also compete with us in recruiting and retaining qualified
scientific, sales, 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. Smaller or early-stage companies may
also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.
The key competitive factors affecting the success of KarXT, and any other product candidates that we develop to address
CNS disorders, if approved, are likely to be efficacy, safety, convenience, price, the level of generic competition and the
availability of reimbursement from government and other third-party payors.
20
Psychosis related to schizophrenia
There are currently no FDA-approved drugs for the negative or cognitive symptoms of schizophrenia. The current
standards of care for the psychotic symptoms of patients with schizophrenia are antipsychotic treatments that work primarily by
inhibiting D2 dopamine receptors as their primary mechanism of action. These drugs include: Abilify, marketed by Bristol-Myers
Squibb Company, Zyprexa, marketed by Eli Lilly, Vraylar, marketed by Allergan, Clozaril, marketed by Mylan Products Ltd.,
Latuda, marketed by Sumitomo Dainippon Pharma Co., Ltd., and Caplyta, marketed by Intra-Cellular Therapies, Inc. Many of
these drugs are prescribed for a variety of neuropsychiatric conditions, including bipolar disorder, depression and Tourette
syndrome. Additionally, we are aware of several product candidates in clinical development that are designed to modulate
dopamine and/or serotonin receptors including product candidates being developed by Alkermes plc and ACADIA
Pharmaceuticals Inc.
Dementia-Related Psychosis
There are currently no approved treatments for DRP, including psychosis related to AD. Patients with DRP are commonly
treated with antipsychotic medications that are indicated and approved for schizophrenia. Available treatments for AD patients
are only indicated for enhancing cognition in AD patients, and include acetylcholinesterase inhibitors such as donepezil,
galantamine, rivastigmine and memantine. These medications are available generically although specific dosage forms and
combinations are proprietary and marketed by large pharmaceutical companies such as, Allergan, Janssen Pharmaceuticals
NV, Novartis International AG and Pfizer Inc.
Pain
The current standard of care for neuropathic and inflammatory pain include opioids, nonsteroidal anti-inflammatory drugs
(NSAIDs), topical agents, anticonvulsants and antidepressants. We are aware of many FDA-approved drugs for the treatment of
neuropathic and inflammatory pain, including Lyrica, marketed by Pfizer Inc., Suboxone, marketed by Reckitt Benckiser Group
plc, Oxeota, marketed by Pfizer Inc., and OxyContin, marketed by Purdue Pharma.
Intellectual Property
We strive to protect the proprietary technologies that we believe are important to our business, including pursuing and
maintaining patent protection intended to cover our product candidate and their methods of use, as well as other inventions that
are important to our business. In addition to patent protection, we also rely on trade secrets to protect aspects of our business
that we do not consider appropriate for patent protection.
Our commercial success depends in part upon our ability to obtain and maintain patent and other proprietary protection for
commercially important technologies, inventions and know-how related to our business, defend and enforce our intellectual
property rights, particularly our patent rights, preserve the confidentiality of our trade secrets and operate without infringing valid
and enforceable intellectual property rights of others.
The patent positions for biotechnology companies like us are generally uncertain and can involve complex legal, scientific
and factual issues. In addition, the coverage claimed in a patent application can be significantly reduced before a patent is
issued, and its scope can be reinterpreted and even challenged after issuance. As a result, we cannot guarantee that any of our
platform technologies and product candidates will be protectable or remain protected by enforceable patents. We cannot predict
whether the patent applications we are currently pursuing will issue as patents in any particular jurisdiction or whether the claims
of any issued patents will provide sufficient proprietary protection from competitors. Any patents that we hold may be
challenged, circumvented or invalidated by third parties.
21
Product Candidates
With regard to our KarXT product candidate, we exclusively license from PureTech Health LLC, or PureTech Health, a
patent family comprising four issued U.S. patents with claims directed to an oral medicament comprising certain doses of
xanomeline and certain doses of trospium chloride and related methods of treatment, and one allowed U.S. patent application
with claims directed to methods for treating central nervous system disorders using an oral medicament comprising certain
doses of xanomeline and certain doses of trospium chloride, issued patents in Canada and Europe, and a total of three foreign
patent applications pending, one in each of Europe, Japan, and Hong Kong. The U.S. patents and the pending patent
applications, if issued, are expected to expire in 2030 without taking into account a possible Patent Term Extension, or PTE, or
any possible patent term adjustments. We also own one pending US provisional patent application with claims directed towards
the use of KarXT for treating schizophrenia. Applications claiming priority to and the benefit of this provisional application, if
issued, are expected to expire in 2040 without taking into account a possible PTE or any possible patent term adjustments. We
also own one pending U.S. non-provisional patent application and one pending PCT application with claims directed to an oral
pharmaceutical composition comprising xanomeline beads and trospium beads. Applications claiming priority to and the benefit
of this provisional application, if issued, are expected to expire in 2039 without taking into account a possible PTE or any
possible patent term adjustments. We also own six pending U.S. provisional patent applications and one PCT application with
claims directed to compounds targeting muscarinic receptors and methods of treatment using such compounds. Applications
claiming priority to and the benefit of these provisional applications, if issued, are expected to expire in 2040 without taking into
account a possible PTE or any possible patent term adjustments. Our U.S. and foreign patent applications also disclose other
muscarinic activators in combination with other muscarinic inhibitors for the treatment of CNS disorders.
License Agreements
License Agreement with Eli Lilly and Company
In May 2012, we entered into an exclusive license agreement, or the Lilly License Agreement, with Eli Lilly, pursuant to
which Eli Lilly assigned to us all of its rights to certain patents (now expired), regulatory documentation, data records and
materials related to xanomeline. We are also entitled to sublicense or otherwise transfer the rights granted in connection with the
Lilly License Agreement.
Under the Lilly License Agreement, we are obligated to use commercially reasonable efforts to develop, manufacture,
commercialize and seek and maintain regulatory approval for xanomeline, in any formulation, for use in humans.
We paid Eli Lilly an upfront payment of $100,000 and have agreed to make milestone payments to Eli Lilly of up to an
aggregate of $16 million upon the achievement of specified regulatory milestones and up to an aggregate of $54 million in
commercial milestones. In addition, we are obligated to pay Eli Lilly tiered royalties, at rates in the low to mid single-digit
percentages, on the worldwide net sales of any commercialized product on a country-by-country basis until the expiration of the
applicable royalty term, which is the longer of six years from the date of first commercial sale of each licensed product within a
country or data exclusivity in such country. During the royalty term, Eli Lilly is prohibited from granting any third-party rights to
the patents, regulatory documentation, data records and materials that have been licensed to us under the Lilly License
Agreement.
The Lilly License Agreement will expire on the later of (i) the expiration of the last-to-expire royalty term on a licensed
product-by-licensed product basis or (ii) the date on which we have made all milestone payments pursuant to the terms of the
Lilly License Agreement, unless terminated earlier by the parties. In no event will the term of the Lilly License Agreement exceed
15 years past the anniversary of the first commercial sale of a xanomeline product. We may terminate the Lilly License
Agreement for any reason with proper prior notice to Eli Lilly. Either party may terminate the Lilly License Agreement upon an
uncured material breach by the other party.
22
Patent License Agreement with PureTech Health LLC
In March 2011, we entered into an exclusive license agreement, or the Patent License Agreement, with PureTech Health,
pursuant to which PureTech Health granted us an exclusive license to patent rights relating to combinations of a muscarinic
activator with a muscarinic inhibitor for the treatment of central nervous system disorders.
In connection with the Patent License Agreement, we have agreed to make milestone payments to PureTech Health of up
to an aggregate of $10 million upon the achievement of specified development and regulatory milestones. In addition, we are
obligated to pay PureTech Health low single-digit royalties on the worldwide net sales of any commercialized product covered by
the licenses granted under the Patent License Agreement. In the event that we sublicense any of the patent rights granted under
the Patent License Agreement, we will be obligated to pay PureTech Health royalties within the range of 15% to 25% on any
income we receive from the sublicensee, excluding royalties.
We may terminate the Patent License Agreement for any reason with proper prior notice to PureTech Health. Either party
may terminate the Patent License Agreement upon an uncured material breach by the other party.
Government Regulation
Government authorities in the United States, at the federal, state and local level, and in other countries and jurisdictions,
including the European Union, extensively regulate, among other things, the research, development, testing, manufacture,
quality control, approval, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, post-
approval monitoring and reporting, and import and export of pharmaceutical products. The processes for obtaining regulatory
approvals in the United States and in foreign countries and jurisdictions, along with subsequent compliance with applicable
statutes and regulations, require the expenditure of substantial time and financial resources.
Review and Approval of Drugs in the United States
In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and its
implementing regulations. The failure to comply with applicable U.S. requirements at any time during the product development
process, approval process or after approval may subject an applicant and/or sponsor to a variety of administrative or judicial
sanctions, including refusal by the FDA to approve pending applications, withdrawal of an approval, imposition of a clinical hold,
issuance of warning letters and other types of letters, product seizures, total or partial suspension of production or distribution,
injunctions, fines, refusals of government contracts, restitution, disgorgement of profits, or civil or criminal investigations and
penalties brought by the FDA and the Department of Justice or other governmental entities. In addition, an applicant may need
to recall a product.
An applicant seeking approval to market and distribute a new drug product in the United States must typically undertake
the following:
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•
•
completion of nonclinical, or preclinical, laboratory tests, animal studies and formulation studies in compliance with the
FDA’s good laboratory practice, or GLP, regulations;
submission to the FDA of an investigational new drug application, or IND, which must take effect before human clinical
trials may begin;
approval by an independent Institutional Review Board, or IRB, representing each clinical site before each clinical trial
may be initiated at that site;
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•
•
•
•
•
•
•
performance of adequate and well-controlled human clinical trials in accordance with good clinical practices, or GCPs,
to establish the safety and efficacy of the proposed drug product for each indication;
preparation and submission to the FDA of a new drug application, or NDA, and payment of user fees;
review of the product by an FDA advisory committee, where appropriate or if applicable;
satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities at which the product,
or components thereof, are produced to assess compliance with current Good Manufacturing Practice, or cGMP,
requirements and to assure that the facilities, methods and controls are adequate to preserve the product’s identity,
strength, quality and purity;
satisfactory completion of FDA audits of clinical trial sites to assure compliance with GCPs and the integrity of the
clinical data;
FDA review and approval of the NDA; and
compliance with any post-approval requirements, including Risk Evaluation and Mitigation Strategies, or REMS, and
post-approval studies required by the FDA.
Preclinical Studies
Before an applicant begins testing a compound in humans, the drug candidate enters the preclinical testing stage.
Preclinical studies include laboratory evaluation of the purity and stability of the manufactured drug substance or active
pharmaceutical ingredient and the formulated drug or drug product, as well as in vitro and animal studies to assess the safety
and activity of the drug for initial testing in humans and to establish a rationale for therapeutic use. The conduct of preclinical
studies is subject to federal regulations and requirements, including GLP regulations. Some long-term preclinical testing, such
as animal tests of reproductive adverse events and carcinogenicity, may continue after the IND is submitted.
The IND and IRB Processes
An IND is an exemption from the FDCA that allows an unapproved drug to be shipped in interstate commerce for use in an
investigational clinical trial and a request for FDA authorization to administer such investigational drug to humans. Such
authorization must be secured prior to interstate shipment and administration of the investigational drug. In an IND, applicants
must submit a protocol for each clinical trial and any subsequent protocol amendments. In addition, the results of the preclinical
tests, manufacturing information, analytical data, any available clinical data or literature and plans for clinical trials, among other
things, are submitted to the FDA as part of an IND. The FDA requires a 30-day waiting period after the filing of each IND before
clinical trials may begin. At any time during this 30-day period, the FDA may raise concerns or questions about the conduct of
the trials as outlined in the IND and impose a clinical hold. In this case, the IND sponsor and the FDA must resolve any
outstanding concerns before clinical trials can begin.
Following commencement of a clinical trial under an IND, the FDA may also place a clinical hold or partial clinical hold on
that trial. A clinical hold is an order issued by the FDA to the sponsor to delay a proposed clinical investigation or to suspend an
ongoing investigation. A partial clinical hold is a delay or suspension of only part of the clinical work requested under the IND.
No more than 30 days after imposition of a clinical hold or partial clinical hold, the FDA will provide the sponsor a written
explanation of the basis for the hold. Following issuance of a clinical hold or partial clinical hold, an investigation may only
resume after the FDA has notified the sponsor that the investigation may proceed. The FDA will base that determination on
information provided by the sponsor correcting the deficiencies previously cited or otherwise satisfying the FDA that the
investigation can proceed.
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A sponsor may choose, but is not required, to conduct a foreign clinical study under an IND. When a foreign clinical study
is conducted under an IND, all FDA IND requirements must be met unless waived. When the foreign clinical study is not
conducted under an IND, the sponsor must ensure that the study is conducted in accordance with GCP, including review and
approval by an independent ethics committee, or IEC, and informed consent from subjects. The GCP requirements are intended
to help ensure the protection of human subjects enrolled in non-IND foreign clinical studies, as well as the quality and integrity of
the resulting data. FDA must also be able to validate the data from the study through an on-site inspection if necessary.
In addition to the foregoing IND requirements, an IRB representing each institution participating in the clinical trial must
review and approve the plan for any clinical trial before it commences at that institution, and the IRB must conduct continuing
review of the study at least annually. The IRB must review and approve, among other things, the study protocol and informed
consent information to be provided to study subjects. An IRB must operate in compliance with FDA regulations. An IRB can
suspend or terminate approval of a clinical trial at its institution, or an institution it represents, if the clinical trial is not being
conducted in accordance with the IRB’s requirements or if the product candidate has been associated with unexpected serious
harm to patients.
Additionally, some trials are overseen by an independent group of qualified experts organized by the trial sponsor, known
as a data safety monitoring board or committee. This group provides authorization for whether or not a trial may move forward at
designated check points based on access that only the group maintains to available data from the study. Suspension or
termination of development during any phase of clinical trials can occur if it is determined that the subjects or patients are being
exposed to an unacceptable health risk. Other reasons for suspension or termination may be made by us based on evolving
business objectives and/or competitive climate.
Information about certain clinical trials must be submitted within specific timeframes to the National Institutes of Health, or
NIH, for public dissemination on its ClinicalTrials.gov website.
Human Clinical Trials in Support of an NDA
Clinical trials involve the administration of the investigational product to human subjects under the supervision of qualified
investigators in accordance with GCP requirements, which include, among other things, the requirement that all research
subjects, or their legal representative, provide their informed consent in writing before their participation in any clinical trial.
Clinical trials are conducted under written study protocols detailing, among other things, the inclusion and exclusion criteria, the
objectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated.
Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined:
•
•
•
•
Phase 1. The drug is initially introduced into healthy human subjects or, in certain indications such as cancer, patients
with the target disease or condition and tested for safety, dosage tolerance, absorption, metabolism, distribution,
excretion and, if possible, to gain an early indication of its effectiveness and to determine optimal dosage.
Phase 2. The drug is administered to a limited patient population to identify possible adverse effects and safety risks,
to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance
and optimal dosage.
Phase 3. The drug is administered to an expanded patient population, generally at geographically dispersed clinical
trial sites, in well-controlled clinical trials to generate enough data to evaluate the efficacy and safety of the product for
approval, to establish the overall risk-benefit profile of the product and to provide adequate information for the labeling
of the product.
Phase 4. Post-approval studies may be conducted after initial regulatory approval. These studies are used to gain
additional experience from the treatment of patients in the intended therapeutic indication.
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Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA. In addition, within
15 calendar days after the sponsor determines that the information qualifies for reporting, IND safety reports must be submitted
to the FDA for any of the following: serious and unexpected suspected adverse reactions; findings from other studies or animal
or in vitro testing that suggest a significant risk in humans exposed to the drug; and any clinically important increase in the case
of a serious suspected adverse reaction over that listed in the protocol or investigator brochure. The sponsor also must notify
the FDA of any unexpected fatal or life-threatening suspected adverse reaction within seven calendar days after the sponsor’s
initial receipt of the information. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any
specified period, or at all. Furthermore, the FDA or the sponsor may suspend or terminate a clinical trial at any time on various
grounds, including a finding that the research subjects are being exposed to an unacceptable health risk. Similarly, an IRB can
suspend or terminate approval of a clinical trial at its institution, or an institution it represents, if the clinical trial is not being
conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to
patients. The FDA will typically inspect one or more clinical sites to assure compliance with GCP and the integrity of the clinical
data submitted.
Concurrent with clinical trials, companies often complete additional animal studies and must also develop additional
information about the chemistry and physical characteristics of the drug as well as finalize a process for manufacturing the
product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of
consistently producing quality batches of the drug candidate and, among other things, the applicant must develop methods for
testing the identity, strength, quality, purity, and potency of the final drug. Additionally, appropriate packaging must be selected
and tested, and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable
deterioration over its shelf life.
Combination Rule
The FDA’s Combination Rule governing fixed combination drug products provides that two or more drugs may be
combined in a single dosage form when each component contributes to the claimed effects and the dosage of each component
(amount, frequency, duration) is such that the combination is safe and effective for a significant patient population requiring such
concurrent therapy as defined in the labeling for the drug. This rule is meant to ensure that any fixed-dose combination drug
provides an advantage to the patient over and above that obtained when one of the individual ingredients is used in the usual
safe and effective dose.
Review of an NDA by the FDA
Assuming successful completion of required clinical testing and other requirements, the results of the preclinical studies
and clinical trials, together with detailed information relating to the product’s chemistry, manufacture, controls and proposed
labeling, among other things, are submitted to the FDA as part of an NDA requesting approval to market the drug product for
one or more indications. Under federal law, the submission of most NDAs is additionally subject to a significant application user
fee as well as annual prescription drug product program fees. These fees are typically increased annually. Certain exceptions
and waivers are available for some of these fees.
The FDA conducts a preliminary review of an NDA within 60 days of its receipt, before accepting the NDA for filing, to
determine whether the application is sufficiently complete to permit substantive review. The FDA may request additional
information rather than accept an NDA for filing. In this event, the application must be resubmitted with the additional
information. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is
accepted for filing, the FDA begins an in-depth substantive review. The FDA has agreed to specified performance goals in the
review process of NDAs. Applications for drugs containing new molecular entities are meant to be reviewed within ten months
from the date of filing, and applications for “priority review” products containing new molecular entities are meant to be reviewed
within six months of filing. The review process may be extended by the FDA for three additional months to consider new
information or clarification provided by the applicant to address an outstanding deficiency identified by the FDA following the
original submission.
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During its review of an NDA, the FDA typically will inspect the facility or facilities where the product is or will be
manufactured. These pre-approval inspections may cover all facilities associated with an NDA, including drug component
manufacturing (such as active pharmaceutical ingredients), finished drug product manufacturing, and control testing
laboratories. The FDA will not approve an NDA unless it determines that the manufacturing processes and facilities are in
compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications.
In addition, as a condition of approval, the FDA may require an applicant to develop a REMS. REMS use risk minimization
strategies beyond the professional labeling to ensure that the benefits of the product outweigh the potential risks. To determine
whether a REMS is needed, the FDA will consider the size of the population likely to use the product, seriousness of the
disease, expected benefit of the product, expected duration of treatment, seriousness of known or potential adverse events, and
whether the product is a new molecular entity. REMS can include medication guides, physician communication plans for
healthcare professionals, and elements to assure safe use, or ETASU. ETASU may include, but are not limited to, special
training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring, and the
use of patient registries. The FDA may require a REMS before approval or post-approval if it becomes aware of a serious risk
associated with use of the product.
The FDA is required to refer an application for a novel drug to an advisory committee or explain why such referral was not
made. Typically, an advisory committee is a panel of independent experts, including clinicians and other scientific experts, that
reviews, evaluates and provides a recommendation as to whether the application should be approved and under what
conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations
carefully when making decisions.
Fast Track, Breakthrough Therapy, and Priority Review
The FDA has a number of programs intended to facilitate and expedite development and review of new drugs if they are
intended to address an unmet medical need in the treatment of a serious or life-threatening disease or condition. Three of these
programs are referred to as fast track designation, breakthrough therapy designation, and priority review designation.
Specifically, the FDA may designate a product for Fast Track review if it is intended, whether alone or in combination with
one or more other products, for the treatment of a serious or life-threatening disease or condition, and it demonstrates the
potential to address unmet medical needs for such a disease or condition. For Fast Track products, sponsors may have greater
interactions with the FDA and the FDA may initiate review of sections of a Fast Track product’s application before the application
is complete. This rolling review may be available if the FDA determines, after preliminary evaluation of clinical data submitted by
the sponsor, that a Fast Track product may be effective. The sponsor must also provide, and the FDA must approve, a schedule
for the submission of the remaining information and the sponsor must pay applicable user fees. However, the FDA’s time period
goal for reviewing a Fast Track application does not begin until the last section of the application is submitted. In addition, the
Fast Track designation may be withdrawn by the FDA if the FDA believes that the designation is no longer supported by data
emerging in the clinical trial process.
Second, a product may be designated as a Breakthrough Therapy if it is intended, either alone or in combination with one
or more other products, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that
the product may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints,
such as substantial treatment effects observed early in clinical development. The FDA may take certain actions with respect to
Breakthrough Therapies, including holding meetings with the sponsor throughout the development process; providing timely
advice to the product sponsor regarding development and approval; involving more senior staff in the review process; assigning
a cross-disciplinary project lead for the review team; and taking other steps to design the clinical trials in an efficient manner.
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Third, the FDA may designate a product for priority review if it is a product that treats a serious or life-threatening disease
or condition and, if approved, would provide a significant improvement in safety or effectiveness. The FDA determines, on a
case-by-case basis, whether the proposed product represents a significant improvement when compared with other available
therapies. Significant improvement may be illustrated by evidence of increased effectiveness in the treatment of a condition,
elimination or substantial reduction of a treatment-limiting product reaction, documented enhancement of patient compliance
that may lead to improvement in serious outcomes, and evidence of safety and effectiveness in a new subpopulation. A priority
designation is intended to direct overall attention and resources to the evaluation of such applications, and to shorten the FDA’s
goal for taking action on a marketing application from ten months to six months.
Accelerated Approval Pathway
The FDA may grant accelerated approval to a product for a serious or life-threatening condition that provides meaningful
therapeutic advantage to patients over existing treatments based upon a determination that the product has an effect on a
surrogate endpoint that is reasonably likely to predict clinical benefit or on an intermediate clinical endpoint that can be
measured earlier than an effect on irreversible morbidity or mortality, or IMM, and that is reasonably likely to predict an effect on
IMM or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of
alternative treatments. Products granted accelerated approval must meet the same statutory standards for safety and
effectiveness as those granted traditional approval.
For the purposes of accelerated approval, a surrogate endpoint is a marker, such as a laboratory measurement,
radiographic image, physical sign, or other measure that is thought to predict clinical benefit, but is not itself a measure of
clinical benefit. Surrogate endpoints can often be measured more easily or more rapidly than clinical endpoints. An intermediate
clinical endpoint is a measurement of a therapeutic effect that is considered reasonably likely to predict the clinical benefit of a
product, such as an effect on IMM. The FDA has limited experience with accelerated approvals based on intermediate clinical
endpoints, but has indicated that such endpoints generally may support accelerated approval where the therapeutic effect
measured by the endpoint is not itself a clinical benefit and basis for traditional approval, if there is a basis for concluding that
the therapeutic effect is reasonably likely to predict the ultimate clinical benefit of a product.
The accelerated approval pathway is most often used in settings in which the course of a disease is long and an extended
period of time is required to measure the intended clinical benefit of a product, even if the effect on the surrogate or intermediate
clinical endpoint occurs rapidly.
The accelerated approval pathway is usually contingent on a sponsor’s agreement to conduct, in a diligent manner,
additional post-approval confirmatory studies to verify and describe the product’s clinical benefit. As a result, a product
candidate approved on this basis is subject to rigorous post-marketing compliance requirements, including the completion of
Phase 4 or post-approval clinical trials to confirm the effect on the clinical endpoint. Failure to conduct required post-approval
studies, or confirm a clinical benefit during post-marketing studies, could result in the FDA’s withdrawal of the approval and
require the withdrawal of the product from the market on an expedited basis. All promotional materials for product candidates
approved under accelerated regulations are subject to prior review by the FDA.
The FDA’s Decision on an NDA
On the basis of the FDA’s evaluation of the NDA and accompanying information, including the results of the inspection of
the manufacturing facilities and select clinical trial sites, the FDA may issue an approval letter or a complete response letter. An
approval letter authorizes commercial marketing of the product with specific prescribing information for specific indications. A
complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing or
information in order for the FDA to reconsider the application. If a complete response letter is issued, the applicant may resubmit
the NDA to address all of the deficiencies identified in the letter, withdraw the application, or request a hearing. If the applicant
resubmits the NDA, only when the deficiencies have been addressed to the FDA’s satisfaction will the FDA will issue an
approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of
information included. Even with submission of this additional information, the FDA ultimately may decide that the application
does not satisfy the regulatory criteria for approval.
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If the FDA approves a product, it may limit the approved indications for use for the product, require that contraindications,
warnings or precautions be included in the product labeling, require that post-approval studies, including Phase 4 clinical trials,
be conducted to further assess the drug’s safety or effectiveness after approval, require testing and surveillance programs to
monitor the product after commercialization, or impose other conditions, including distribution restrictions or other risk
management mechanisms, including REMS, which can materially affect the potential market and profitability of the product. The
FDA may prevent or limit further marketing of a product based on the results of post-market studies or surveillance programs.
Post-Approval Requirements
Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the
FDA, including, among other things, requirements relating to recordkeeping, periodic reporting, product sampling and
distribution, advertising and promotion and reporting of adverse experiences with the product. After approval, many changes to
the approved product, such as adding new indications or other labeling claims, are subject to prior FDA review and approval.
There also are annual prescription drug product program fee requirements for certain marketed products.
In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are
required to register their establishments with the FDA and state agencies, and are subject to periodic unannounced inspections
by the FDA and these state agencies for compliance with cGMP requirements. Changes to the manufacturing process are
strictly regulated and often require prior FDA approval before being implemented. FDA regulations also require investigation and
correction of any deviations from cGMP and impose reporting and documentation requirements upon the NDA holder and any
third-party manufacturers that the NDA holder may decide to use. Accordingly, manufacturers must continue to expend time,
money, and effort in the area of production and quality control to maintain cGMP compliance.
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and
standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown
problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or
failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information;
imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions
under a REMS program. Other potential consequences include, among other things:
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•
•
•
•
restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or
voluntary product recalls;
fines, warning or untitled letters or holds on post-approval clinical trials;
refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of
product approvals;
product seizure or detention, or refusal to permit the import or export of products; or
injunctions or the imposition of civil or criminal penalties.
The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs
may be promoted only for the approved indications and in accordance with the provisions of the approved label. However,
companies may share truthful and not misleading information that is otherwise consistent with a product’s FDA approved
labeling. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a
company that is found to have improperly promoted off-label uses may be subject to significant liability.
In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, or
PDMA, which regulates the distribution of drugs and drug samples at the federal level, and sets minimum standards for the
registration and regulation of drug distributors by the states. Both the PDMA and state laws limit the distribution of prescription
pharmaceutical product samples and impose requirements to ensure accountability in distribution.
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Hatch-Waxman Amendments
Section 505 of the FDCA describes three types of marketing applications that may be submitted to the FDA to request
marketing authorization for a new drug. A Section 505(b)(1) NDA is an application that contains full reports of investigations of
safety and efficacy. A 505(b)(2) NDA is an application that contains full reports of investigations of safety and efficacy but where
at least some of the information required for approval comes from investigations that were not conducted by or for the applicant
and for which the applicant has not obtained a right of reference or use from the person by or for whom the investigations were
conducted. This regulatory pathway enables the applicant to rely, in part, on the FDA’s prior findings of safety and efficacy for an
existing product, or published literature, in support of its application. Section 505(j) establishes an abbreviated approval process
for a generic version of approved drug products through the submission of an Abbreviated New Drug Application, or ANDA. An
ANDA provides for marketing of a generic drug product that has the same active ingredients, dosage form, strength, route of
administration, labeling, performance characteristics and intended use, among other things, to a previously approved product,
known as a reference listed drug, or RLD. ANDAs are termed “abbreviated” because they are generally not required to include
preclinical (animal) and clinical (human) data to establish safety and efficacy. Instead, generic applicants must scientifically
demonstrate that their product is bioequivalent to, or performs in the same manner as, the innovator drug through in vitro, in
vivo, or other testing. The generic version must deliver the same amount of active ingredients into a subject’s bloodstream in the
same amount of time as the innovator drug and can often be substituted by pharmacists under prescriptions written for the
reference listed drug.
Non-Patent Exclusivity
Under the Hatch-Waxman Amendments, the FDA may not approve (or in some cases accept) an ANDA or 505(b)(2)
application until any applicable period of non-patent exclusivity for the RLD has expired. The FDCA provides a period of five
years of non-patent data exclusivity for a new drug containing a new chemical entity, or NCE. For the purposes of this provision,
an NCE is a drug that contains no active moiety that has previously been approved by the FDA in any other NDA. An active
moiety is the molecule or ion responsible for the physiological or pharmacological action of the drug substance. In cases where
such NCE exclusivity has been granted, an ANDA may not be filed with the FDA until the expiration of five years unless the
submission is accompanied by a Paragraph IV certification, which states the proposed generic drug will not infringe one or more
of the already approved product’s listed patents or that such patents are invalid or unenforceable, in which case the applicant
may submit its application four years following the original product approval.
The FDCA also provides for a period of three years of exclusivity for non-NCE drugs if the NDA or a supplement to the
NDA includes reports of one or more new clinical investigations, other than bioavailability or bioequivalence studies, that were
conducted by or for the applicant and are essential to the approval of the application or supplement. This three-year exclusivity
period often protects changes to a previously approved drug product, such as a new dosage form, route of administration,
combination or indication, but it generally would not protect the original, unmodified product from generic competition. Unlike
five-year NCE exclusivity, an award of three-year exclusivity does not block the FDA from accepting ANDAs seeking approval
for generic versions of the drug as of the date of approval of the original drug product; it only prevents FDA from approving such
ANDAs.
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Hatch-Waxman Patent Certification and the 30-Month Stay
In seeking approval of an NDA or a supplement thereto, NDA sponsors are required to list with the FDA each patent with
claims that cover the applicant’s product or an approved method of using the product. Upon approval, each of the patents listed
by the NDA sponsor is published in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly
known as the Orange Book. Upon submission of an ANDA or 505(b)(2) NDA, an applicant is required to certify to the FDA
concerning any patents listed for the RLD in the Orange Book that:
•
•
•
•
no patent information on the drug product that is the subject of the application has been submitted to the FDA;
such patent has expired;
the date on which such patent expires; or
such patent is invalid, unenforceable or will not be infringed upon by the manufacture, use, or sale of the drug product
for which the application is submitted.
Generally, the ANDA or 505(b)(2) NDA cannot be approved until all listed patents have expired, except where the ANDA
or 505(b)(2) NDA applicant challenges a listed patent through the last type of certification, also known as a paragraph IV
certification. If the applicant does not challenge the listed patents or indicates that it is not seeking approval of a patented
method of use, the ANDA or 505(b)(2) NDA application will not be approved until all of the listed patents claiming the referenced
product have expired. If the ANDA or 505(b)(2) NDA applicant has provided a paragraph IV certification the applicant must send
notice of the paragraph IV certification to the NDA and patent holders once the application has been accepted for filing by the
FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of the paragraph IV
certification. If the paragraph IV certification is challenged by an NDA holder or the patent owner(s) asserts a patent challenge to
the paragraph IV certification, the FDA may not approve that application until the earlier of 30 months from the receipt of the
notice of the paragraph IV certification, the expiration of the patent, when the infringement case concerning each such patent
was favorably decided in the applicant’s favor or settled, or such shorter or longer period as may be ordered by a court. This
prohibition is generally referred to as the 30-month stay. In instances where an ANDA or 505(b)(2) NDA applicant files a
paragraph IV certification, the NDA holder or patent owner(s) regularly take action to trigger the 30-month stay, recognizing that
the related patent litigation may take many months or years to resolve. Thus, approval of an ANDA or 505(b)(2) NDA could be
delayed for a significant period of time depending on the patent certification the applicant makes and the reference drug
sponsor’s decision to initiate patent litigation. If the drug has NCE exclusivity and the ANDA is submitted four years after
approval, the 30-month stay is extended so that it expires seven and a half years after approval of the innovator drug, unless the
patent expires or there is a decision in the infringement case that is favorable to the ANDA applicant before then.
Patent Term Restoration and Extension
A patent claiming a new drug product may be eligible for a limited patent term extension under the Hatch-Waxman
Amendments, which permits a patent term restoration of up to seven and a half years for patent term lost during product
development and the FDA regulatory review. The restoration period granted is typically one-half the time between the effective
date of an IND and the submission date of an NDA, plus the time between the submission date of an NDA and the ultimate
approval date, provided the sponsor acted with diligence. Patent term restoration cannot be used to extend the remaining term
of a patent past a total of 14 years from the product’s approval date. Only one patent applicable to an approved drug product is
eligible for the extension, and the application for the extension must be submitted prior to the expiration of the patent in question
and within 60 days of drug approval. A patent that covers multiple drugs for which approval is sought can only be extended in
connection with one of the approvals. The U.S. Patent and Trademark Office reviews and approves the application for any
patent term extension or restoration in consultation with the FDA.
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Review and Approval of Medicinal Products in the European Union
In order to market any product outside of the United States, a company must also comply with numerous and varying
regulatory requirements of other countries and jurisdictions regarding quality, safety and efficacy and governing, among other
things, clinical trials, marketing authorization, commercial sales and distribution of products. Whether or not it obtains FDA
approval for a product, an applicant will need to obtain the necessary approvals by the comparable foreign regulatory authorities
before it can commence clinical trials or marketing of the product in those countries or jurisdictions. Specifically, the process
governing approval of medicinal products in the European Union generally follows the same lines as in the United States. It
entails satisfactory completion of preclinical studies and adequate and well-controlled clinical trials to establish the safety and
efficacy of the product for each proposed indication. It also requires the submission to the relevant competent authorities of a
marketing authorization application, or MAA, and granting of a marketing authorization by these authorities before the product
can be marketed and sold in the European Union.
Clinical Trial Approval
The Clinical Trials Directive 2001/20/EC, the Directive 2005/28/EC on Good Clinical Practice, or GCP, and the related
national implementing provisions of the individual EU Member States govern the system for the approval of clinical trials in the
European Union. Under this system, an applicant must obtain prior approval from the competent national authority of the EU
Member States in which the clinical trial is to be conducted. Furthermore, the applicant may only start a clinical trial at a specific
study site after the competent ethics committee has issued a favorable opinion. The clinical trial application must be
accompanied by, among other documents, an investigational medicinal product dossier (the Common Technical Document) with
supporting information prescribed by Directive 2001/20/EC, Directive 2005/28/EC, where relevant the implementing national
provisions of the individual EU Member States and further detailed in applicable guidance documents.
In April 2014, the new Clinical Trials Regulation, (EU) No 536/2014 (Clinical Trials Regulation) was adopted. The
Regulation is anticipated to apply in 2020. The Clinical Trials Regulation will be directly applicable in all the EU Member States,
repealing the current Clinical Trials Directive 2001/20/EC. Conduct of all clinical trials performed in the European Union will
continue to be bound by currently applicable provisions until the new Clinical Trials Regulation becomes applicable. The extent
to which ongoing clinical trials will be governed by the Clinical Trials Regulation will depend on when the Clinical Trials
Regulation becomes applicable and on the duration of the individual clinical trial. If a clinical trial continues for more than three
years from the day on which the Clinical Trials Regulation becomes applicable the Clinical Trials Regulation will at that time
begin to apply to the clinical trial.
The new Clinical Trials Regulation aims to simplify and streamline the approval of clinical trials in the European Union. The
main characteristics of the regulation include: a streamlined application procedure via a single entry point, the “EU 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 EU 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 EU Member State. However,
overall related timelines will be defined by the Clinical Trials Regulation.
Marketing Authorization
To obtain a marketing authorization for a product under European Union regulatory systems, an applicant must submit an
MAA either under a centralized procedure administered by the European Medicines Agency, or EMA, or one of the procedures
administered by competent authorities in the EU Member States (decentralized procedure or mutual recognition procedure). A
marketing authorization may be granted only to an applicant established in the European Union. Regulation (EC) No 1901/2006
provides that prior to obtaining a marketing authorization in the European Union, applicants have to demonstrate compliance
with all measures included in an EMA-approved Pediatric Investigation Plan, or PIP, covering all subsets of the pediatric
population, unless the EMA has granted (1) a product-specific waiver, (2) a class waiver or (3) a deferral for one or more of the
measures included in the PIP.
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The centralized procedure provides for the grant of a single marketing authorization by the European Commission that is
valid for all EU Member States and Iceland, Liechtenstein and Norway. Pursuant to Regulation (EC) No 726/2004, the
centralized procedure is compulsory for specific products, including for medicines produced by certain biotechnological
processes, products designated as orphan medicinal products, advanced therapy products and products with a new active
substance indicated for the treatment of certain diseases, including products for the treatment of HIV or AIDS, cancer, diabetes,
neurodegenerative diseases, auto-immune and other immune dysfunctions and viral diseases. For products with a new active
substance indicated for the treatment of other diseases and products that are a significant therapeutic, scientific or technical
innovation and whose authorization would be in the interest of public health at EU level, the centralized procedure is optional.
Under the centralized procedure, the Committee for Medicinal Products for Human Use, or the CHMP, established at the
EMA is responsible for conducting the initial assessment of a product. The CHMP is also responsible for several post-
authorization and maintenance activities, such as the assessment of modifications or extensions to an existing marketing
authorization. Under the centralized procedure in the European Union, the maximum timeframe for the evaluation of an MAA is
210 days, excluding clock stops, when additional information or written or oral explanation is to be provided by the applicant in
response to questions of the CHMP. Accelerated evaluation might be granted by the CHMP in exceptional cases, when a
medicinal product is of major interest from the point of view of public health and in particular from the viewpoint of therapeutic
innovation. If the CHMP accepts such request, the time limit of 210 days will be reduced to 150 days but it is possible that the
CHMP can revert to the standard time limit for the centralized procedure if it considers that it is no longer appropriate to conduct
an accelerated assessment. At the end of this period, the CHMP provides a scientific opinion on whether or not a marketing
authorization should be granted in relation to a medicinal product. Within 67 days from the date of the CHMP Opinion, the
European Commission will adopt its final decision on the marketing authorization application.
Unlike the centralized authorization procedure, the decentralized marketing authorization procedure requires a separate
application to, and leads to separate approval by, the competent authorities of each EU Member State in which the product is to
be marketed. This application is identical to the application that would be submitted to the EMA for authorization through the
centralized procedure. The reference EU Member State prepares a draft assessment and drafts of the related materials within
120 days after receipt of a valid application. The resulting assessment report is submitted to the concerned EU Member States
who, within 90 days of receipt, must decide whether to approve the assessment report and related materials. If a concerned EU
Member State cannot approve the assessment report and related materials due to concerns relating to a potential serious risk to
public health, disputed elements may be referred to the European Commission, whose decision is binding on all EU Member
States.
The mutual recognition procedure similarly is based on the acceptance by the competent authorities of the EU Member
States of the marketing authorization of a medicinal product by the competent authorities of other EU Member States. The
holder of a national marketing authorization may submit an application to the competent authority of an EU Member State
requesting that this authority recognize the marketing authorization delivered by the competent authority of another EU Member
State.
Regulatory Data Protection in the European Union
In the European Union, innovative medicinal products approved on the basis of a complete independent data package
qualify for eight years of data exclusivity upon marketing authorization and an additional two years of market exclusivity pursuant
to Directive 2001/83/EC. Regulation (EC) No 726/2004 repeats this entitlement for medicinal products authorized in accordance
the centralized authorization procedure. Data exclusivity prevents applicants for authorization of generics of these innovative
products from referencing the innovator’s data to assess a generic (abbreviated) application for a period of eight years. During
an additional two-year period of market exclusivity, a generic marketing authorization application can be submitted and
authorized, and the innovator’s data may be referenced, but no generic medicinal product can be placed on the European Union
market until the expiration of the market exclusivity. The overall ten-year period will be
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extended to a maximum of 11 years if, during the first eight years of those ten years, the marketing authorization holder obtains
an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to their authorization,
are held to bring a significant clinical benefit in comparison with existing therapies. Even if a compound is considered to be a
new chemical entity so that the innovator gains the prescribed period of data exclusivity, another company nevertheless could
also market another version of the product if such company obtained marketing authorization based on an MAA with a complete
independent data package of pharmaceutical tests, preclinical tests and clinical trials.
Periods of Authorization and Renewals
A marketing authorization has an initial validity for five years in principle. The marketing authorization may be renewed
after five years on the basis of a re-evaluation of the risk-benefit balance by the EMA or by the competent authority of the EU
Member State. To this end, the marketing authorization holder must provide the EMA or the competent authority with a
consolidated version of the file in respect of quality, safety and efficacy, including all variations introduced since the marketing
authorization was granted, at least six months before the marketing authorization ceases to be valid. The European Commission
or the competent authorities of the EU Member States may decide, on justified grounds relating to pharmacovigilance, to
proceed with one further five-year period of marketing authorization. Once subsequently definitively renewed, the marketing
authorization shall be valid for an unlimited period. Any authorization which is not followed by the actual placing of the medicinal
product on the European Union market (in case of centralized procedure) or on the market of the authorizing EU Member State
within three years after authorization ceases to be valid (the so-called sunset clause).
Regulatory Requirements after a Marketing Authorization has been Obtained
In case an authorization for a medicinal product in the European Union is obtained, the holder of the marketing
authorization is required to comply with a range of requirements applicable to the manufacturing, marketing, promotion and sale
of medicinal products. These include:
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Compliance with the European Union’s stringent pharmacovigilance or safety reporting rules must be ensured. These
rules can impose post-authorization studies and additional monitoring obligations.
The manufacturing of authorized medicinal products, for which a separate manufacturer’s license is mandatory, must
also be conducted in strict compliance with the applicable European Union laws, regulations and guidance, including
Directive 2001/83/EC, Directive 2003/94/EC, Regulation (EC) No 726/2004 and the European Commission Guidelines
for Good Manufacturing Practice. These requirements include compliance with European Union cGMP standards
when manufacturing medicinal products and active pharmaceutical ingredients, including the manufacture of active
pharmaceutical ingredients outside of the European Union with the intention to import the active pharmaceutical
ingredients into the European Union.
The marketing and promotion of authorized drugs, including industry-sponsored continuing medical education and
advertising directed toward the prescribers of drugs and/or the general public, are strictly regulated in the European
Union notably under Directive 2001/83/EC, as amended, and EU Member State laws.
Brexit and the Regulatory Framework in the United Kingdom
On June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the European Union, commonly referred
to as “Brexit”. Thereafter, on March 29, 2017, the country formally notified the European Union of its intention to withdraw
pursuant to Article 50 of the Lisbon Treaty. The withdrawal of the United Kingdom from the European Union will take effect either
on the effective date of the withdrawal agreement or, in the absence of agreement, two years after the United Kingdom provides
a notice of withdrawal pursuant to the EU Treaty. Since the regulatory framework for pharmaceutical products in the United
Kingdom covering quality, safety and efficacy of pharmaceutical products, clinical trials, marketing authorization, commercial
sales and distribution of pharmaceutical products is derived from European Union directives and regulations, Brexit could
materially impact the future regulatory regime which applies to products and the approval of product candidates in the United
Kingdom. It remains to be seen how, if at all, Brexit will impact regulatory requirements for product candidates and products in
the United Kingdom.
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European Data Collection Regulation
In the event we decide to conduct clinical trials in the European Union, we may be subject to additional privacy restrictions.
The collection and use of personal health information in the European Union is governed by the provisions of the Data
Protection Directive, and as of May 25, 2018, the General Data Protection Regulation, or GDPR. This directive imposes several
requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the
individuals, notification of data processing obligations to the competent national data protection authorities and the security and
confidentiality of the personal data. The GDPR also imposes strict rules on the transfer of personal data out of the EU to the
United States. Failure to comply with the requirements of the Data Protection Directive (which governs the collection and use of
personal health data in the European Union), the GDPR, and the related national data protection laws of the EU Member States
may result in fines and other administrative penalties. The GDPR introduced new data protection requirements in the EU and
substantial fines for breaches of the data protection rules. The GDPR regulations may impose additional responsibility and
liability in relation to personal data that we process and we may be required to put in place additional mechanisms ensuring
compliance with the new data protection rules. This may be onerous and adversely affect our business, financial condition,
results of operations and prospects.
Healthcare and Privacy Laws and Regulation
Healthcare providers and third-party payors play a primary role in the recommendation and prescription of drug products
that are granted regulatory approval. Arrangements with providers, consultants, third-party payors and customers are subject to
broadly applicable fraud and abuse, anti-kickback, false claims laws, reporting of payments to physicians and teaching hospitals
and patient privacy laws and regulations and other healthcare laws and regulations that may constrain our business and/or
financial arrangements. Restrictions under applicable federal and state healthcare and privacy laws and regulations, include the
following:
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the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and
willfully soliciting, offering, paying, receiving or providing remuneration, directly or indirectly, in cash or in kind, to
induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or
service, for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare
and Medicaid; a person or entity need not have actual knowledge of the federal Anti-Kickback Statute or specific intent
to violate it in order to have committed a violation. Violations are subject to civil and criminal fines and penalties for
each violation, plus up to three times the remuneration involved, imprisonment, and exclusion from government
healthcare programs. In addition, the government may assert that a claim that includes items or services resulting
from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil
False Claims Act;
the federal civil and criminal false claims laws, including the civil False Claims Act, or FCA, and civil monetary
penalties laws, which prohibit individuals or entities from, among other things, knowingly presenting, or causing to be
presented, to the federal government, claims for payment that are false, fictitious or fraudulent; knowingly making a
false statement or record material to a false or fraudulent claim or obligation to pay or transmit money or property to
the federal government; or knowingly concealing or knowingly and improperly avoiding or decreasing an obligation to
pay money to the federal government. Manufacturers can be held liable under the FCA even when they do not submit
claims directly to government payors if they are deemed to “cause” the submission of false or fraudulent claims. The
FCA also permits a private individual acting as a “whistleblower” to bring actions on behalf of the federal government
alleging violations of the FCA and to share in any monetary recovery;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created additional federal civil
and criminal laws that prohibit, among other things, knowingly and willfully executing, or attempting to execute, a
scheme to defraud any healthcare benefit program or knowingly and willfully falsifying, concealing or covering up by
any trick or device a material fact or making any materially false statement in connection with the delivery of or
payment for healthcare benefits, items or services; similar to the federal Anti-Kickback Statute, a person or entity does
not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;
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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH
and their respective implementing regulations, including the Final Omnibus Rule published in January 2013, which
impose requirements on certain covered healthcare providers, health plans, and healthcare clearinghouses as well as
their respective business associates that perform services for them that involve the use, or disclosure of, individually
identifiable health information, relating to the privacy, security and transmission of individually identifiable health
information. HITECH also created new tiers of civil monetary penalties, amended HIPAA to make civil and criminal
penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions
for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs
associated with pursuing federal civil actions;
the federal transparency requirements known as the federal Physician Payments Sunshine Act, under the Patient
Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively
the Affordable Care Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies to
report annually to the Centers for Medicare & Medicaid Services, or CMS, within the United States Department of
Health and Human Services, or HHS, information related to payments and other transfers of value made by that entity
to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their
immediate family members;
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply
to healthcare items or services that are reimbursed by non-governmental third-party payors, including private insurers;
• many state laws govern the privacy of personal information in specified circumstances, for example, in California the
California Consumer Privacy Act (“CCPA”), which will go into effect on January 1, 2020, establishes a new privacy
framework for covered businesses by creating an expanded definition of personal information, establishing new data
privacy rights for consumers in the State of California, imposing special rules on the collection of consumer data from
minors, and creating a new and potentially severe statutory damages framework for violations of the CCPA and for
businesses that fail to implement reasonable security procedures and practices to prevent data breaches. While
clinical trial data and information governed by HIPAA are currently exempt from the current version of the CCPA, other
personal information may be applicable and possible changes to the CCPA may broaden its scope; and
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some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance
guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring
manufacturers to report information related to payments to physicians and other healthcare providers, marketing
expenditures, and drug pricing information. Certain state and local laws require the registration of pharmaceutical
sales representatives. State and foreign laws, including for example the European Union General Data Protection
Regulation, also govern the privacy and security of health information in some circumstances, many of which differ
from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
Pharmaceutical Insurance Coverage and Healthcare Reform
In the United States and markets in other countries, patients who are prescribed treatments for their conditions and
providers performing the prescribed services generally rely on third-party payors to reimburse all or part of the associated
healthcare costs. Thus, even if a product candidate is approved, sales of the product will depend, in part, on the extent to which
third-party payors, including government health programs in the United States such as Medicare and Medicaid, commercial
health insurers and managed care organizations, provide coverage, and establish adequate reimbursement levels for, the
product. In the United States, no uniform policy of coverage and reimbursement for drug products exists among third-party
payors. Therefore, coverage and reimbursement for drug products can differ significantly from payor to payor. The process for
determining whether a third-party payor will provide coverage for a product may be separate from
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the process for setting the price or reimbursement rate that the payor will pay for the product once coverage is approved. Third-
party payors are increasingly challenging the prices charged, examining the medical necessity, and reviewing the cost-
effectiveness of medical products and services and imposing controls to manage costs. Third-party payors may limit coverage to
specific products on an approved list, also known as a formulary, which might not include all of the approved products for a
particular indication.
In order to secure coverage and reimbursement for any product that might be approved for sale, a company may need to
conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the
product, in addition to the costs required to obtain FDA or other comparable regulatory approvals. Additionally, companies may
also need to provide discounts to purchasers, private health plans or government healthcare programs. Nonetheless, product
candidates may not be considered medically necessary or cost effective. A decision by a third-party payor not to cover a product
could reduce physician utilization once the product is approved and have a material adverse effect on sales, results of
operations and financial condition. Additionally, a third-party payor’s decision to provide coverage for a product does not imply
that an adequate reimbursement rate will be approved. Further, one payor’s determination to provide coverage for a product
does not assure that other payors will also provide coverage and reimbursement for the product, and the level of coverage and
reimbursement can differ significantly from payor to payor.
The containment of healthcare costs has become a priority of federal, state and foreign governments, and the prices of
products have been a focus in this effort. Governments have shown significant interest in implementing cost-containment
programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products.
Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing
controls and measures, could further limit a company’s revenue generated from the sale of any approved products. Coverage
policies and third-party payor reimbursement rates may change at any time. Even if favorable coverage and reimbursement
status is attained for one or more products for which a company or its collaborators receive regulatory approval, less favorable
coverage policies and reimbursement rates may be implemented in the future.
There have been a number of federal and state proposals during the last few years regarding the pricing of
pharmaceutical products, limiting coverage and the amount of reimbursement for drugs and other medical products, government
control and other changes to the healthcare system in the United States. For example, in March 2010, the United States
Congress enacted the Affordable Care Act, which, among other things, includes contains to the coverage and payment for
products under government health care programs. The Affordable Care Act includes provisions of importance to our potential
product candidates, including among other things, that:
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created an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs
and biologic products, apportioned among these entities according to their market share in certain government
healthcare programs;
expanded eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage
to certain individuals with income at or below 133% of the federal poverty level, thereby potentially increasing a
manufacturer’s Medicaid rebate liability;
expanded manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate
for both branded and generic drugs and revising the definition of “average manufacturer price,” or AMP, for calculating
and reporting Medicaid drug rebates on outpatient prescription drug prices;
addressed a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program
are calculated for drugs that are inhaled, infused, instilled, implanted or injected;
expanded the types of entities eligible for the 340B drug discount program;
established the Medicare Part D coverage gap discount program by requiring manufacturers to provide a 50% point-
of-sale-discount, which was increased to 70% by the Bipartisan Budget Act of 2018 (as of January 1, 2019), off the
negotiated price of applicable brand drugs to eligible beneficiaries during their coverage gap period as a condition for
the manufacturers’ outpatient drugs to be covered under Medicare Part D; and
created a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct
comparative clinical effectiveness research, along with funding for such research.
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Some of the provisions of the Affordable Care Act have yet to be implemented, and there have been judicial and
Congressional challenges to certain provisions of the Affordable Care Act, as well as recent efforts by the Trump administration
to repeal or replace certain aspects of the Affordable Care Act. Since January 2017, President Trump has signed two Executive
Orders and other directives designed to delay the implementation of certain provisions of the Affordable Care Act. Concurrently,
Congress has considered legislation that would repeal or repeal and replace all or part of the Affordable Care Act. While
Congress has not passed comprehensive repeal legislation, it has enacted laws that modify certain provisions of the Affordable
Care Act such as removing penalties, starting January 1, 2019, for not complying with the Affordable Care Act’s individual
mandate to carry health insurance, delaying the implementation of certain Affordable Care Act-mandated fees, and increasing
the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D. On December 14,
2018, a Texas U.S. District Court Judge ruled that the Affordable Care Act is unconstitutional in its entirety because the
“individual mandate” was repealed by Congress as part of the Tax Cuts and Jobs Act of 2017. While the Texas U.S. District
Court Judge, as well as the Trump administration and CMS, have stated that the ruling will have no immediate effect pending
appeal of the decision, it is unclear how this decision, subsequent appeals, and other efforts to repeal and replace the Affordable
Care Act will impact the Affordable Care Act.
Other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was
enacted. In August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by
Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2
trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic
reduction to several government programs. This includes aggregate reductions of Medicare payments to providers of 2% per
fiscal year, which went into effect in April 2013 and, due to subsequent legislative amendments to the statute, will remain in
effect through 2027 unless additional Congressional action is taken. In January 2013, President Obama signed into law the
American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers,
including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the
government to recover overpayments to providers from three to five years.
In addition, recently there has been heightened governmental scrutiny over the manner in which manufacturers set prices
for their commercial products, which has resulted in several Congressional inquiries and proposed and enacted state and
federal legislation designed to, among other things, bring more transparency to product pricing, review the relationship between
pricing and manufacturer patient programs, and reform government program reimbursement methodologies for pharmaceutical
products. For example, at the federal level, the Trump administration released a “Blueprint” to lower drug prices and reduce out
of pocket costs of drugs that contains additional proposals to increase drug manufacturer competition, increase the negotiating
power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products, and reduce the
out of pocket costs of drug products paid by consumers. While some proposed measures may require additional authorization to
become effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or
administrative measures to control drug costs. For example, on September 25, 2019, the Senate Finance Committee introduced
the Prescription Drug Pricing Reduction Action of 2019, a bill intended to reduce Medicare and Medicaid prescription drug
prices. The proposed legislation would restructure the Part D benefit, modify payment methodologies for certain drugs, and
impose an inflation cap on drug price increases. An even more restrictive bill, the Lower Drug Costs Now Act of 2019, was
introduced in the House of Representatives on September 19, 2019, and would require the Department of Health and Human
Services (HHS) to directly negotiate drug prices with manufacturers. It is unclear whether either of these bills will make it through
both chambers and be signed into law, and if either is enacted, what effect it would have on our business. Individual states in the
United States have also increasingly passed legislation and implemented regulations designed to control pharmaceutical
product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and
marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other
countries and bulk purchasing.
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Outside the United States, ensuring coverage and adequate payment for a product also involves challenges. Pricing of
prescription pharmaceuticals is subject to government control in many countries. Pricing negotiations with government
authorities can extend well beyond the receipt of regulatory approval for a product and may require a clinical trial that compares
the cost-effectiveness of a product to other available therapies. The conduct of such a clinical trial could be expensive and result
in delays in commercialization.
In the European Union, pricing and reimbursement schemes vary widely from country to country. Some countries provide
that products may be marketed only after a reimbursement price has been agreed. Some countries may require the completion
of additional studies that compare the cost-effectiveness of a particular product candidate to currently available therapies or so-
called health technology assessments, in order to obtain reimbursement or pricing approval. For example, the European Union
provides options for its member states to restrict the range of products for which their national health insurance systems provide
reimbursement and to control the prices of medicinal products for human use. European Union member states may approve a
specific price for a product or it may instead adopt a system of direct or indirect controls on the profitability of the company
placing the product on the market. Other member states allow companies to fix their own prices for products, but monitor and
control prescription volumes and issue guidance to physicians to limit prescriptions. Recently, many countries in the European
Union have increased the amount of discounts required on pharmaceuticals and these efforts could continue as countries
attempt to manage healthcare expenditures, especially in light of the severe fiscal and debt crises experienced by many
countries in the European Union. The downward pressure on healthcare costs in general, particularly prescription products, has
become intense. As a result, increasingly high barriers are being erected to the entry of new products. Political, economic and
regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after
reimbursement has been obtained. Reference pricing used by various European Union member states, and parallel trade, i.e.,
arbitrage between low-priced and high-priced member states, can further reduce prices. There can be no assurance that any
country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and
pricing arrangements for any products, if approved in those countries.
We are not currently subject to any material legal proceedings.
Legal Proceedings
Facilities
Our headquarters are located at 33 Arch Street, Suite 3110, Boston, Massachusetts, where we occupied approximately
7,050 square feet of leased office space as of December 31, 2019. In January 2020, we executed an amendment to take
possession of approximately 4,175 square feet of additional leased office space on the same floor as our headquarters. This
lease expires in December 2023.
Additionally, in February 2020, we opened an office located at 11711 N. Meridian Street, Suite 430, Carmel, Indiana,
consisting of 5,050 square feet of leased office space. This lease expires in July 2023.
As of March 13, 2020, we had 19 full-time employees, including a total of seven employees with M.D. and/or Ph.D.
degrees. Of our workforce, nine employees are directly engaged in research and development with the rest providing
administrative, business and operations support. None of our employees are represented by labor unions or covered by
collective bargaining agreements. We consider the relationship with our employees to be good.
Employees
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Item 1A.
Risk Factors.
Investing in our common stock involves a high degree of risk. Careful consideration should be given to the following risk
factors, in addition to the other information set forth in this Annual Report on Form 10-K, including our consolidated financial
statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” in evaluating our company and our business. If any of the following risks actually occur, our business, financial
condition, results of operations and growth prospects could be materially and adversely affected. In these circumstances, 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 Capital
We are a clinical-stage biopharmaceutical company and we have incurred significant losses since our inception. We
anticipate that we will continue to incur significant losses for the foreseeable future.
Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital
expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable
safety profile, gain regulatory approval and become commercially viable. We have no products approved for commercial sale
and have not generated any revenue from product sales to date, and we will continue to incur significant research and
development and other expenses related to our clinical development and ongoing operations. As a result, we are not profitable
and have incurred losses in each period since our inception. Since our inception, we have devoted substantially all of our
financial resources and efforts to research and development, including preclinical studies and our clinical trials. Our financial
condition and operating results, including net losses, may fluctuate significantly from quarter to quarter and year to year.
Accordingly, you should not rely upon the results of any quarterly or annual periods as indications of future operating
performance. Additionally, net losses and negative cash flows have had, and will continue to have, an adverse effect on our
stockholders’ equity and working capital. Our net losses were $44.0 million and $17.5 million for the years ended December 31,
2019 and 2018, respectively. As of December 31, 2019, we had an accumulated deficit of $75.5 million. We expect to continue
to incur significant losses for the foreseeable future, and we expect these losses to increase as we continue our research and
development of, and seek regulatory approvals for, KarXT in our initial and potential additional indications as well as for other
product candidates.
We anticipate that our expenses will increase substantially if and as we:
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continue to develop and conduct clinical trials for KarXT for our initial and potential additional indications;
initiate and continue research and development, including preclinical, clinical, and discovery efforts for any future
product candidates;
seek to identify additional product candidates;
seek regulatory approvals for KarXT, or any other product candidates that successfully complete clinical development;
add operational, financial and management information systems and personnel, including personnel to support our
product candidate development and help us comply with our obligations as a public company;
hire and retain additional personnel, such as clinical, quality control, scientific, commercial and administrative
personnel;
• maintain, expand and protect our intellectual property portfolio;
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establish sales, marketing, distribution, manufacturing, supply chain and other commercial infrastructure in the future
to commercialize various products for which we may obtain regulatory approval;
add equipment and physical infrastructure to support our research and development; and
acquire or in-license other product candidates and technologies.
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Our expenses could increase beyond our expectations if we are required by the U.S. Food and Drug Administration, or
FDA, or other regulatory authorities to perform clinical trials in addition to those that we currently expect, or if there are any
delays in establishing appropriate manufacturing arrangements for or in completing our clinical trials or the development of any
of our product candidates.
We have never generated revenue from product sales and may never be profitable.
Our ability to become and remain profitable depends on our ability to generate revenue. We do not expect to generate
significant revenue, if any, unless and until we, either alone or with a collaborator, are able to obtain regulatory approval for, and
successfully commercialize, KarXT for our initial and potential additional indications, or any other product candidates we may
develop, license or acquire. Successful commercialization will require achievement of many key milestones, including
demonstrating safety and efficacy in clinical trials, obtaining regulatory, including marketing, approval for these product
candidates, manufacturing, marketing and selling those products for which we, or any of our future collaborators, may obtain
regulatory approval, satisfying any post-marketing requirements and obtaining reimbursement for our products from private
insurance or government payors. Because of the uncertainties and risks associated with these activities, we are unable to
accurately and precisely predict the timing and amount of revenues, the extent of any further losses or if or when we might
achieve profitability. We and any future collaborators may never succeed in these activities and, even if we do, or any future
collaborators do, we may never generate revenues that are large enough for us to achieve profitability. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Additionally, our expenses
could increase if we are required by the FDA or any comparable foreign regulatory authority to perform clinical trials in addition
to those currently expected, or if there are any delays in completing our clinical trials or the development of any of our product
candidates.
Our failure to become and remain profitable may depress the market price of our common stock and could impair our
ability to raise capital, expand our business, diversify our product offerings or continue our operations. If we continue to suffer
losses as we have in the past, investors may not receive any return on their investment and may lose their entire investment.
We have a limited operating history, which may make it difficult to evaluate the prospects for our future viability.
Our operations to date have been limited to organizing, staffing and financing our company, raising capital, in-licensing our
technology and conducting research and development activities, including preclinical studies and clinical trials, for our product
candidates. We have not yet demonstrated an ability to generate revenues, obtain regulatory approvals, manufacture a
commercial-scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities
necessary for successful product commercialization. Accordingly, you should consider our prospects in light of the costs,
uncertainties, delays and difficulties frequently encountered by companies in clinical development, especially clinical-stage
biopharmaceutical companies such as ours. Any predictions you make about our future success or viability may not be as
accurate as they could be if we had a longer operating history or a history of successfully developing and commercializing
pharmaceutical products.
We may encounter unforeseen expenses, difficulties, complications, delays and other known or unknown factors in
achieving our business objectives. We will eventually need to transition from a company with a development focus to a company
capable of supporting commercial activities. We may not be successful in such a transition.
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We will need substantial additional funding, and if we are unable to raise capital when needed, we could be forced to
delay, reduce or eliminate our product discovery and development programs or commercialization efforts.
Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial
amounts to continue the preclinical and clinical development of our current and future programs. If we are able to gain marketing
approval for product candidates that we develop, including any indication for which we are developing or may develop KarXT,
we will require significant additional amounts of cash in order to launch and commercialize such product candidates to the extent
that such launch and commercialization are not the responsibility of a future collaborator that we may contract with in the future.
In addition, other unanticipated costs may arise in the course of our development efforts. Because the design and outcome of
our planned and anticipated clinical trials is highly uncertain, we cannot reasonably estimate the actual amounts necessary to
successfully complete the development and commercialization of any product candidate we develop.
Our future capital requirements depend on many factors, including:
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the scope, progress, results and costs of researching and developing KarXT for our initial and potential additional
indications, as well as other product candidates we may develop;
the timing of, and the costs involved in, obtaining marketing approvals for KarXT for our initial and potential additional
indications, and other product candidates we may develop and pursue;
the number of future product candidates that we may pursue and their development requirements;
if approved, the costs of commercialization activities for KarXT for any approved indications, or any other product
candidate that receives regulatory approval to the extent such costs are not the responsibility of any future
collaborators, including the costs and timing of establishing product sales, marketing, distribution and manufacturing
capabilities;
subject to receipt of regulatory approval, revenue, if any, received from commercial sales of KarXT for any approved
indications or any other product candidates;
the extent to which we in-license or acquire rights to other products, product candidates or technologies;
our headcount growth and associated costs as we expand our research and development, increase our office space,
and establish a commercial infrastructure;
the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property
rights, including enforcing and defending intellectual property related claims; and
the ongoing costs of operating as a public company.
We cannot be certain that additional funding will be available on acceptable terms, or at all. We have no committed source
of additional capital and 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 the development or commercialization of our product candidates or other
research and development initiatives. Any of our current or future license agreements may also be terminated if we are unable
to meet the payment or other obligations under the agreements.
We believe that our existing cash, cash equivalents and short-term investments as of December 31, 2019, will enable us
to fund our operating expenses and capital expenditure requirements through at least the next 36 months. Our estimate may
prove to be wrong, and we could use our available capital resources sooner than we currently expect. Further, changing
circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we
currently anticipate, and we may need to seek additional funds sooner than planned.
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Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish
rights to our technologies or product candidates.
We expect our expenses to increase in connection with our planned operations. Unless and until we can generate a
substantial amount of revenue from our product candidates, we expect to finance our future cash needs through public or private
equity offerings, debt financings, collaborations, licensing arrangements or other sources, or any combination of the foregoing.
In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe that
we have sufficient funds for our current or future operating plans.
To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity
securities, your ownership interest may be diluted, and the terms of these securities could include liquidation or other
preferences and anti-dilution protections that could adversely affect your rights as a common stockholder. In addition, debt
financing, if available, may result in fixed payment obligations and may involve agreements that include restrictive covenants
that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, creating liens,
redeeming stock or declaring dividends, that could adversely impact our ability to conduct our business. In addition, securing
financing could require a substantial amount of time and attention from our management and may divert a disproportionate
amount of their attention away from day-to-day activities, which may adversely affect our management’s ability to oversee the
development of our product candidates.
If we raise additional funds through collaborations or marketing, distribution, licensing and royalty arrangements with third
parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant
licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be required
to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and
market product candidates that we would otherwise prefer to develop and market ourselves.
Our ability to use net operating losses and research and development credits to offset future taxable income may be
subject to certain limitations.
As of August 1, 2018, PureTech no longer held 80% of the outstanding shares of the Company and therefore, beginning
on this date, we filed a separate U.S. federal income tax return. On July 2, 2019, PureTech no longer held 50% of the
outstanding shares of the Company and therefore, beginning on this date, we will file separate state income tax returns. At
December 31, 2019, on a separate return method, we had federal net operating loss carryforwards totaling $51.8 million of
which $9.7 million begin to expire in 2029 and $42.1 million can be carried forward indefinitely. In addition, we had state net
operating loss carryforwards totaling $51.6 million which begin to expire in 2030. Lastly, we also had federal and state research
and development tax credit carryforwards of $2.8 million and $0.3 million, respectively, which expire in 2035 and 2031,
respectively. Because the Company had historically been a subsidiary of PureTech, $51.4 million and $16.7 million of the federal
and state net operating loss carryforwards, respectively, can be used to offset income on our future tax returns. In addition, $2.7
million and $0.3 million of the federal and state tax credit carryforwards, respectively, can be used to offset tax due on our future
tax returns. Our net operating loss and tax credit carryforwards could, in whole or in part, expire unused and be unavailable to
offset future income tax liabilities.
In addition, in general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, a
corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating
losses or tax credits, or NOLs or credits, to offset future taxable income or taxes. For these purposes, an ownership change
generally occurs where the aggregate stock ownership of one or more stockholders or groups of stockholders who owns at least
5% of a corporation’s stock increases its ownership by more than 50 percentage points over its lowest ownership percentage
within a specified testing period. The Company has not conducted a formal study to assess whether an ownership change has
occurred through December 31, 2019. If an ownership change has occurred or does occur in the future, existing NOLs or credits
may be subject to such limitations. Our NOLs or credits may also be impaired under state law. Accordingly, we may not be able
to utilize a material portion of our NOLs or credits and as a result it is possible that a limitation on our ability to use our historical
NOLs or credits could harm our future operating results by effectively increasing our future tax obligations.
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Furthermore, our ability to utilize our NOLs or credits is conditioned upon our attaining profitability and generating U.S.
federal and state taxable income. As described above under “—Risks Related to Our Financial Position and Need for Additional
Capital,” we have incurred significant net losses since our inception and anticipate that we will continue to incur significant
losses for the foreseeable future; and therefore, we do not know whether or when we will generate the U.S. federal or state
taxable income necessary to utilize our NOL or credit carryforwards that are subject to limitation by Sections 382 and 383 of the
Code.
Comprehensive tax reform legislation could adversely affect our business and financial condition.
The U.S. government has recently enacted comprehensive tax legislation that includes significant changes to the taxation
of business entities. These changes include, among others, a permanent reduction to the corporate income tax rate.
Notwithstanding the reduction in the corporate income tax rate, the overall impact of this tax reform is uncertain, and our
business and financial condition could be adversely affected.
Risks Related to the Discovery, Development and Commercialization of Our Product Candidates
Our business substantially depends upon the successful development of KarXT. If we are unable to obtain regulatory
approval for, and successfully commercialize, KarXT, our business may be materially harmed.
We currently have no products approved for sale and are investing the majority of our efforts and financial resources in the
development of our lead product candidate, KarXT for psychosis in patients with schizophrenia and dementia-related psychosis,
or DRP, as well as pain. Successful continued development and ultimate regulatory approval of KarXT for our initial and
potential additional indications is critical to the future success of our business. We will need to raise sufficient funds for, and
successfully enroll and complete, our clinical development programs of KarXT for psychosis in patients with schizophrenia and
DRP as well as pain, and possibly other diseases. The future regulatory and commercial success of KarXT is subject to a
number of risks, including the following:
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successful completion of preclinical studies and clinical trials;
successful patient enrollment in clinical trials;
successful efficacy data from our clinical programs that support acceptable risk-benefit profiles of our product
candidates in the intended populations;
receipt and maintenance of marketing approvals from applicable regulatory authorities;
obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;
• making arrangements with third-party manufacturers, or establishing manufacturing capabilities, for both clinical and
commercial supplies of our product candidates;
entry into collaborations to further the development of our product candidates;
establishing sales, marketing and distribution capabilities and commercial launch of our products, if and when
approved, whether alone or in collaboration with others;
successful commercial launch of our product candidates, if and when approved;
acceptance of our products, if and when approved, by patients, the medical community and third-party payors;
obtaining and maintaining third-party insurance coverage and adequate reimbursement;
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• maintaining a continued acceptable safety profile of the products following approval;
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effectively competing with other therapies; and
enforcing and defending intellectual property rights and claims.
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Many of these risks are beyond our control, including the risks related to clinical development, the regulatory submission
process, potential threats to our intellectual property rights and the manufacturing, marketing and sales efforts of any future
collaborator. If we are unable to develop, receive regulatory approval for, or successfully commercialize KarXT for the indications
we are developing it for, or if we experience delays as a result of any of these risks or otherwise, our business could be
materially harmed.
In addition, of the large number of drugs in development in the pharmaceutical industry, only a small percentage result in
the submission of a new drug application, or NDA, to the FDA and even fewer are approved for commercialization. Furthermore,
even if we do receive regulatory approval for KarXT for any indication, any such approval may be subject to limitations on the
indications or uses or patient populations for which we may market the product. Accordingly, even if we are able to obtain the
requisite financing to continue to fund our development programs, we cannot assure you that we will successfully develop or
commercialize KarXT for any indication. If we or any of our future collaborators are unable to develop, or obtain regulatory
approval for, or, if approved, successfully commercialize KarXT for our initial or potential additional indications, we may not be
able to generate sufficient revenue to continue our business. In addition, our failure to demonstrate positive results in our clinical
trials in any indication for which we are developing KarXT could adversely affect our development efforts for KarXT in other
indications.
We have never commercialized a product candidate and may experience delays or unexpected difficulties in obtaining
regulatory approval for KarXT for our initial or potential additional indications.
We have never obtained regulatory approval for, or commercialized, a drug. It is possible that the FDA may refuse to
accept any or all of our planned NDAs for substantive review or may conclude after review of our data that our application is
insufficient to obtain regulatory approval for any product candidates. If the FDA does not approve any of our planned NDAs, it
may require that we conduct additional costly clinical, nonclinical or manufacturing validation studies before it will reconsider our
applications. Depending on the extent of these or any other FDA-required studies, approval of any NDA or other application that
we submit may be significantly delayed, possibly for several years, or may require us to expend more resources than we have
available. Any failure or delay in obtaining regulatory approvals would prevent us from commercializing KarXT for any indication
or any other product candidate, generating revenues and achieving and sustaining profitability. It is also possible that additional
studies, if performed and completed, may not be considered sufficient by the FDA to approve any NDA or other application that
we submit. If any of these outcomes occur, we may be forced to abandon the development of our product candidates, which
would materially adversely affect our business and could potentially cause us to cease operations. We face similar risks for our
applications in foreign jurisdictions. In addition, difficulties in obtaining approval of KarXT in any of the initial indications for which
we are developing it could adversely affect our efforts to seek approval from regulatory authorities for KarXT in other indications.
The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time-consuming and
inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our product candidates, our
business will be substantially harmed.
We, and any future collaborators, are not permitted to commercialize, market, promote or sell any product candidate in the
United States without obtaining regulatory approval from the FDA. Foreign regulatory authorities, such as the European
Medicines Agency, or EMA, impose similar requirements. The time required to obtain approval by the FDA and comparable
foreign authorities is unpredictable, but typically takes many years following the commencement of clinical trials and depends
upon numerous factors, including substantial discretion of the regulatory authorities. In addition, approval policies, regulations,
or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s
clinical development and may vary among jurisdictions. To date, we have not submitted an NDA to the FDA or similar drug
approval submissions to comparable foreign regulatory authorities for KarXT or any other product candidate. We, and any future
collaborators, must complete additional preclinical or nonclinical studies and clinical trials to demonstrate the safety and efficacy
of our product candidates in humans before we will be able to obtain these approvals.
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Clinical testing is expensive, difficult to design and implement, can take many years to complete and is inherently
uncertain as to outcome. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if
at all. The clinical development of KarXT for our initial and potential additional indications or other product candidates is
susceptible to the risk of failure inherent at any stage of development, including failure to demonstrate efficacy in a clinical trial
or across a broad population of patients, the occurrence of adverse events that are severe or medically or commercially
unacceptable, failure to comply with protocols or applicable regulatory requirements, and determination by the FDA or any
comparable foreign regulatory authority that a product candidate may not continue development or is not approvable. It is
possible that even if KarXT or any other product candidate has a beneficial effect, that effect will not be detected during clinical
evaluation as a result of one or more of a variety of factors, including the size, duration, design, measurements, conduct or
analysis of our clinical trials. Conversely, as a result of the same factors, our clinical trials may indicate an apparent positive
effect of KarXT or any other product candidate that is greater than the actual positive effect, if any. Similarly, in our clinical trials
we may fail to detect toxicity of or intolerability caused by KarXT or any other product candidate, or mistakenly believe that our
product candidates are toxic or not well-tolerated when that is not in fact the case.
Our current and future product candidates could fail to receive regulatory approval for many reasons, including the
following:
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the FDA or comparable foreign regulatory authorities may disagree as to the design or implementation of our clinical
trials;
we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a
product candidate is safe and effective for its proposed indication;
the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign
regulatory authorities for approval;
we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;
the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from clinical trials or
preclinical studies;
the data collected from clinical trials of our product candidates may not be sufficient to support the submission of an
NDA, to the FDA or other submission or to obtain regulatory approval in the United States, the European Union or
elsewhere;
the FDA or comparable foreign regulatory authorities may find deficiencies with or fail to approve the manufacturing
processes or facilities of third-party manufacturers with which we contract for clinical and commercial supplies; and
the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in
a manner rendering our clinical data insufficient for approval.
This lengthy approval process as well as the unpredictability of clinical trial results may result in our failing to obtain
regulatory approval to market any product candidate we develop, which would significantly harm our business, results of
operations and prospects. There is no assurance that the endpoints and trial designs used for the approval of currently
approved CNS drugs will be acceptable for future approvals, including for KarXT. The FDA and other comparable foreign
authorities have substantial discretion in the approval process, and determining when or whether regulatory approval will be
obtained for any product candidate that we develop. Even if we believe the data collected from future clinical trials of our product
candidates are promising, such data may not be sufficient to support approval by the FDA or any other regulatory authority.
In addition, even if we were to obtain approval, regulatory authorities may approve any of our product candidates for fewer
or more limited indications than we request, may not approve the price we intend to charge for our products, may grant approval
contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with a label that does
not include the labeling claims necessary or desirable for the successful commercialization of that product candidate. Any of the
foregoing scenarios could materially harm the commercial prospects for our product candidates.
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We may incur unexpected costs or experience delays in completing, or ultimately be unable to complete, the
development and commercialization of our product candidates.
To obtain the requisite regulatory approvals to commercialize any of our product candidates, we must demonstrate through
extensive preclinical studies and clinical trials that our product candidates are safe and effective in humans. Clinical testing is
expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during
the clinical trial process and our future clinical trial results may not be successful.
We may experience delays in completing our clinical trials or preclinical studies and initiating or completing additional
clinical trials. We may also experience numerous unforeseen events during our clinical trials that could delay or prevent our
ability to receive marketing approval or commercialize the product candidates we develop, including:
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regulators, or institutional review boards, or IRBs, or other reviewing bodies may not authorize us or our investigators
to commence a clinical trial, or to conduct or continue a clinical trial at a prospective or specific trial site;
we may not reach agreement on acceptable terms with prospective contract research organizations, or CROs, and
clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different
CROs and trial sites;
the number of subjects or patients required for clinical trials of KarXT in an indication or any other product candidate
may be larger than we anticipate, enrollment in these clinical trials may be insufficient or slower than we anticipate,
and the number of clinical trials being conducted at any given time may be high and result in fewer available patients
for any given clinical trial, or patients may drop out of these clinical trials at a higher rate than we anticipate;
our third-party contractors, including those manufacturing our product candidates or conducting clinical trials on our
behalf, 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 amend clinical trial protocol submitted to regulatory authorities or conduct additional studies to reflect
changes in regulatory requirements or guidance, which we may be required to resubmit to an IRB and regulatory
authorities for re-examination;
regulators, IRBs or other reviewing bodies may fail to approve or subsequently find fault with the manufacturing
processes or facilities of third-party manufacturers with which we enter into agreement for clinical and commercial
supplies, or the supply or quality of KarXT or any other product candidate or other materials necessary to conduct
clinical trials of our product candidates may be insufficient, inadequate or not available at an acceptable cost, or we
may experience interruptions in supply; and
the potential for approval policies or regulations of the FDA or the applicable foreign regulatory agencies to
significantly change in a manner rendering our clinical data insufficient for approval.
Regulators, IRBs of the institutions in which clinical trials are being conducted or data monitoring committees may
suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical trial in accordance with
regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other
regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to
demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate
funding to continue the clinical trial. For example, a previous Phase 1 clinical trial of KarXT conducted by us was put on hold by
the FDA in April 2017 after one and half days of dosing due to preliminary assessment of preclinical findings. Although this hold
was lifted in August 2017 after the FDA’s complete review of the preclinical data and our proposed addition of monitoring for
potential decreased gastrointestinal motility to the clinical protocol, we face the risk of future clinical holds that may not be lifted
in a timely manner, if at all.
Negative or inconclusive results from our planned Phase 3 clinical trial of KarXT for the treatment of psychosis in patients
with schizophrenia, or any other clinical trial or preclinical studies in animals that we conduct, could mandate repeated or
additional clinical trials and could result in changes to or delays in clinical trials KarXT in other indications. We do not know
whether any clinical trials that we may conduct will demonstrate adequate efficacy and safety to result in regulatory approval to
market KarXT for our initial or potential additional indications, or any other product candidate. If later stage clinical trials do not
produce favorable results, our ability to obtain regulatory approval for KarXT for initial or potential additional indications, or any
other product candidate, may be adversely impacted.
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Our failure to successfully initiate and complete clinical trials of KarXT for our initial or potential additional indications or
any other product candidate and to demonstrate the efficacy and safety necessary to obtain regulatory approval to market
KarXT or any other product candidate would significantly harm our business. Our product candidate development costs will also
increase if we experience delays in testing or regulatory approvals and we may be required to obtain additional funds to
complete clinical trials. We cannot assure you that our clinical trials will begin as planned or be completed on schedule, if at all,
or that we will not need to restructure our trials after they have begun. Significant clinical trial delays also could shorten any
periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring
products to market before we do and impair our ability to successfully commercialize our product candidates, which may harm
our business and results of operations. In addition, many of the factors that cause, or lead to, delays of clinical trials may
ultimately lead to the denial of regulatory approval of KarXT or any other product candidate.
Even if we complete the necessary preclinical studies and clinical trials, the marketing approval process is expensive,
time-consuming and uncertain and may prevent us or any future collaboration partners from obtaining approvals for
the commercialization of KarXT for our initial or potential additional indications as well as for any other product
candidate we develop.
Any product candidate we may develop 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 authorities in the United States
and by comparable authorities in other countries. Failure to obtain marketing approval for a product candidate will prevent us
from commercializing the product candidate in a given jurisdiction. We have not received approval to market any product
candidates from regulatory authorities in any jurisdiction and it is possible that none of the product candidates we may seek to
develop in the future will ever obtain regulatory approval. We have no experience in filing and supporting the applications
necessary to gain marketing approvals and expect to rely on third-party CROs or regulatory consultants to assist us in this
process. Securing regulatory approval requires the submission of extensive preclinical and clinical data and supporting
information to the various regulatory authorities for each therapeutic indication to establish the biologic product candidate’s
safety, purity, efficacy and potency. Securing regulatory approval also requires the submission of information about the product
manufacturing process to, and inspection of manufacturing facilities by, the relevant regulatory authority. Any product candidates
we develop 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, may take many years if
additional clinical trials are required, if approval is obtained at all, and can vary substantially based upon a variety of factors,
including the type, complexity, and novelty of the product candidates involved. Changes in marketing approval policies during
the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for
each submitted product application, may cause delays in the approval or rejection of an application. The FDA and comparable
authorities in other countries have substantial discretion in the approval process and may refuse to accept any application or
may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. In addition,
varying interpretations of the data obtained from preclinical and clinical testing could delay, limit, or prevent marketing approval
of a product candidate. Any marketing approval we ultimately obtain may be limited or subject to restrictions or post-approval
commitments that render the approved product not commercially viable.
If we experience delays in obtaining approval or if we fail to obtain approval of any product candidates we may develop,
the commercial prospects for those product candidates, including for KarXT in other indications, may be harmed, and our ability
to generate revenues will be materially impaired.
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Risks associated with the in-licensing or acquisition of product candidates could cause substantial delays in the
preclinical and clinical development of our product candidates.
We have relied on Eli Lilly and Company, or Eli Lilly, to have conducted research and development in accordance with the
applicable protocol, legal, regulatory and scientific standards, having accurately reported the results of all clinical trials
conducted prior to our acquisition of the rights to xanomeline and having correctly collected and interpreted the data from these
trials. If the research and development processes or the results of the development programs prior to our development of KarXT
prove to be unreliable, this could result in increased costs and delays in the development of KarXT, which could adversely affect
any future revenue from this product candidate.
We may also acquire or in-license additional product candidates for preclinical or clinical development or commercial sale
in the future as we continue to build our pipeline. The risks associated with acquiring or in-licensing product candidates could
result in delays in the commencement or completion of our preclinical studies and clinical trials, if ever, and our ability to
generate revenues from our product candidates may be delayed.
The results of early-stage clinical trials and preclinical studies may not be predictive of future results. Initial data in our
clinical trials may not be indicative of results obtained when these trials are completed or in later stage trials.
The results of preclinical studies may not be predictive of the results of clinical trials, and the results of any early-stage
clinical trials we commence may not be predictive of the results of the later-stage clinical trials. In addition, initial data in clinical
trials may not be indicative of results obtained when such trials are completed. There can be no assurance that any of our
clinical trials will ultimately be successful or support further clinical development of any of our product candidates. There is a
high failure rate for drugs and biologics proceeding through clinical trials. A number of companies in the pharmaceutical and
biotechnology industries have suffered significant setbacks in clinical development even after achieving promising results in
earlier studies, and any such setbacks in our clinical development could have a material adverse effect on our business and
operating results.
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 publish interim topline or preliminary data from our 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. Preliminary or 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, interim and preliminary data should be viewed with caution until the final data are available. Adverse
differences between preliminary or interim data and final data could significantly harm our reputation and business prospects.
If we encounter difficulties enrolling patients in our future clinical trials, our clinical development activities could be
delayed or otherwise adversely affected.
We may experience difficulties in patient enrollment in our clinical trials for a variety of reasons. The timely completion of
clinical trials in accordance with their protocols depends, among other things, on our ability to enroll a sufficient number of
patients who remain in the study until its conclusion.
Patient enrollment is affected by many factors, including:
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the patient eligibility criteria defined in the protocol;
the size of the patient population required for analysis of the trial’s primary endpoints;
the proximity of patients to trial sites;
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the design of the trial;
our ability to recruit clinical trial investigators with the appropriate competencies and experience;
competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages and risks of the
product candidate being studied in relation to other available therapies, including any new drugs that may be approved
for the indications that we are investigating;
our ability to obtain and maintain patient consents; and
the risk that patients enrolled in clinical trials will drop out of the trials before completion.
In addition, our clinical trials will compete with other clinical trials for product candidates that are in the same therapeutic
areas as our product candidates, and this competition will reduce the number and types of patients available to us, because
some patients who might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our
competitors. Since the number of qualified clinical investigators is limited, we expect to conduct some of our clinical trials at the
same clinical trial sites that some of our competitors use, which will reduce the number of patients who are available for our
clinical trials in such clinical trial site.
Our inability to enroll a sufficient number of patients for our clinical trials would result in significant delays or might require
us to abandon one or more clinical trials altogether. Delays in patient enrollment may result in increased costs, affect the timing
or outcome of the planned clinical trials, product candidate development and approval process and jeopardize our ability to seek
and obtain the regulatory approval required to commence product sales and generate revenue, which could prevent completion
of these trials, adversely affect our ability to advance the development of our product candidates, cause the value of our
company to decline and limit our ability to obtain additional financing if needed.
Changes in methods of product candidate manufacturing or formulation may result in additional costs or delay.
As product candidates proceed through preclinical studies to late-stage clinical trials towards potential approval and
commercialization, it is common that various aspects of the development program, such as manufacturing methods and
formulation, are altered along the way in an effort to optimize processes and results. For example, we are exploring other
formulations and modes of administration for KarXT. Similarly, in our recently completed Phase 2 clinical trial, we used a co-
formulation of KarXT, whereas previous clinical data were based on either xanomeline alone or xanomeline co-administered with
trospium. Such changes carry the risk that they will not achieve these intended objectives. Any of these changes could cause
our product candidates to perform differently and affect the results of planned clinical trials or other future clinical trials
conducted with the materials manufactured using altered processes. Such changes may also require additional testing, FDA
notification or FDA approval. This could delay completion of clinical trials, require the conduct of bridging clinical trials or the
repetition of one or more clinical trials, increase clinical trial costs, delay approval of our product candidates and jeopardize our
ability to commence sales and generate revenue.
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 regulatory approval, if obtained.
Undesirable side effects caused by KarXT, or any future product candidate, 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 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. In clinical trials of KarXT to date, cholinergic adverse events were
generally mild or moderate in severity. However, there can be no guarantee that we would observe a similar tolerability profile of
KarXT in our planned Phase 3 clinical trial or in other future clinical trials. Many compounds that initially showed promise in
clinical or earlier stage testing are later found to cause undesirable or unexpected side effects that prevented further
development of the compound.
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If unacceptable side effects arise in the development of our product candidates, we, the FDA or comparable foreign
regulatory authorities, the IRBs, or independent ethics committees at the institutions in which our trials are conducted, or the
independent safety monitoring committee could suspend or terminate our clinical trials or the FDA 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-emergent side effects that are deemed to be drug-related could also affect subject recruitment or the
ability of enrolled subjects to complete the trial or result in potential product liability claims. Undesirable side effects in one of our
clinical trials for KarXT in one indication could adversely affect enrollment in clinical trials, regulatory approval and
commercialization of KarXT in other indications. In addition, these side effects may not be appropriately recognized or managed
by the treating medical staff. We expect to have to train medical personnel using our product candidates to understand the side
effect profiles for our clinical trials and upon any commercialization of any of our product candidates. Inadequate training in
recognizing or managing the potential side effects of our product candidates could result in patient injury or death. Any of these
occurrences may harm our business, financial condition and prospects significantly.
Moreover, clinical trials of our product candidates are conducted in carefully defined sets of patients who have agreed to
enter into clinical trials. Consequently, it is possible that our clinical trials, or those of any future collaborator, may indicate an
apparent positive effect of a product candidate that is greater than the actual positive effect, if any, or alternatively fail to identify
undesirable side effects.
Even if KarXT or any future product candidate of ours receives regulatory approval, it may fail to achieve the degree of
market acceptance by physicians, patients, third-party payors and others in the medical community necessary for
commercial success, in which case we may not generate significant revenues or become profitable.
We have never commercialized a product, and even if KarXT for the treatment of any indication, or any future product
candidate of ours is approved by the appropriate regulatory authorities for marketing and sale, it may nonetheless fail to gain
sufficient market acceptance by physicians, patients, third-party payors and others in the medical community. Physicians may be
reluctant to take their patients off their current medications and switch their treatment regimen to KarXT. Further, patients often
acclimate to the treatment regimen that they are currently taking and do not want to switch unless their physicians recommend
switching products or they are required to switch due to lack of coverage and adequate reimbursement. In addition, even if we
are able to demonstrate our product candidates’ safety and efficacy to the FDA and other regulators, safety or efficacy concerns
in the medical community may hinder market acceptance.
Efforts to educate the medical community and third-party payors on the benefits of our product candidates may require
significant resources, including management time and financial resources, and may not be successful. In particular, we may
have difficulty in convincing the medical community that KarXT’s preferential targeting and stimulation of certain muscarinic
receptors has the potential to avoid the undesirable side effects associated with stimulation of muscarinic receptors in the
peripheral tissues. If KarXT or any other product candidate is approved but does not achieve an adequate level of market
acceptance, we may not generate significant revenues and we may not become profitable. The degree of market acceptance of
our product candidates, if approved for commercial sale, will depend on a number of factors, including:
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the efficacy and safety of the product;
the potential advantages of the product compared to competitive therapies;
the prevalence and severity of any side effects;
whether the product is designated under physician treatment guidelines as a first-, second- or third-line therapy;
our ability, or the ability of any future collaborators, to offer the product for sale at competitive prices;
the product’s convenience and ease of administration compared to alternative treatments;
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the willingness of the target patient population to try, and of physicians to prescribe, the product;
limitations or warnings, including distribution or use restrictions contained in the product’s approved labeling;
the strength of sales, marketing and distribution support;
changes in the standard of care for the targeted indications for the product; and
availability and adequacy of coverage and reimbursement from government payors, managed care plans and other
third-party payors.
Any failure by KarXT or any other potential product candidate of ours that obtains regulatory approval to achieve market
acceptance or commercial success would adversely affect our business prospects.
If we fail to develop and commercialize KarXT for additional indications or fail to discover, develop and commercialize
other product candidates, we may be unable to grow our business and our ability to achieve our strategic objectives
would be impaired.
Although the development and commercialization of KarXT for the treatment of psychosis in patients with schizophrenia
and DRP as well as pain is our primary focus, as part of our longer-term growth strategy, we plan to evaluate KarXT in other
indications and develop other product candidates. We intend to evaluate internal opportunities from KarXT or other potential
product candidates, and also may choose to in-license or acquire other product candidates as well as commercial products to
treat patients suffering from other disorders with significant unmet medical needs and limited treatment options. These other
potential product candidates will require additional, time-consuming development efforts prior to commercial sale, including
preclinical studies, clinical trials and approval by the FDA and/or applicable foreign regulatory authorities. All product candidates
are prone to the risks of failure that are inherent in pharmaceutical product development, including the possibility that the
product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities. In addition, we
cannot assure you that any such products that are approved will be manufactured or produced economically, successfully
commercialized or widely accepted in the marketplace or be more effective than other commercially available alternatives.
Research programs to identify product candidates require substantial technical, financial and human resources, whether
or not any product candidates are ultimately identified. Our research programs may initially show promise in identifying potential
product candidates, yet fail to yield product candidates for clinical development for many reasons, including the following:
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the research methodology used may not be successful in identifying potential product candidates;
competitors may develop alternatives that render our product candidates obsolete;
product candidates that we develop may nevertheless be covered by third parties’ patents or other exclusive rights;
a product candidate may, on further study, be shown to have harmful side effects or other characteristics that indicate
it is unlikely to be effective or otherwise does not meet applicable regulatory criteria;
a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all;
and
a product candidate may not be accepted as safe and effective by patients, the medical community or third-party
payors.
If we are unsuccessful in identifying and developing additional product candidates, our potential for growth and achieving
our strategic objectives may be impaired.
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We may expend our resources to pursue a particular product candidate or indication and forgo the opportunity to
capitalize on product candidates or indications that may ultimately 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
specific indications that we identify as most likely to succeed, in terms of both their potential for 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 research and development programs and product candidates for specific indications may not
yield any commercially viable product candidates. 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 the product candidate.
The market for KarXT for schizophrenia, DRP and pain and any other product candidates we may develop may be
smaller than we expect.
Our estimates of the potential market opportunity for KarXT for the treatment of psychosis in patients with schizophrenia
and DRP and in pain as well as any other product candidates include several key assumptions based on our industry
knowledge, industry publications and third-party research reports. There can be no assurance that any of these assumptions
are, or will remain, accurate. If the actual market for KarXT for these or other indications, or for any other product candidate we
may develop, is smaller than we expect, our revenues, if any, may be limited and it may be more difficult for us to achieve or
maintain profitability.
Competitive products may reduce or eliminate the commercial opportunity for KarXT for our current or future
indications. If our competitors develop technologies or product candidates more rapidly than we do, or their
technologies are more effective or safer than ours, our ability to develop and successfully commercialize KarXT may
be adversely affected.
The clinical and commercial landscape for the treatment of psychosis in patients with schizophrenia and DRP as well as in
pain is highly competitive and subject to rapid and significant technological change. We face competition with respect to our
indications for KarXT and will face competition with respect to any other drug candidates that we may seek to develop or
commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology
companies worldwide. There are a number of large pharmaceutical and biotechnology companies that currently market and sell
drugs or are pursuing the development of drug candidates for the treatment of the indications that we are pursuing. Potential
competitors also include academic institutions, government agencies and other public and private research organizations that
conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing
and commercialization.
Although there are no FDA-approved drugs for the negative and cognitive symptoms of schizophrenia, many large
pharmaceutical companies market FDA-approved drugs for the treatment of the psychotic symptoms of schizophrenia. These
drugs include: Abilify, marketed by Bristol-Myers Squibb Company, Zyprexa, marketed by Eli Lilly, Vraylar, marketed by Allergan,
Clozaril, marketed by Mylan Products Ltd., and Latuda, marketed by Sumitomo Dainippon Pharma Co., Ltd. Similarly, while
there are currently no FDA-approved treatments for DRP, patients with Alzheimer’s Disease, or AD, are prescribed drugs for
enhancing their cognition, and include acetylcholinesterase inhibitors such as, donepezil, galantamine, rivastigmine and
memantine. These medications are available generically although specific dosage forms and combinations are proprietary and
marketed by large pharmaceutical companies such as, Allergan, Janssen Pharmaceuticals NV, Novartis International AG and
Pfizer Inc. Furthermore, patients with DRP may be prescribed antipsychotic medications that are indicated and approved for
schizophrenia.
The current standard of care for neuropathic and inflammatory pain include opioids, nonsteroidal anti-inflammatory drugs
(NSAIDs), topical agents, anticonvulsants and antidepressants. We are aware of many FDA-approved drugs for the treatment of
neuropathic and inflammatory pain, including Lyrica, marketed by Pfizer Inc., Suboxone, marketed by Reckitt Benckiser Group
plc, Oxecta, marketed by Pfizer Inc., and OxyContin, manufactured by Purdue Pharma.
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We believe that a significant number of product candidates are currently under development for the same indications we
are currently pursuing, and may become commercially available in the future, for the treatment of conditions for which we may
try to develop product candidates. Our potential competitors include large pharmaceutical and biotechnology companies,
specialty pharmaceutical and generic drug companies, academic institutions, government agencies and research institutions.
Our competitors may have significantly greater financial resources, established presence in the market, expertise in
research and development, manufacturing, preclinical and clinical testing, obtaining regulatory approvals and reimbursement
and marketing approved products than we do. Accordingly, our competitors may be more successful than we may be in
obtaining regulatory approval for therapies and achieving widespread market acceptance. Our competitors’ products may be
more effective, or more effectively marketed and sold, than any product candidate we may commercialize and may render our
therapies obsolete or non-competitive before we can recover development and commercialization expenses. If KarXT is
approved for the indications we are currently pursuing, it could compete with a range of therapeutic treatments that are in
development. In addition, our competitors may succeed in developing, acquiring or licensing technologies and drug products
that are more effective or less costly than KarXT or any other product candidates that we may develop, which could render our
product candidates obsolete and noncompetitive.
If we obtain approval for KarXT or any other future product candidate, we may face competition based on many different
factors, including the efficacy, safety and tolerability of our products, the ease with which our products can be administered, the
timing and scope of regulatory approvals for these products, the availability and cost of manufacturing, marketing and sales
capabilities, price, reimbursement coverage and patent position. Existing and future competing products could present superior
treatment alternatives, including being more effective, safer, less expensive or marketed and sold more effectively than any
products we may develop. Competitive products may make any products we develop obsolete or noncompetitive before we
recover the expense of developing and commercializing our product candidates. Such competitors could also recruit our
employees, which could negatively impact our level of expertise and our ability to execute our business plan. Mergers and
acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a
small number of competitors.
In addition, our competitors may obtain patent protection, regulatory exclusivities or FDA approval and commercialize
products more rapidly than we do, which may impact future approvals or sales of any of our product candidates that receive
regulatory approval. If the FDA approves the commercial sale of KarXT or any other product candidate, we will also be
competing with respect to marketing capabilities and manufacturing efficiency. We expect competition among products will be
based on product efficacy and safety, the timing and scope of regulatory approvals, availability of supply, marketing and sales
capabilities, product price, reimbursement coverage by government and private third-party payors, regulatory exclusivities and
patent position. Our profitability and financial position will suffer if our product candidates receive regulatory approval, but cannot
compete effectively in the marketplace.
Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being
concentrated among a smaller number of our competitors. Smaller and other early stage companies may also prove to be
significant competitors, particularly through collaborative arrangements with large and established companies. These third
parties compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial
sites, as well as in acquiring technologies complementary to, or necessary for, our programs.
KarXT is a patented combination of trospium, an FDA-approved generic drug, and xanomeline which exposes us to
additional risks.
We are developing KarXT as a combination of trospium, which has been approved by the FDA for the treatment of
overactive bladder, and xanomeline. Even if KarXT were to receive marketing approval or be commercialized, we would
continue to be subject to the risks that the FDA or similar regulatory authorities could revoke approval of trospium or that safety,
efficacy, manufacturing or supply issues could arise with trospium. This could result in our own products being removed from the
market or being less commercially successful.
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We may be unable to prevent third parties from selling, making, promoting, manufacturing, or distributing alternative
combination therapies with xanomeline, or xanomeline as a single therapeutic.
We currently have two issued U.S. patents directed to an oral medicament comprising certain doses of xanomeline and/or
the salt thereof in combination with certain doses of trospium chloride and two issued U.S. patents directed to methods for
treating central nervous system disorders using combinations of certain oral doses of xanomeline and/or the salt thereof and
certain oral doses of trospium chloride. We also have one issued patent in Canada and one in Europe, with other patent
applications pending in the U.S., Europe, Hong Kong and Japan. These patents would not prevent a third-party from creating,
making and marketing alternative combination therapies that fall outside the scope of the patent claims. There can be no
assurance that any such alternative combination therapies with xanomeline, or xanomeline as a single therapeutic, will not be
therapeutically equivalent or commercially feasible. In the event an alternative combination with xanomeline, or xanomeline as a
single therapeutic, is developed and approved for use in indications that we may seek approval for, the marketability and
commercial success of KarXT, if approved, could be materially harmed.
If the FDA or comparable foreign regulatory authorities approve generic versions of KarXT or any other product
candidate of ours that receives regulatory approval, or such authorities do not grant our products appropriate periods
of non-patent exclusivity before approving generic versions of such products, the sales of such products could be
adversely affected.
Once an NDA is approved, the product covered thereby becomes a “listed drug” in the FDA’s publication, “Approved Drug
Products with Therapeutic Equivalence Evaluations,” or the Orange Book. Manufacturers may seek approval of generic versions
of reference listed drugs through submission of abbreviated new drug applications, or ANDAs, in the United States. In support of
an ANDA, a generic manufacturer generally must show that its product has the same active ingredient(s), dosage form,
strength, route of administration, conditions of use and labeling as the reference listed drug and that the generic version is
bioequivalent to the reference listed drug, meaning, in part, that it is absorbed in the body at the same rate and to the same
extent. Generic products may be significantly less costly to bring to market than the reference listed drug and companies that
produce generic products are generally able to offer them at lower prices. Moreover, many states allow or require substitution of
therapeutically equivalent generic drugs at the pharmacy level even if the branded drug is prescribed. Thus, following the
introduction of a generic drug, a significant percentage of the sales of any branded product or reference listed drug may be lost
to the generic product.
The FDA may not approve an ANDA for a generic product until any applicable period of non-patent exclusivity for the
reference listed drug has expired. The Federal Food, Drug, and Cosmetic Act, or FDCA, provides a period of five years of non-
patent exclusivity for a new drug containing a new chemical entity, or NCE. Specifically, in cases where such exclusivity has
been granted, an ANDA may not be filed with the FDA until the expiration of five years unless the submission is accompanied by
a Paragraph IV certification that a patent covering the listed drug is invalid, unenforceable or will not be infringed by the generic
product, in which case the applicant may submit its application four years following approval of the listed drug. It is unclear
whether the FDA will treat the xanomeline in our product candidates as an NCE and, therefore, afford them five years of NCE
data exclusivity if approved. If any product we develop does not receive five years of NCE exclusivity, the FDA may approve
generic versions of such product three years after its date of approval, subject to the requirement that the ANDA applicant
certifies to any patents listed for our products in the Orange Book. Three-year exclusivity is given to a drug if it contains an
active moiety that has previously been approved, and the NDA includes reports of one or more new clinical investigations, other
than bioavailability or bioequivalence studies, that were conducted by or for the applicant and are essential to the approval of the
NDA. If approved, manufacturers may seek to launch these generic products following the expiration of the applicable marketing
exclusivity period, even if we still have patent protection for our product.
Competition that our products, if approved, may face from generic versions of our products could negatively impact our
future revenue, profitability and cash flows and substantially limit our ability to obtain a return on our investments in those
product candidates.
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We currently have no commercial infrastructure. If we are unable to develop such infrastructure on our own or through
collaborations with partners, we will not be successful in commercializing our product candidates.
We currently have no commercial infrastructure, which includes but is not limited to, marketing, sales or distribution
capabilities. If KarXT is approved for the treatment of psychosis in patients with schizophrenia and DRP, we intend to establish a
sales and marketing organization, either on our own or in collaboration with third parties, with technical expertise and supporting
distribution capabilities to commercialize the approved product in key territories, which will require substantial additional
resources. Some or all of these costs may be incurred in advance of any approval of KarXT. Any failure or delay in the
development of our or third parties’ internal sales, marketing and distribution capabilities would adversely impact the
commercialization of KarXT and other future product candidates.
Factors that may inhibit our efforts to commercialize our products on our own include:
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our inability to recruit and retain adequate numbers of effective sales and marketing personnel;
the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe any
future products;
the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage
relative to companies with more extensive product lines; and
unforeseen costs and expenses associated with creating an independent sales and marketing organization.
With respect to our existing and future product candidates, we may choose to collaborate with third parties that have direct
sales forces and established distribution systems to serve as an alternative to our own sales force and distribution systems. Our
product revenue may be lower than if we directly marketed or sold our products, if approved. In addition, any revenue we
receive will depend in whole or in part upon the efforts of these third parties, which may not be successful and are generally not
within our control. If we are not successful in commercializing any approved products, our future product revenue will suffer and
we may incur significant additional losses.
If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties,
we will not be successful in commercializing our product candidates.
Any of our current and future product candidates for which we, or any future collaborators, obtain regulatory approval
in the future will be subject to ongoing obligations and continued regulatory review, which may result in significant
additional expense. If approved, our product candidates could be subject to post-marketing restrictions or withdrawal
from the market and we, or any future collaborators, may be subject to substantial penalties if we, or they, fail to
comply with regulatory requirements or if we, or they, experience unanticipated problems with our products following
approval.
Any of our product candidates for which we, or any future collaborators, obtain regulatory approval, as well as the
manufacturing processes, post-approval studies, labeling, advertising and promotional activities for such product, among other
things, will be subject to ongoing 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,
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 user fees and periodic inspection by the FDA and other regulatory authorities to monitor
compliance with these requirements and the terms of any product approval we may obtain. Even if regulatory approval of a
product candidate is granted, the approval may be subject to limitations on the indications or uses for which the product may be
marketed or to the conditions of approval, including the requirement to implement a Risk Evaluation and Mitigation Strategy, or
REMS.
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The FDA and other regulatory authorities may also impose requirements for costly post-marketing studies or clinical trials
and surveillance to monitor the safety or efficacy of a product. The FDA and other agencies, including the Department of Justice,
closely regulate and monitor the post-approval marketing and promotion of products to ensure that they are manufactured,
marketed and distributed 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. However, companies may share
truthful and not misleading information that is otherwise consistent with a product’s FDA approved labeling. If we, or any future
collaborators, do not market any of our product candidates for which we, or they, receive regulatory approval for only their
approved indications, we, or they, may be subject to warnings or enforcement action for off-label marketing if it is alleged that we
are doing so. Violation of the FDCA and other statutes relating to the promotion and advertising of prescription drugs may lead
to investigations or allegations of violations of federal and state health care fraud and abuse laws and state consumer protection
laws, including the False Claims Act.
In addition, later discovery of previously unknown adverse events or other problems with our products or their
manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results,
including:
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restrictions on the manufacturing of such products;
restrictions on the labeling or marketing of such products;
restrictions on product distribution or use;
requirements to conduct post-marketing studies or clinical trials;
warning letters or untitled letters;
withdrawal of the products from the market;
refusal to approve pending applications or supplements to approved applications that we submit;
recall of products;
restrictions on coverage by third-party payors;
fines, restitution or disgorgement of profits or revenues;
exclusion from federal health care programs such as Medicare and Medicaid;
suspension or withdrawal of regulatory approvals;
refusal to permit the import or export of products;
product seizure; or
injunctions or the imposition of civil or criminal penalties.
Obtaining and maintaining marketing approval of our product candidates in one jurisdiction does not mean that we will
be successful in obtaining marketing approval of our product candidates in other jurisdictions. Our failure to obtain
regulatory approval in foreign jurisdictions would prevent our product candidates from being marketed abroad, and
any approval we are granted for KarXT or any of our other product candidates in the United States would not assure
approval of product candidates in foreign jurisdictions.
In order to market any products outside of the United States, we must establish and comply with numerous and varying
regulatory requirements of other countries regarding clinical trial design, safety and efficacy. Clinical trials conducted in one
country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not mean
that regulatory approval will be obtained in any other country. Approval procedures vary among countries and can involve
additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approvals could
result in
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significant delays, difficulties and costs for us and may require additional preclinical studies or clinical trials which would be
costly and time consuming and could delay or prevent introduction of KarXT or any of our other product candidates in those
countries. We do not have experience in obtaining regulatory approval in international markets. If we or our partners fail to
comply with regulatory requirements or to obtain and maintain required approvals, our target market will be reduced and our
ability to realize the full market potential of our product candidates will be harmed.
Additionally, on June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the European Union,
commonly referred to as Brexit. On March 29, 2017, the country formally notified the European Union of its intention to withdraw
pursuant to Article 50 of the Lisbon Treaty. The United Kingdom formally left the European Union on January 31, 2020. A
transition period began on February 1, 2020, during which European Union pharmaceutical law remains applicable to the United
Kingdom. This transition period is due to end on December 31, 2020. Since the regulatory framework in the United Kingdom
covering quality, safety and efficacy of pharmaceutical products, clinical trials, marketing authorization, commercial sales and
distribution of pharmaceutical products is derived from European Union directives and regulations, Brexit could materially impact
the future regulatory regime with respect to the approval of our product candidates in the United Kingdom. It remains to be seen
how, if at all, Brexit will impact regulatory requirements for product candidates and products in the United Kingdom. Any delay in
obtaining, or an inability to obtain, any regulatory approvals, as a result of Brexit or otherwise, would prevent us from
commercializing our product candidates in the United Kingdom and/or the European Union and restrict our ability to generate
revenue and achieve and sustain profitability. If any of these outcomes occur, we may be forced to restrict or delay efforts to
seek regulatory approval in the United Kingdom and/or European Union for our product candidates, which could significantly and
materially harm our business.
Even if we, or any future collaborators, are able to commercialize any product candidate that we, or they, develop, the
product may become subject to unfavorable pricing regulations or third-party payor coverage and reimbursement
policies, any of which could harm our business.
Patients who are provided medical treatment for their conditions generally rely on third party payors to reimburse all or part
of the costs associated with their treatment. Therefore, our ability, and the ability of any future collaborators to commercialize
any of our product candidates will depend in part on the extent to which coverage and reimbursement for these products and
related treatments will be available from third-party payors including government health administration authorities and private
health coverage insurers. Third-party payors decide which medications they will cover and establish reimbursement levels. We
cannot be certain that coverage will be available and reimbursement will be adequate for KarXT for our initial or potential
additional indications or for any other potential product candidates. Also, we cannot be certain that reimbursement policies will
not reduce the demand for, or the price paid for, our products.
If coverage and reimbursement are not available, or reimbursement is available only to limited levels, we, or any future
collaborators, may be limited in our ability to successfully commercialize our product candidates. Even if coverage is provided,
the approved reimbursement amount may not be high enough to allow us, or any future collaborators, to establish or maintain
pricing sufficient to realize a sufficient return on our or their investment. In the United States, no uniform policy of coverage and
reimbursement for products exists among third-party payors and coverage and reimbursement for products can differ
significantly from payor to payor. As a result, the coverage determination process is often a time-consuming and costly process
that will require us to provide scientific and clinical support for the use of our products to each payor separately, with no
assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance.
There is significant uncertainty related to third-party payor coverage and reimbursement of newly approved drugs.
Regulatory approvals, pricing and reimbursement for new drug products vary widely from country to country. In the United
States, the principal decisions about reimbursement for new medicines are typically made by the Centers for Medicare &
Medicaid Services, or CMS, an agency within the U.S. Department of Health and Human Services, or HHS, as CMS decides
whether and to what extent a new medicine will be covered and reimbursed under Medicare. Private payors tend to follow CMS
to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement for novel products such as
ours. Reimbursement agencies in Europe may be more conservative than CMS, but ultimately make their own
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coverage determinations. Outside the United States, certain countries, including a number of member states of the European
Union, set prices and reimbursement for pharmaceutical products, or medicinal products, as they are commonly referred to in
the European Union, with limited participation from the marketing authorization holders. We cannot be sure that such prices and
reimbursement will be acceptable to us or our collaborators. If the regulatory authorities in these foreign jurisdictions set prices
or reimbursement levels that are not commercially attractive for us or our collaborators, our revenues from sales by us or our
collaborators, and the potential profitability of our drug products, in those countries would be negatively affected. An increasing
number of countries are taking initiatives to attempt to reduce large budget deficits by focusing cost-cutting efforts on
pharmaceuticals for their state-run health care systems. These international price control efforts have impacted all regions of the
world, but have been most drastic in the European Union. Additionally, some countries require approval of the sale price of a
product before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing
approval is granted. As a result, we might obtain marketing approval for a product in a particular country, but then may
experience delays in the reimbursement approval of our product or be subject to price regulations that would delay our
commercial launch of the product, possibly for lengthy time periods, which could negatively impact the revenues we are able to
generate from the sale of the product in that particular country.
The healthcare industry is acutely focused on cost containment, both in the United States and elsewhere. Government
authorities and other third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement
for certain medications, which could affect our ability or that of any future collaborators to sell our product candidates profitably.
For example, the Trump administration recently released a “Blueprint,” to reduce the cost of drugs. The Trump administration’s
Blueprint contains certain measures that the HHS is already working to implement. At the state level, legislatures are
increasingly passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing,
including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost
disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk
purchasing. Payors may not view our products, if any, as cost-effective, and coverage and reimbursement may not be available
to our customers, or those of any future collaborators, or may not be sufficient to allow our products, if any, to be marketed on a
competitive basis. Cost-control initiatives could cause us, or any future collaborators, to decrease the price we, or they, might
establish for products, which could result in lower than anticipated product revenues. If the prices for our products, if any,
decrease or if governmental and other third-party payors do not provide coverage or adequate reimbursement, our prospects for
revenue and profitability will suffer.
There may also be delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be
more limited than the indications for which the drug is approved by the FDA or comparable foreign regulatory authorities.
Moreover, eligibility for reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers our costs,
including research, development, manufacture, sale and distribution. Reimbursement rates may vary, by way of example,
according to the use of the product and the clinical setting in which it is used. Reimbursement rates may also be based on
reimbursement levels already set for lower cost drugs or may be incorporated into existing payments for other services.
In addition, increasingly, third-party payors are requiring higher levels of evidence of the benefits and clinical outcomes of
new technologies and are challenging prices. We cannot be sure that coverage will be available for any product candidate that
we, or any future collaborator, commercialize and, if available, that the reimbursement rates will be adequate. Further, the net
reimbursement for drug products may be subject to additional reductions if there are changes to laws that presently restrict
imports of drugs from one country to another. An inability to promptly obtain coverage and adequate payment rates from both
government-funded and private payors for any of our product candidates for which we, or any future collaborator, obtain
regulatory approval could significantly harm our operating results, our ability to raise capital needed to commercialize products
and our overall financial condition.
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We may seek Breakthrough Therapy Designation by the FDA for a product candidate that we develop, and we may be
unsuccessful. If we are successful, the designation 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 Breakthrough Therapy Designation for any product candidate that we develop. A breakthrough therapy is
defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening
disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over
currently approved therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early
in clinical development. For drugs that have been designated as breakthrough therapies, interaction and communication
between the FDA and the sponsor of the trial can help to identify the most efficient path for clinical development while
minimizing the number of patients placed in ineffective control regimens. Drugs designated as breakthrough therapies by the
FDA are also eligible for accelerated approval and priority review.
Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe a product
candidate we develop 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 Breakthrough Therapy Designation for a product candidate
may not result in a faster development process, review or approval compared to drugs considered for approval under
conventional FDA procedures and does not assure ultimate approval by the FDA. In addition, even if the product candidates we
develop qualify as breakthrough therapies, the FDA may later decide that the drugs no longer meet the conditions for
qualification and rescind the designation.
We may seek Fast Track Designation by the FDA for a product candidate that we develop, and we may be
unsuccessful. If we are successful, the designation may not actually lead to a faster development or regulatory review
or approval process.
We may seek Fast Track Designation for the product candidates we develop. If a product is intended for the treatment of a
serious or life-threatening condition and preclinical or clinical data demonstrate the potential to address an unmet medical need
for this condition, the product sponsor may apply for Fast Track Designation. The FDA has broad discretion whether or not to
grant this designation, so even if we believe a particular product candidate is eligible for this designation, we cannot assure 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. The FDA may rescind the Fast Track
Designation if it believes that the designation is no longer supported by data from our clinical development program.
Product liability lawsuits against us or any of our future collaborators could divert our resources and attention, cause
us to incur substantial liabilities and limit commercialization of our product candidates.
We are exposed to potential product liability and professional indemnity risks that are inherent in the research,
development, manufacturing, marketing and use of pharmaceutical products. Currently, we have no products that have been
approved for commercial sale; however, the use of our product candidates by us and any collaborators in clinical trials, and the
sale of these product candidates, if approved, in the future, may expose us to liability claims. We face an inherent risk of product
liability lawsuits related to the use of our product candidates in elderly patients and will face an even greater risk if product
candidates are approved by regulatory authorities and introduced commercially. Product liability claims may be brought against
us or our partners by participants enrolled in our clinical trials, patients, health care providers, pharmaceutical companies, our
collaborators or others using, administering or selling any of our future approved products. If we cannot successfully defend
ourselves against any such claims, we may incur substantial liabilities or be required to limit commercialization of our product
candidates. Regardless of the merits or eventual outcome, liability claims may result in:
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decreased demand for any of our future approved products;
injury to our reputation;
withdrawal of clinical trial participants;
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termination of clinical trial sites or entire trial programs;
significant litigation costs;
substantial monetary awards to, or costly settlements with, patients or other claimants;
product recalls or a change in the indications for which they may be used;
loss of revenue;
diversion of management and scientific resources from our business operations; and
the inability to commercialize our product candidates.
Although the clinical trial process is designed to identify and assess potential side effects, clinical development does not
always fully characterize the safety and efficacy profile of a new medicine, and it is always possible that a drug, even after
regulatory approval, may exhibit unforeseen side effects. If our product candidates were to cause adverse side effects during
clinical trials or after approval, we may be exposed to substantial liabilities. Physicians and patients may not comply with any
warnings that identify known potential adverse effects and patients who should not use our product candidates. If any of our
product candidates are approved for commercial sale, we will be highly dependent upon consumer perceptions of us and the
safety and quality of our products. We could be adversely affected if we are subject to negative publicity associated with illness
or other adverse effects resulting from patients’ use or misuse of our products or any similar products distributed by other
companies.
Although we maintain product liability insurance coverage in the amount of up to $10.0 million in the aggregate, including
clinical trial liability, this insurance may not fully cover potential liabilities that we may incur. The cost of any product liability
litigation or other proceeding, even if resolved in our favor, could be substantial. We will need to increase our insurance
coverage if we commercialize any product that receives regulatory approval. In addition, insurance coverage is becoming
increasingly expensive. If we are unable to maintain sufficient insurance coverage at an acceptable cost or to otherwise protect
against potential product liability claims, it could prevent or inhibit the development and commercial production and sale of our
product candidates, which could harm our business, financial condition, results of operations and prospects.
Even if we, or any future collaborators, obtain regulatory approvals for our product candidates, the terms of approvals
and ongoing regulation of our products may limit how we manufacture and market our products, which could impair
our ability to generate revenue.
Once regulatory approval has been granted, an approved product and its manufacturer and marketer are subject to
ongoing review and extensive regulation. We, and any future collaborators, must therefore comply with requirements concerning
advertising and promotion for any of our product candidates for which we or they obtain regulatory approval. Promotional
communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be
consistent with the information in the product’s approved labeling. Thus, we and any future collaborators will not be able to
promote any products we develop for indications or uses for which they are not approved.
In addition, manufacturers of approved products and those manufacturers’ facilities are required to comply with extensive
FDA requirements, including ensuring that quality control and manufacturing procedures conform to current Good Manufacturing
Practices, or cGMPs, which include requirements relating to quality control and quality assurance as well as the corresponding
maintenance of records and documentation and reporting requirements. We, our contract manufacturers, any future
collaborators and their contract manufacturers could be subject to periodic unannounced inspections by the FDA to monitor and
ensure compliance with cGMPs. Despite our efforts to inspect and verify regulatory compliance, one or more of our third-party
manufacturing vendors may be found on regulatory inspection by FDA or other authorities to be not in compliance with cGMP
regulations, which may result in shutdown of the third-party vendor or invalidation of drug product lots or processes. In some
cases, a product recall may be warranted or required, which would materially affect our ability to supply and market our drug
products.
Accordingly, assuming we, or any future collaborators, receive regulatory approval for one or more of our product
candidates, we, and any future collaborators, and our and their contract manufacturers will continue to expend time, money and
effort in all areas of regulatory compliance, including manufacturing, production, product surveillance and quality control.
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If we, and any future collaborators, are not able to comply with post-approval regulatory requirements, we, and any future
collaborators, could have the regulatory approvals for our products withdrawn by regulatory authorities and our, or any future
collaborators’, ability to market any future products could be limited, which could adversely affect our ability to achieve or sustain
profitability. Further, the cost of compliance with post-approval regulations may have a negative effect on our operating results
and financial condition.
A pandemic, epidemic or outbreak of an infectious disease in the United States may adversely affect our business.
If a pandemic, epidemic or outbreak of an infectious disease occurs in the United States or worldwide, our business may
be adversely affected. In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China. This virus
continues to spread globally and, as of March 2020, has spread to over 70 countries, including the United States and has been
declared a pandemic by the World Health Organization. The spread of COVID-19 has impacted the global economy and may
impact our operations, including the potential interruption of our clinical trial activities, regulatory reviews and our supply chain.
For example, the COVID-19 outbreak may delay enrollment in our clinical trials due to prioritization of hospital resources toward
the outbreak or other factors, and some patients may be unwilling to enroll in our trials or be unable to comply with clinical trial
protocols if quarantines impede patient movement or interrupt healthcare services, which would delay our ability to conduct
clinical trials or release clinical trial results and could delay our ability to obtain regulatory approval and commercialize our
product candidates. Furthermore, the spread of the virus may affect the operations of key governmental agencies, such as the
FDA, which may delay the development of our product candidates. The spread of an infectious disease, including COVID-19,
may also result in the inability of our suppliers to deliver components or raw materials on a timely basis or at all. In addition,
hospitals may reduce staffing and reduce or postpone certain treatments in response to the spread of an infectious disease.
Such events may result in a period of business disruption, and in reduced operations, or doctors and medical providers may be
unwilling to participate in our clinical trials, any of which could materially affect our business, financial condition and results of
operations. The extent to which the coronavirus impacts our business will depend on future developments, which are highly
uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and
the actions to contain the coronavirus or treat its impact, among others. A significant outbreak of coronavirus and other
infectious diseases could result in a widespread health crisis that could adversely affect the economies and financial markets
worldwide, resulting in an economic downturn that could impact our business, financial condition and results of operations.
Our relationships with healthcare providers, physicians and third-party payors will be subject to applicable anti-
kickback, fraud and abuse, privacy and transparency and other healthcare laws and regulations, which could expose
us to criminal sanctions, civil penalties, exclusion from government 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 products for which we obtain regulatory approval. Our arrangements with third party payors, healthcare providers and
physicians may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain
the business or financial arrangements and relationships through which we conduct our operations, including how we research,
market, sell and distribute any products for which we obtain regulatory approval. These include the following:
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Anti-Kickback Statute—The federal Anti-Kickback Statute prohibits, among other things, persons from knowingly and
willfully soliciting, offering, paying, receiving or providing remuneration, directly or indirectly, overtly or covertly, in cash
or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or
recommendation or arranging of, any good or service, for which payment may be made under a federal healthcare
program such as Medicare and Medicaid. This statute has been interpreted to apply to arrangements between
pharmaceutical manufacturers on the one hand, and prescribers, purchasers and formulary managers, among others,
on the other. A person or entity can be found guilty of violating the federal Anti-Kickback Statute without actual
knowledge of the statute or specific intent to violate it. 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 civil False Claims Act or federal civil money penalties statute;
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Federal civil and criminal false claims laws and civil monetary penalty laws, including False Claims Laws—
The federal civil and criminal false claims laws, including the federal civil False Claims Act, and federal civil monetary
penalties laws which prohibit individuals or entities from, among other things, knowingly presenting, or causing to be
presented, to the federal government, claims for payment that are false, fictitious or fraudulent; knowingly making or
causing a false statement or record material to a false or fraudulent claim or obligation to pay or transmit money or
property to the federal government; or knowingly concealing or knowingly and improperly avoiding or decreasing an
obligation to pay money to the federal government A claim that includes items or services resulting from a violation of
the federal Anti-Kickback Statute constitutes a false or fraudulent claim under the federal civil False Claims Act.
Manufacturers can be held liable under the False Claims Act even when they do not submit claims directly to
government payors if they are deemed to “cause” the submission of false or fraudulent claims. The False Claims Act
also permits a private individual acting as a “whistleblower” to bring qui tam actions on behalf of the federal
government alleging violations of the False Claims Act and to share in any monetary recovery;
HIPAA—The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created additional
federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud
any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations, or promises, any
of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of
the payor (e.g., public or private) and knowingly and willfully falsifying, concealing or covering up by any trick or device
a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare
benefits, items or services relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or
entity can be found guilty of violating HIPAA without actual knowledge of the statute or specific intent to violate it.
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH,
and their respective implementing regulations, which impose requirements on certain covered healthcare providers,
health plans, and healthcare clearinghouses as well as their respective business associates that perform services for
them that involve the use, or disclosure of, individually identifiable health information, relating to the privacy, security
and transmission of individually identifiable health information. HITECH also created new tiers of civil monetary
penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave
state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the
federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions;
Transparency Requirements—The federal Physician Payments Sunshine Act, created under the ACA, and its
implementing regulations, require manufacturers of drugs, devices, biologicals and medical supplies for which
payment is available under Medicare, Medicaid or the Children’s Health Insurance Program to report annually to the
HHS under the Open Payments Program, information related to payments or other transfers of value made to
physicians, certain other healthcare professionals, and teaching hospitals, as well as ownership and investment
interests held by physicians, certain other healthcare professional and their immediate family members. Effective
January 1, 2022, these reporting obligations will extend to include transfers of value made to certain non-physician
providers such as physician assistants and nurse practitioners; and
Analogous State and Foreign Laws—Analogous state and foreign fraud and abuse laws and regulations, such as
state anti-kickback and false claims laws, which may be broader in scope and apply regardless of payor. These laws
are enforced by various state agencies and through private actions. Some state laws require pharmaceutical
companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant federal
government compliance guidance, require drug manufacturers to report information related to payments and other
transfers of value to physicians and other healthcare providers, and restrict marketing practices or require disclosure
of marketing expenditures or drug pricing. Some state and local laws require the registration of pharmaceutical sales
representatives. State and foreign laws also govern the privacy and security of health information in some
circumstances. These data privacy and security laws may differ from each other in significant ways and often are not
pre-empted by HIPAA, which may complicate compliance efforts.
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Efforts to ensure that our business arrangements with third parties, and our business generally, 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, agency guidance or case law involving applicable
fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or
any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative
penalties, damages, fines, imprisonment, disgorgement, exclusion from government funded healthcare programs, such as
Medicare and Medicaid, integrity and oversight agreements to resolve allegations of non-compliance, contractual damages,
reputational harm, diminished profits and future earnings, and the curtailment or restructuring of our operations, any of which
could adversely affect our ability to operate our business and our results of operations. Defending against any such actions can
be costly, time-consuming and may require significant financial and personnel resources. Therefore, even if we are successful in
defending against any such actions that may be brought against us, our business may be impaired. If any of the physicians or
other healthcare providers or entities with whom we expect to do business is found to be not in compliance with applicable laws,
they may be subject to significant criminal, civil or administrative sanctions, including exclusions from government funded
healthcare programs.
The provision of benefits or advantages to physicians to induce or encourage the prescription, recommendation,
endorsement, purchase, supply, order or use of medicinal products is generally not permitted in the countries that form part of
the European Union. Some European Union Member States, like the United Kingdom, through the United Kingdom Bribery Act
2010, have enacted laws explicitly prohibiting the provision of these types of benefits and advantages. Infringements of these
laws can result in substantial fines and imprisonment.
Payments made to physicians in certain European Union Member States (e.g., France or Belgium) must be publicly
disclosed. Moreover, agreements with physicians often must be the subject of prior notification and approval by the physician’s
employer, his or her competent professional organization and/or the regulatory authorities of the individual European Union
Member States. These requirements are provided in the European Union Member State national laws, industry codes (e.g. the
European Federation of Pharmaceutical Industries and Associations Disclosure and Healthcare Professionals Codes) or
professional codes of conduct. Failure to comply with these requirements could result in reputational risk, public reprimands,
administrative penalties, fines or imprisonment.
The collection and processing of personal data—including health data—is governed by the European Union-wide General
Data Protection Regulation, or GDPR, which became applicable on May 25, 2018, replacing the current data protection laws of
each European Union Member State. GDPR applies to any business, regardless of its location, that provides goods or services
to residents in the EU. This expansion includes our clinical trial activities in European Union Member States. The GDPR
imposes more stringent operational requirements for processors and controllers of personal data, including, for example, special
protections for “sensitive information” which includes health and genetic information of data subjects residing in the EU,
expanded disclosures about how personal information is to be used, limitations on retention of information, increased
requirements pertaining to health data and pseudonymised (i.e., key-coded) data, mandatory data breach notification
requirements and higher standards for controllers to demonstrate that they have obtained valid consent for certain data
processing activities. GDPR grants individuals the opportunity to object to the processing of their personal information, allows
them to request deletion of personal information in certain circumstances, and provides the individual with an express right to
seek legal remedies in the event the individual believes his or her rights have been violated. Further, the GDPR imposes strict
rules on the transfer of personal data out of the European Union to the United States or other regions that have not been
deemed to offer “adequate” privacy protections. The GDPR provides that European Union Member States may make their own
further laws and regulations in relation to the processing of genetic, biometric or health data, which could result in differences
between Member States, limit our ability to use and share personal data or could cause our costs to increase, and harm our
business and financial condition. We are also subject to evolving and strict rules on the transfer of personal data out of the
European Union to the United States. Failure to comply with European Union data protection laws may result in fines (for
example, of up to €20,000,000 or up to 4% of the total worldwide annual turnover of the preceding financial year (whichever is
higher) under the GDPR) and other administrative penalties, which may be onerous and adversely affect our business, financial
condition,
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results of operations and prospects. As a result of the implementation of the GDPR, we may be required to put in place
additional mechanisms ensuring compliance with the new data protection rules. There is significant uncertainty related to the
manner in which data protection authorities will seek to enforce compliance with GDPR is not yet clear. For example, it is not
clear if the authorities will conduct random audits of companies doing business in the EU, or if the authorities will wait for
complaints to be filed by individuals who claim their rights have been violated. Enforcement uncertainty and the costs associated
with ensuring GDPR compliance be onerous and adversely affect our business, financial condition, results of operations and
prospects.
Current and future legislation may increase the difficulty and cost for us and any collaborators to obtain regulatory
approval of and commercialize our product candidates and affect the prices we, or they, may obtain.
In the United States and foreign jurisdictions, there have been a number of legislative and regulatory changes and
proposed changes regarding the healthcare system that could prevent or delay regulatory 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
regulatory approval. We expect that current laws, as well as other healthcare reform measures that may be adopted in the
future, may result in additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, new
payment methodologies and in additional downward pressure on the price that we, or any collaborators, may receive for any
approved products.
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the
Health Care and Education Reconciliation Act, or collectively the ACA. Among the provisions of the ACA of potential importance
to our business and our product candidates are the following:
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an annual, non-deductible fee on any entity that manufactures or imports specified branded prescription products and
biologic products;
an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;
a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are
calculated for products that are inhaled, infused, instilled, implanted or injected;
expansion of healthcare fraud and abuse laws, including the civil False Claims Act and the federal Anti-Kickback
Statute, new government investigative powers and enhanced penalties for noncompliance;
a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale
discounts, which was increased to 70% by the Bipartisan Budget Act of 2018, off negotiated prices of applicable brand
products to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient
products to be covered under Medicare Part D;
extension of manufacturers’ Medicaid rebate liability to individuals enrolled in Medicaid managed care organizations;
expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
new requirements to report certain financial arrangements with physicians and teaching hospitals;
a new requirement to annually report product samples that manufacturers and distributors provide to physicians;
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 the Center for Medicare and Medicaid Innovation within CMS to test innovative payment and service
delivery models.
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Some of the provisions of the ACA have yet to be implemented, and there have been judicial and Congressional
challenges to certain aspects of the ACA, as well as recent efforts by the Trump administration to repeal or replace certain
aspects of the ACA. Since January 2017, President Trump has signed two executive orders and other directives designed to
delay the implementation of certain provisions of the ACA. Concurrently, Congress has considered legislation that would repeal
or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, it has enacted
laws that modify certain provisions of the ACA. The Tax Cuts and Jobs Act of 2017, or Tax Act, includes a provision that
repealed, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals
who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.”
On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas, or the Texas 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. On December 18, 2019, the Fifth Circuit U.S. Court of Appeals
held that the individual mandate is unconstitutional, and remanded the case to the lower court to reconsider its earlier
invalidation of the full ACA. Pending review, the ACA remains in effect, but it is unclear at this time what effect the latest ruling
will have on the status of the ACA.
On January 20, 2017, President Trump signed an Executive Order directing federal agencies with authorities and
responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA
that would impose a fiscal burden on states or a cost, fee, tax, penalty or regulatory burden on individuals, healthcare providers,
health insurers, or manufacturers of pharmaceuticals or medical devices. On October 13, 2017, President Trump signed an
Executive Order terminating the cost-sharing subsidies that reimburse insurers under the ACA. Several state Attorneys General
filed suit to stop the administration from terminating the subsidies, but their request for a restraining order was denied by a
federal judge in California on October 25, 2017. On June 14, 2018, U.S. Court of Appeals for the Federal Circuit ruled that the
federal government was not required to pay more than $12 billion in ACA risk corridor payments to third-party payors who
argued were owed to them. This was appealed to the U.S. Supreme Court, which heard arguments on December 10, 2019. We
cannot predict how the U.S. Supreme Court will rule. The effects of this gap in reimbursement on third-party payors, the viability
of the ACA marketplace, providers, and potentially our business, are not yet known. In December 2018, CMS published a final
rule permitting further collections and payments to and from certain ACA qualified health plans and health insurance issuers
under the ACA risk adjustment program in response to the outcome of the federal district court litigation regarding the method
CMS uses to determine this risk adjustment. On January 31, 2020, CMS issued the proposed annual Notice of Benefit and
Payment Parameters Rule for 2021, which, in part, sets the parameters for the risk adjustment program. In addition, CMS
published a final rule that would give states greater flexibility, starting in 2020, in setting benchmarks for insurers in the individual
and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for
plans sold through such marketplaces.
Moreover, on January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that
delayed the implementation of certain ACA-mandated fees, including the so called “Cadillac” tax on certain high cost employer-
sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the
medical device excise tax on non-exempt medical devices. However, on December 20, 2019, President Trump signed into law
the Further Consolidated Appropriations Act (H.R. 1865), which repeals the Cadillac tax, the health insurance provider tax, and
the medical device excise tax. It is impossible to determine whether similar taxes could be instated in the future. The Bipartisan
Budget Act of 2018, also amended the ACA, effective January 1, 2019, by increasing the point-of-sale discount that is owed by
pharmaceutical manufacturers who participate in Medicare Part D and closing the coverage gap in most Medicare drug plans,
commonly referred to as the “donut hole.” In December 2018, CMS published a final rule permitting further collections and
payments to and from certain ACA qualified health plans and health insurance issuers under the ACA risk adjustment program
in response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment.
On January 31, 2020, CMS issued the proposed annual Notice of Benefit and Payment Parameters Rule for 2021, which, in
part, will set the parameters for the risk adjustment program. In addition, CMS has published a final rule that
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would give states greater flexibility, starting in 2020, in setting benchmarks for insurers in the individual and small group
marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold through
such marketplaces. 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 to Medicare payments to
providers of 2% per fiscal year, which went into effect in April 2013 and, due to subsequent legislative amendments to the
statute, will remain in effect through 2029 unless additional Congressional action is taken. The American Taxpayer Relief Act of
2012, 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. These new laws and regulations may result in
additional reductions in Medicare and other healthcare funding and otherwise affect the prices we may obtain for any of our
product candidates for which we may obtain regulatory approval or the frequency with which any such product candidate is
prescribed or used.
There has been increasing legislative and enforcement interest in the United States with respect to drug pricing practices.
Specifically, there have been several recent U.S. Congressional inquiries and proposed federal and state legislation designed to,
among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, review the
relationship between pricing and manufacturer patient programs, and reform government program reimbursement
methodologies for drugs. At the federal level, the Trump administration’s budget proposal for fiscal years 2019 and 2020 contain
further drug price control measures that could be enacted during the budget process or in other future legislation, including, for
example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow
some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients.
Additionally, the Trump administration released a “Blueprint” to lower drug prices and reduce out of pocket costs of drugs
that contains additional proposals to increase drug manufacturer competition, increase the negotiating power of certain federal
healthcare programs, incentivize manufacturers to lower the list price of their products, and reduce the out of pocket costs of
drug products paid by consumers. HHS has already started the process of soliciting feedback on some of these measures and,
at the same time, is immediately implementing others under its existing authority. For example, in May 2019, CMS issued a final
rule to allow Medicare Advantage Plans the option of using step therapy for Part B drugs, effective January 1, 2020. This final
rule codified CMS’s policy change that was effective January 1, 2019. Congress and the Trump administration have each
indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. For example, on
September 25, 2019, the Senate Finance Committee introduced the Prescription Drug Pricing Reduction Act of 2019, a bill
intended to reduce Medicare and Medicaid prescription drug prices. The proposed legislation would restructure the Part D
benefit, modify payment methodologies for certain drugs, and impose an inflation cap on drug price increases. An even more
restrictive bill, the Lower Drug Costs Now Act of 2019, was introduced in the House of Representatives on September 19, 2019,
passed the House on December 12, 2019, and was received in the Senate four days later. This bill, if passed, would require the
HHS to directly negotiate drug prices with manufacturers. It is unclear whether either of these bills will be signed into law, and if
either is enacted, what effect it would have on our business.
In addition, individual states have also become increasingly active in passing legislation and 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, to encourage
importation from other countries and bulk purchasing.
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The pricing of prescription pharmaceuticals is also subject to governmental control outside the United States. In these
countries, pricing negotiations with governmental authorities can take considerable time after the receipt of regulatory approval
for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that
compares the cost-effectiveness of our product candidates to other available therapies. If reimbursement of our products is
unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our ability to generate revenues and
become profitable could be impaired.
There have been, and likely will continue to be, legislative and regulatory proposals at the foreign, federal and state levels
directed at containing or lowering the cost of healthcare. 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. Such reforms
could have an adverse effect on anticipated revenue from product candidates that we may successfully develop and for which
we may obtain regulatory approval and may affect our overall financial condition and ability to develop product candidates. We
cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance companies,
managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare and/or impose
price controls may adversely affect:
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the demand for our product candidates, if approved;
our ability to receive or set a price that we believe is fair for our products;
our ability to generate revenue and achieve or maintain profitability;
the amount of taxes that we are required to pay; and
the availability of capital.
We expect that the ACA, as well as other healthcare reform measures that may be adopted in the future, may result in
additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, lower reimbursement, and new
payment methodologies. This could lower the price that we receive for any approved product. Any denial in coverage or
reduction in reimbursement from Medicare or other government-funded programs may result in a similar denial or reduction in
payments from private payors, which may prevent us from being able to generate sufficient revenue, attain profitability or
commercialize our product candidates, if approved.
Governments outside the United States may impose strict price controls, which may adversely affect our revenues, if
any.
In some countries, including Member States of the European Union, the pricing of prescription drugs is subject to
governmental control. Additional countries may adopt similar approaches to the pricing of prescription drugs. In such countries,
pricing negotiations with governmental authorities can take considerable time after receipt of regulatory 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 countries and parallel distribution, or arbitrage between low-priced and high-priced countries, can further reduce
prices. In some countries, we may be required to conduct a clinical study or other studies that compare the cost-effectiveness of
any of our product candidates to other available therapies in order to obtain or maintain reimbursement or pricing approval,
which is time-consuming and costly. We cannot be sure that such prices and reimbursement will be acceptable to us or our
strategic partners. Publication of discounts by third-party payors or authorities may lead to further pressure on the prices or
reimbursement levels within the country of publication and other countries. If pricing is set at unsatisfactory levels or if
reimbursement of our products is unavailable or limited in scope or amount, our revenues from sales by us or our strategic
partners and the potential profitability of any of our product candidates in those countries would be negatively affected.
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Laws and regulations governing any international operations we may have in the future may preclude us from
developing, manufacturing and selling certain products outside of the United States and require us to develop and
implement costly compliance programs.
If we engage in operations outside of the United States, we must dedicate additional resources to comply with numerous
laws and regulations in each jurisdiction in which we plan to operate. The Foreign Corrupt Practices Act, or FCPA, prohibits any
U.S. individual or business from paying, offering, authorizing payment or offering of anything of value, directly or indirectly, to any
foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist
the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in
the United States to comply with certain accounting provisions requiring us to maintain books and records that accurately and
fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate
system of internal accounting controls for international operations.
Compliance with the FCPA is expensive and difficult, particularly in countries in which corruption is a recognized problem.
In addition, the FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are
operated by the government, and doctors and other hospital employees are considered foreign officials. Certain payments to
hospitals in connection with clinical trials and other work have been deemed to be improper payments to government officials
and have led to FCPA enforcement actions.
Various laws, regulations and executive orders, including export control and trade sanctions laws, also restrict the use and
dissemination outside of the United States, or the sharing with certain non-U.S. nationals, of information classified for national
security purposes, as well as certain products and technical data relating to those products. If we expand our presence outside
of the United States, it will require us to dedicate additional resources to comply with these laws, and these laws may preclude
us from developing, manufacturing, or selling certain products and product candidates outside of the United States, which could
limit our growth potential and increase our development costs.
The failure to comply with laws governing international business practices may result in substantial civil and criminal
penalties and suspension or debarment from government contracting. The Securities and Exchange Commission, or SEC, also
may suspend or bar issuers from trading securities on U.S. exchanges for violations of the FCPA’s accounting provisions.
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. From time to time and in
the future, our operations may involve the use of hazardous and flammable materials, including chemicals and biological
materials, and may also produce hazardous waste products. Even if we contract with third parties for the disposal of these
materials and waste products, we cannot completely eliminate the risk of contamination or injury resulting from these materials.
In the event of contamination or injury resulting from the use or disposal of our 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.
We maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our
employees, but this insurance may not provide adequate coverage against potential liabilities. However, we do not maintain
insurance for environmental liability or toxic tort claims that may be asserted against us.
In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws
and regulations. Environmental laws and regulations may impair our research, development or production efforts. In addition,
failure to comply with these laws and regulations may result in substantial fines, penalties or other sanctions.
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Risks Related to Our Dependence on Third Parties
We may seek to establish collaborations and, if we are not able to establish them on commercially reasonable terms,
we may have to alter our development and commercialization plans.
The advancement of our product candidates and development programs and the potential commercialization of our
current and future product candidates will require substantial additional cash to fund expenses. For some of our programs, we
may decide to collaborate with additional pharmaceutical and biotechnology companies with respect to development and
potential commercialization. Likely collaborators may include large and mid-size pharmaceutical companies, regional and
national pharmaceutical companies and biotechnology companies. In addition, if we are able to obtain regulatory approval for
product candidates from foreign regulatory authorities, we may enter into collaborations with international biotechnology or
pharmaceutical companies for the commercialization of such product candidates.
We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a
collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms
and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors
may include the potential differentiation of our product candidate from competing product candidates, design or results of clinical
trials, the likelihood of approval by the FDA or comparable foreign regulatory authorities and the regulatory pathway for any such
approval, the potential market for the product candidate, the costs and complexities of manufacturing and delivering the product
to patients and the potential of competing products. The collaborator may also consider alternative product candidates or
technologies for similar indications that may be available for collaboration and whether such a collaboration could be more
attractive than the one with us for our product candidate. If we elect to increase our expenditures to fund development or
commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on
acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop our product candidates or
bring them to market and generate product revenue.
Collaborations are complex and time-consuming to negotiate and document. Further, there have been a significant
number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of
potential future collaborators. Any collaboration agreements that we enter into in the future may contain restrictions on our ability
to enter into potential collaborations or to otherwise develop specified product candidates. We may not be able to negotiate
collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail the
development of the product candidate for which we are seeking to collaborate, reduce or delay its development program or one
or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing
activities, or increase our expenditures and undertake development or commercialization activities at our own expense.
If we enter into collaborations with third parties for the development and commercialization of our product candidates,
our prospects with respect to those product candidates will depend in significant part on the success of those
collaborations.
We may enter into collaborations for the development and commercialization of certain of our product candidates. If we
enter into such collaborations, we will have limited control over the amount and timing of resources that our collaborators will
dedicate to the development or commercialization of our product candidates. Our ability to generate revenues from these
arrangements will depend on any future collaborators’ abilities to successfully perform the functions assigned to them in these
arrangements. In addition, any future collaborators may have the right to abandon research or development projects and
terminate applicable agreements, including funding obligations, prior to or upon the expiration of the agreed upon terms.
Collaborations involving our product candidates pose a number of risks, including the following:
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collaborators have significant discretion in determining the efforts and resources that they will apply to these
collaborations;
collaborators may not perform their obligations as expected;
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collaborators may not pursue development and commercialization of our product candidates or may elect not to
continue or renew development or commercialization programs, based on clinical trial results, changes in the
collaborators’ strategic focus or available funding or external factors, such as an acquisition, that divert resources or
create competing priorities;
collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or
abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate
for clinical testing;
collaborators could independently develop, or develop with third parties, products that compete directly or indirectly
with our product candidates;
a collaborator with marketing and distribution rights to one or more products may not commit sufficient resources to
the marketing and distribution of such product or products;
disagreements with collaborators, including disagreements over proprietary rights, including trade secrets and
intellectual property rights, contract interpretation, or the preferred course of development might cause delays or
termination of the research, development or commercialization of product candidates, might lead to additional
responsibilities for us with respect to product candidates, or might result in litigation or arbitration, any of which would
be time-consuming and expensive;
collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary
information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property or proprietary
information or expose us to potential litigation;
collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and
potential liability; and
collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further
development or commercialization of the applicable product candidates.
Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient
manner or at all. If any future collaborator of ours is involved in a business combination, it could decide to delay, diminish or
terminate the development or commercialization of any product candidate licensed to it by us.
We rely on third parties to assist in conducting our clinical trials. If they do not perform satisfactorily, we may not be
able to obtain regulatory approval or commercialize our product candidates, or such approval or commercialization
may be delayed, and our business could be substantially harmed.
We have relied upon and plan to continue to rely on third parties, such as contract research organizations, clinical data
management organizations, medical institutions and clinical investigators, to conduct our clinical trials and expect to rely on
these third parties to conduct clinical trials of any other product candidate that we develop. Any of these third parties may
terminate their engagements with us under certain circumstances. We may not be able to enter into alternative arrangements or
do so on commercially reasonable terms. In addition, there is a natural transition period when a new CRO begins work. As a
result, delays may occur, which could negatively impact our ability to meet our expected clinical development timelines and harm
our business, financial condition and prospects.
Further, although our reliance on these third parties for clinical development activities limits our control over these
activities, we remain responsible for ensuring that each of our trials is conducted in accordance with the applicable protocol,
legal and regulatory requirements and scientific standards. Moreover, the FDA requires us to comply with Good Clinical
Practices, or GCPs, for conducting, recording and reporting the results of clinical trials to assure that data and reported results
are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. The FDA enforces
these GCPs through periodic inspections of trial sponsors, principal investigators, clinical trial sites and IRBs. If we or our third-
party contractors fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable
and the FDA may require us to perform additional clinical trials before approving our product candidates, which would delay the
regulatory approval process. We cannot be certain that, upon inspection, the FDA will determine that any of our clinical trials
comply with GCPs. We are also required to register certain clinical trials and post the results of completed clinical trials on a
government-sponsored database, ClinicalTrials.gov, within certain timeframes. Failure to do so can result in fines, adverse
publicity and civil and criminal sanctions.
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Furthermore, the third parties conducting clinical trials on our behalf are not our employees, and except for remedies
available to us under our agreements with such contractors, we cannot control whether or not they devote sufficient time, skill
and resources to our ongoing development programs. These contractors may also have relationships with other commercial
entities, including our competitors, for whom they may also be conducting clinical trials or other drug development activities,
which could impede their ability to devote appropriate time to our clinical programs. If these third parties, including clinical
investigators, do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in
accordance with regulatory requirements or our stated protocols, we may not be able to obtain, or may be delayed in obtaining,
regulatory approvals for our product candidates. If that occurs, we will not be able to, or may be delayed in our efforts to,
successfully commercialize our product candidates. In such an event, our financial results and the commercial prospects for any
product candidates that we seek to develop could be harmed, our costs could increase and our ability to generate revenues
could be delayed, impaired or foreclosed.
We also rely on other third parties to store and distribute drug supplies for our clinical trials. Any performance failure on the
part of our distributors could delay clinical development or regulatory approval of our product candidates or commercialization of
any resulting products, producing additional losses and depriving us of potential product revenue.
Our use of third parties to manufacture our product candidates may increase the risk that we will not have sufficient
quantities of our product candidates, products, or necessary quantities of such materials on time or at an acceptable
cost.
We do not own or operate manufacturing facilities for the production of clinical or commercial quantities of our product
candidates, and we lack the resources and the capabilities to do so. As a result, we currently rely on third parties for the
manufacture and supply of the active pharmaceutical ingredients, or APIs, in our product candidates. Our current strategy is to
outsource all manufacturing of our product candidates to third parties.
We currently engage third-party manufacturers to provide the APIs of KarXT and for the final drug product formulation of
KarXT that is being used in our clinical trials. Although we believe that there are several potential alternative manufacturers who
could manufacture KarXT, we may incur added costs and delays in identifying and qualifying any such replacement. In addition,
we typically order raw materials and services on a purchase order basis and do not enter into long-term dedicated capacity or
minimum supply arrangements with any commercial manufacturer. There is no assurance that we will be able to timely secure
needed supply arrangements on satisfactory terms, or at all. Our failure to secure these arrangements as needed could have a
material adverse effect on our ability to complete the development of our product candidates or, to commercialize them, if
approved. We may be unable to conclude agreements for commercial supply with third-party manufacturers, or may be unable
to do so on acceptable terms. There may be difficulties in scaling up to commercial quantities and formulation of KarXT, and the
costs of manufacturing could be prohibitive.
Even if we are able to establish and maintain arrangements with third-party manufacturers, reliance on third-party
manufacturers entails additional risks, including:
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the failure of the third-party manufacturer to comply with applicable regulatory requirements and reliance on third-
parties for manufacturing process development, regulatory compliance and quality assurance;
• manufacturing delays if our third-party manufacturers give greater priority to the supply of other products over our
product candidates or otherwise do not satisfactorily perform according to the terms of the agreement between us;
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limitations on supply availability resulting from capacity and scheduling constraints of third-parties;
the possible breach of manufacturing agreements by third-parties because of factors beyond our control;
the possible termination or non-renewal of the manufacturing agreements by the third-party, at a time that is costly or
inconvenient to us; and
the possible misappropriation of our proprietary information, including our trade secrets and know-how.
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If we do not maintain our key manufacturing relationships, we may fail to find replacement manufacturers or develop our
own manufacturing capabilities, which could delay or impair our ability to obtain regulatory approval for our products. If we do
find replacement manufacturers, we may not be able to enter into agreements with them on terms and conditions favorable to us
and there could be a substantial delay before new facilities could be qualified and registered with the FDA and other foreign
regulatory authorities.
Our third-party manufacturers may be subject to damage or interruption from, among other things, fire, natural or man-
made disaster, power loss, telecommunications failure, unauthorized entry, computer viruses, denial-of-service attacks, acts of
terrorism, human error, vandalism or sabotage, financial insolvency, bankruptcy and similar events. For example, in December
2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China. The extent to which the novel
coronavirus may impact our results will depend on future developments, which are highly uncertain and cannot be predicted,
including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat
its impact, among others.
If KarXT for any of our initial or potential additional indications or any other product candidate is approved by any
regulatory agency, we intend to utilize arrangements with third-party contract manufacturers for the commercial production of
those products. This process is difficult and time consuming and we may face competition for access to manufacturing facilities
as there are a limited number of contract manufacturers operating under cGMPs that are capable of manufacturing our product
candidates. Consequently, we may not be able to reach agreement with third-party manufacturers on satisfactory terms, which
could delay our commercialization.
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,
seizures or voluntary recalls of product candidates, operating restrictions and criminal prosecutions, any of which could
significantly affect supplies of our product candidates. The facilities used by our contract manufacturers to manufacture our
product candidates must be evaluated by the FDA. We do not control the manufacturing process of, and are completely
dependent on, our contract manufacturing partners for compliance with cGMPs. If our contract manufacturers cannot
successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or
others, we may not be able to secure and/or maintain regulatory approval for our product manufactured at these facilities. In
addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality
assurance and qualified personnel. If the FDA finds deficiencies or a comparable foreign regulatory authority does not approve
these facilities for the manufacture of our product candidates or if it withdraws any such approval in the future, we may need to
find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or
market our product candidates, if approved. Contract manufacturers may face manufacturing or quality control problems causing
drug substance production and shipment delays or a situation where the contractor may not be able to maintain compliance with
the applicable cGMP requirements. Any failure to comply with cGMP requirements or other FDA, EMA and comparable foreign
regulatory requirements could adversely affect our clinical research activities and our ability to develop our product candidates
and market our products, if approved.
The FDA and other foreign regulatory authorities require manufacturers to register manufacturing facilities. The FDA and
corresponding foreign regulators also inspect these facilities to confirm compliance with cGMPs. Contract manufacturers may
face manufacturing or quality control problems causing drug substance production and shipment delays or a situation where the
contractor may not be able to maintain compliance with the applicable cGMP requirements. Any failure to comply with cGMP
requirements or other FDA, EMA and comparable foreign regulatory requirements could adversely affect our clinical research
activities and our ability to develop our product candidates and market our products following approval.
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If any third-party manufacturer of our product candidates is unable to increase the scale of its production of our
product candidates, and/or increase the product yield of its manufacturing, then our costs to manufacture the product
may increase and commercialization may be delayed.
In order to produce sufficient quantities to meet the demand for clinical trials and, if approved, subsequent
commercialization of KarXT, or any other product candidates that we may develop, our third-party manufacturers will be required
to increase their production and optimize their manufacturing processes while maintaining the quality of the product. The
transition to larger scale production could prove difficult. In addition, if our third party manufacturers are not able to optimize their
manufacturing processes to increase the product yield for our product candidates, or if they are unable to produce increased
amounts of our product candidates while maintaining the quality of the product, then we may not be able to meet the demands
of clinical trials or market demands, which could decrease our ability to generate profits and have a material adverse impact on
our business and results of operation.
We may need to maintain licenses for active ingredients from third parties to develop and commercialize some of our
product candidates, which could increase our development costs and delay our ability to commercialize those product
candidates.
Should we decide to use API in any of our product candidates that are proprietary to one or more third parties, we would
need to maintain licenses to those active ingredients from those third parties. If we are unable to gain or continue to access
rights to these active ingredients prior to conducting preclinical toxicology studies intended to support clinical trials, we may need
to develop alternate product candidates from these programs by either accessing or developing alternate active ingredients,
resulting in increased development costs and delays in commercialization of these product candidates. If we are unable to gain
or maintain continued access rights to the desired active ingredients on commercially reasonable terms or develop suitable
alternate active ingredients, we may not be able to commercialize product candidates from these programs.
Use of third parties to conduct testing of our product candidates in tissues or animals may increase the risk that we
will have unsuitable or invalidated data for regulatory submissions and approval.
We currently do not own or operate laboratory facilities in which to conduct preclinical testing of our product candidates in
tissues or animals. Preclinical studies regulated by FDA, EMA and most other health authorities are governed by Good
Laboratory Practices, or GLP. Additionally, studies involving animals may be subject to further regulation by institutional, private
or government animal welfare authorities that may vary by territory. Studies involving human tissues may also be subject to
institutional and government human subject privacy policies that may vary by territory. Third party vendors conducting tissue
and/or animal studies on our behalf may be found to be in violation of one or more of these regulations or policies and may be
subject to closure, censure or other penalties. In some cases, these penalties could materially impact the performance,
availability, or validity of studies conducted on our behalf. Even in the absence of violations resulting in penalties, regulatory and
other authorities may refuse to authorize the conduct or to accept the results of studies for regulatory or ethical reasons.
Cyber-attacks or other failures in our telecommunications or information technology systems, or those of our
collaborators, contract research organizations, third-party logistics providers, distributors or other contractors or
consultants, could result in information theft, data corruption and significant disruption of our business operations.
We, our collaborators, our CROs, third-party logistics providers, distributors and other contractors and consultants utilize
information technology, or IT, systems and networks to process, transmit and store electronic information in connection with our
business activities. As use of digital technologies has increased, cyber incidents, including third parties gaining access to
employee accounts using stolen or inferred credentials, computer malware, viruses, spamming, phishing attacks or other
means, and deliberate attacks and attempts to gain unauthorized access to computer systems and networks, have increased in
frequency and sophistication. These threats pose a risk to the security of our, our collaborators’, our CROs’, third-party logistics
providers’, distributors’ and other contractors’ and consultants’ systems and networks, and the confidentiality, availability and
integrity of our data. There can be no assurance that we will be successful in preventing cyber-attacks or successfully mitigating
their effects. Similarly, there can be no assurance that our
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collaborators, CROs, third-party logistics providers, distributors and other contractors and consultants will be successful in
protecting our clinical and other data that is stored on their systems. Any cyber-attack, data breach or destruction or loss of data
could result in a violation of applicable U.S. and international privacy, data protection and other laws, and subject us to litigation
and governmental investigations and proceedings by federal, state and local regulatory entities in the United States and by
international regulatory entities, resulting in exposure to material civil and/or criminal liability. Further, our general liability
insurance and corporate risk program may not cover all potential claims to which we are exposed and may not be adequate to
indemnify us for all liability that maybe imposed; and could have a material adverse effect on our business and prospects. For
example, the loss of clinical trial data from completed, ongoing or planned clinical trials for any of our product candidates could
result in delays in our development and regulatory approval efforts and significantly increase our costs to recover or reproduce
the data. In addition, we may suffer reputational harm or face litigation or adverse regulatory action as a result of cyber-attacks
or other data security breaches and may incur significant additional expense to implement further data protection measures.
Risks Related to Our Intellectual Property
Our commercial success depends on our ability to protect our intellectual property and proprietary technology.
Our commercial success depends in large part on our ability to obtain and maintain intellectual property rights protection
through patents, trademarks, and trade secrets in the United States and other countries with respect to our proprietary product
candidates. If we do not adequately protect our intellectual property rights, competitors may be able to erode, negate or preempt
any competitive advantage we may have, which could harm our business and ability to achieve profitability. To protect our
proprietary position, we have patent applications and may file other patent applications in the United States or abroad related to
our product candidates that are important to our business; we may also license or purchase patent applications filed by others.
The patent application and approval process is expensive and time-consuming. We may not be able to file and prosecute all
necessary or desirable patent applications at a reasonable cost or in a timely manner.
Agreements through which we license patent rights may not give us control over patent prosecution or maintenance, so
that we may not be able to control which claims or arguments are presented, how claims are amended, and may not be able to
secure, maintain, or successfully enforce necessary or desirable patent protection from those patent rights. We may not have
primary control over patent prosecution and maintenance for certain of the patents and patent applications we may license in the
future, and therefore cannot guarantee that these patents and applications will be prosecuted or maintained in a manner
consistent with the best interests of our business. We cannot be certain that patent prosecution and maintenance activities by
our licensor or future licensor have been or will be conducted in compliance with applicable laws and regulations or will result in
valid and enforceable patents.
If the scope of the patent protection we or our future licensors obtain is not sufficiently broad, we may not be able to
prevent others from developing and commercializing technology and products similar or identical to ours. The degree of patent
protection we require to successfully compete in the marketplace may be unavailable or severely limited in some cases and may
not adequately protect our rights or permit us to gain or keep any competitive advantage. We cannot provide any assurances
that any of our licensed patents have, or that any of our pending owned or licensed patent applications that mature into issued
patents will include, claims with a scope sufficient to protect our proprietary platform or otherwise provide any competitive
advantage, nor can we assure you that our licenses are or will remain in force. Other parties have developed or may develop
technologies that may be related or competitive with our approach, and may have filed or may file patent applications and may
have been issued or may be issued patents with claims that overlap or conflict with our patent applications, either by claiming
the same compounds, formulations or methods or by claiming subject matter that could dominate our patent position. In
addition, the laws of foreign countries may not protect our rights to the same extent as the laws of the United States.
Furthermore, patents have a limited lifespan. In the United States, the natural expiration of a patent is generally twenty years
after it is filed. Various extensions may be available; however, the life of a patent, and the protection it affords, is limited. Given
the
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amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such
candidates might expire before or shortly after such candidates are commercialized. As a result, our patent portfolio may not
provide us with adequate and continuing patent protection sufficient to exclude others from commercializing products similar to
our product candidates.
Even if they are unchallenged, our owned and licensed patent and pending patent applications, if issued, may not provide
us with any meaningful protection or prevent competitors from designing around our patent claims to circumvent our patents by
developing similar or alternative technologies or therapeutics in a non-infringing manner. For example, a third party may develop
a competitive therapy that provides benefits similar to our product candidate but falls outside the scope of our patent protection
or license rights. If the patent protection provided by the patent and patent applications we hold or pursue with respect to our
product candidates is not sufficiently broad to impede such competition, our ability to successfully commercialize our product
candidate could be negatively affected, which would harm our business. Currently, a significant portion of our patents and patent
applications are in-licensed, though similar risks would apply to any patents or patent applications that we now own or may own
or in-license in the future.
We, or any future partners, collaborators, or licensees, may fail to identify patentable aspects of inventions made in the
course of development and commercialization activities before it is too late to obtain patent protection on them. Therefore, we
may miss potential opportunities to strengthen our patent position.
It is possible that defects of form in the preparation or filing of our patent or patent applications may exist, or may arise in
the future, for example with respect to proper priority claims, inventorship, claim scope, or requests for patent term adjustments.
If we or our partners, collaborators, licensees, or licensors, whether current or future, fail to establish, maintain or protect such
patents and other intellectual property rights, such rights may be reduced or eliminated. If our partners, collaborators, licensees,
or licensors, are not fully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent
rights, such patent rights could be compromised. If there are material defects in the form, preparation, prosecution, or
enforcement of our patents or patent applications, such patents may be invalid and/or unenforceable, and such applications may
never result in valid, enforceable patents. Any of these outcomes could impair our ability to prevent competition from third
parties, which may have an adverse impact on our business.
The patent position of biotechnology and pharmaceutical companies carries uncertainty. In addition, the determination of
patent rights with respect to pharmaceutical compounds commonly involves complex legal and factual questions, which are
dependent upon the current legal and intellectual property context, extant legal precedent and interpretations of the law by
individuals. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are characterized
by uncertainty.
Pending patent applications cannot be enforced against third parties practicing the technology claimed in such
applications unless and until a patent issues from such applications. Assuming the other requirements for patentability are met,
currently, the first to file a patent application is generally entitled to the patent. However, prior to March 16, 2013, in the United
States, the first to invent was entitled to the patent. Publications of discoveries in the scientific literature often lag behind the
actual discoveries, and patent applications in the United States and other jurisdictions are not published until 18 months after
filing, or in some cases not at all. Therefore, we cannot be certain that we were the first to make the inventions claimed in our
patent or pending patent applications, or that we were the first to file for patent protection of such inventions. Similarly, we
cannot be certain that parties from whom we do or may license or purchase patent rights were the first to make relevant claimed
inventions, or were the first to file for patent protection for them. If third parties have filed prior patent applications on inventions
claimed in our patents or applications that were filed on or before March 15, 2013, an interference proceeding in the United
States can be initiated by such third parties to determine who was the first to invent any of the subject matter covered by the
patent claims of our applications. If third parties have filed such prior applications after March 15, 2013, a derivation proceeding
in the United States can be initiated by such third parties to determine whether our invention was derived from theirs.
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Moreover, because the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, our
patents or pending patent applications may be challenged in the courts or patent offices in the United States and abroad. There
is no assurance that all of the potentially relevant prior art relating to our patents and patent applications has been found.
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 our patents or pending
patent applications, or that we were the first to file for patent protection of such inventions. If such prior art exists, it may be used
to invalidate a patent, or may prevent a patent from issuing from a pending patent application. For example, such patent filings
may be subject to a third-party submission of prior art to the U.S. Patent and Trademark Office, or USPTO, or to other patent
offices around the world. Alternately or additionally, we may become involved in post-grant review procedures, oppositions,
derivation proceedings, ex parte reexaminations, inter partes review, supplemental examinations, or interference proceedings or
challenges in district court, in the United States or in various foreign patent offices, including both national and regional,
challenging patents or patent applications in which we have rights, including patents on which we rely to protect our business.
An adverse determination in any such challenges may result in loss of the patent or in patent or patent application claims being
narrowed, invalidated or held unenforceable, in whole or in part, or in denial of the patent application or loss or reduction in the
scope of one or more claims of the patent or patent application, any of which could limit our ability to stop others from using or
commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and
products. In addition, given the amount of time required for the development, testing and regulatory review of new product
candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized.
Pending and future patent applications may not result in patents being issued that protect our business, in whole or in part,
or which effectively prevent others from commercializing competitive products. Competitors may also be able to design around
our patents. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may
diminish the value of our patents or narrow the scope of our patent protection. In addition, the laws of foreign countries may not
protect our rights to the same extent or in the same manner as the laws of the United States. For example, patent laws in
various jurisdictions, including significant commercial markets such as Europe, restrict the patentability of methods of treatment
of the human body more than United States law does. If these developments were to occur, they could have a material adverse
effect on our ability to generate revenue.
The patent application process is subject to numerous risks and uncertainties, and there can be no assurance that we or
any of our future development partners will be successful in protecting our product candidates by obtaining and defending
patents. These risks and uncertainties include the following:
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the USPTO and various foreign governmental patent agencies require compliance with a number of procedural,
documentary, fee payment and other provisions during the patent process. There are situations in which
noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete
loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier
than would otherwise have been the case;
patent applications may not result in any patents being issued;
patents that may be issued or in-licensed may be challenged, invalidated, modified, revoked, circumvented, found to
be unenforceable or otherwise may not provide any competitive advantage;
our competitors, many of whom have substantially greater resources and many of whom have made significant
investments in competing technologies, may seek or may have already obtained patents that will limit, interfere with or
eliminate our ability to make, use, and sell our product candidates;
there may be significant pressure on the U.S. government and international governmental bodies to limit the scope of
patent protection both inside and outside the United States for disease treatments that prove successful, as a matter
of public policy regarding worldwide health concerns; and
countries other than the United States may have patent laws less favorable to patentees than those upheld by U.S.
courts, allowing foreign competitors a better opportunity to create, develop and market competing product candidates.
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Issued patents that we have or may obtain or license may not provide us with any meaningful protection, prevent
competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to
circumvent our patents by developing similar or alternative technologies or products in a non-infringing manner. Our competitors
may also seek approval to market their own products similar to or otherwise competitive with our products. Alternatively, our
competitors may seek to market generic versions of any approved products by submitting ANDAs to the FDA in which they claim
that patents owned or licensed by us are invalid, unenforceable or not infringed. In these circumstances, we may need to defend
or assert our patents, or both, including by filing lawsuits alleging patent infringement. In any of these types of proceedings, a
court or other agency with jurisdiction may find our patents invalid or unenforceable, or that our competitors are competing in a
non-infringing manner. Thus, even if we have valid and enforceable patents, these patents still may not provide protection
against competing products or processes sufficient to achieve our business objectives.
In addition, we rely on the protection of our trade secrets and proprietary, unpatented know-how. Although we have taken
steps to protect our trade secrets and unpatented know-how, including entering into confidentiality agreements with third parties,
and confidential information and invention assignment agreements with employees, consultants, collaborators, vendors, and
advisors, we cannot provide any assurances that all such agreements have been duly executed, and third parties may still
obtain this information or may come upon this or similar information independently. It is possible that technology relevant to our
business will be independently developed by a person who is not a party to such a confidentiality or invention assignment
agreement. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by
consultants, collaborators, vendors, advisors, former employees and current employees. Furthermore, if the parties to our
confidentiality agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such
breach or violation, and we could lose our trade secrets as a consequence of such breaches or violations. Our trade secrets
could otherwise become known or be independently discovered by our competitors. Additionally, if the steps taken to maintain
our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating our trade
secrets. If any of these events occurs or if we otherwise lose protection for our trade secrets or proprietary know-how, our
business may be harmed.
If we fail to comply with our obligations in our current and future intellectual property licenses with third parties, we
could lose rights that are important to our business.
We are party to a patent license agreement with PureTech Health that provides us with intellectual property rights relating
to KarXT. This license agreement imposes milestone payment, royalty and other obligations on us. If we fail to comply with our
obligations, including achieving specified milestone events, PureTech Health may have the right to terminate this license, in
which event we might not be able to develop, manufacture or market any product that is covered by the intellectual property we
in-license from PureTech Health and may face other penalties. Such an occurrence would materially adversely affect our
business prospects. For a variety of purposes, we will likely enter into additional licensing and funding arrangements with third
parties that may also impose similar obligations on us.
Termination of any of our current or future in-licenses would reduce or eliminate our rights under these agreements and
may result in our having to negotiate new or reinstated agreements with less favorable terms or cause us to lose our rights
under these agreements, including our rights to important intellectual property or technology. Any of the foregoing could prevent
us from commercializing our product candidate, which could have a material adverse effect on our operating results and overall
financial condition.
In addition to the above risks, intellectual property rights that we license in the future may include sublicenses under
intellectual property owned by third parties, in some cases through multiple tiers. The actions of our future licensors may
therefore affect our rights to use our sublicensed intellectual property, even if we are in compliance with all of the obligations
under our license agreements. Should our licensor or any of the upstream licensors fail to comply with their obligations under
the agreements pursuant to which they obtain the rights that are sublicensed to us, or should such agreements be terminated or
amended, our ability to develop and commercialize our product candidates may be materially harmed.
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Moreover, disputes may arise regarding intellectual property subject to a licensing agreement, including:
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the scope of rights granted under the license agreement and other interpretation-related issues;
the extent to which our product candidates, technology and processes infringe on intellectual property of the licensor
that is not subject to the licensing agreement;
the sublicensing of patent and other rights under our collaborative development relationships;
our diligence obligations under the license agreement and what activities satisfy those diligence obligations;
the inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual
property by our licensors and us and our partners; and
the priority of invention of patented technology.
In addition, the agreements under which we currently license intellectual property or technology from third parties are
complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any
contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant
intellectual property or technology, or increase what we believe to be our financial or other obligations under the relevant
agreement, either of which could have a material adverse effect on our business, financial condition, results of operations, and
prospects. Moreover, if disputes over intellectual property that we have licensed prevent or impair our ability to maintain our
current licensing arrangements on commercially acceptable terms, we may be unable to successfully develop and
commercialize the affected product candidates, which could have a material adverse effect on our business, financial conditions,
results of operations, and prospects.
It is difficult and costly to protect our intellectual property and our proprietary technologies, and we may not be able to
ensure their protection.
Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection for
the use, formulation and structure of our product candidate, and associated methods of treatment as well as on successfully
defending these patents against potential third-party challenges. Our ability to protect our product candidate from unauthorized
making, using, selling, offering to sell or importing by third parties is dependent on the extent to which we have rights under valid
and enforceable patents that cover these activities.
The patent positions of pharmaceutical, biotechnology and other life sciences companies can be highly uncertain and
involve complex legal and factual questions for which important legal principles remain unresolved and have in recent years
been the subject of much litigation. Changes in either the patent laws or in interpretations of patent laws in the United States and
other countries may diminish the value of our intellectual property. Further, the determination that a patent application or patent
claim meets all of the requirements for patentability is a subjective determination based on the application of law and
jurisprudence. The ultimate determination by the USPTO or by a court or other trier of fact in the United States, or corresponding
foreign national patent offices or courts, on whether a claim meets all requirements of patentability cannot be assured. Although
we have conducted searches for third-party publications, patents and other information that may affect the patentability of claims
in our various patent applications and patents, we cannot be certain that all relevant information has been identified.
Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our owned patents or patent
applications, in our licensed patents or patent applications or in third-party patents.
We cannot provide assurances that any of our patent applications will be found to be patentable, including over our own or
our licensors’ prior art publications or patent literature, or will issue as patents. Neither can we make assurances as to the scope
of any claims that may issue from our pending and future patent applications nor to the outcome of any proceedings by any
potential third parties that could challenge the patentability, validity or enforceability of our patents and patent applications in the
United States or foreign jurisdictions. Any such challenge, if successful, could limit patent protection for our products and
product candidates and/or materially harm our business.
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The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection
and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:
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we may not be able to generate sufficient data to support full patent applications that protect the entire breadth of
developments in one or more of our programs;
it is possible that one or more of our pending patent applications will not become an issued patent or, if issued, that the
patent(s) claims will have sufficient scope to protect our technology, provide us with a basis for commercially viable
products or provide us with any competitive advantages;
if our pending applications issue as patents, they may be challenged by third parties as not infringed, invalid or
unenforceable under United States or foreign laws;
if issued, the patents under which we hold rights may not be valid or enforceable;
we may not successfully commercialize KarXT, if approved, before our relevant patents expire;
we may not be the first to make the inventions covered by each of our patents and pending patent applications; or
we may not develop additional proprietary technologies or product candidates that are separately patentable.
In addition, to the extent that we are unable to obtain and maintain patent protection for one of our products or product
candidates or in the event that such patent protection expires, it may no longer be cost-effective to extend our portfolio by
pursuing additional development of a product or product candidate for follow-on indications.
If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially
adversely affected and our business would be harmed.
In addition to patents, we also may rely on trade secrets to protect our technologies or products, especially where we do
not believe patent protection is appropriate or obtainable. Also, we cannot provide any assurances that any of our licensed
patents have claims with a scope sufficient to protect our technology or otherwise provide any competitive advantage, nor can
we assure you that our licenses are or will remain in full force or effect, in which case we would similarly rely on trade secrets.
However, trade secrets are difficult to protect. We seek to protect our confidential proprietary information, in part, by
confidentiality agreements and invention assignment agreements with our employees, consultants, scientific advisors,
contractors and collaborators. These agreements are designed to protect our proprietary information. However, we cannot be
certain that such agreements have been entered into with all relevant parties, and we cannot be certain that our trade secrets
and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade
secrets or independently develop substantially equivalent information and techniques. For example, our employees, consultants,
contractors, outside scientific collaborators and other advisers may unintentionally or willfully disclose our information to
competitors. Enforcing a claim that a third-party entity illegally obtained and is using any of our trade secrets is expensive and
time-consuming, and the outcome is unpredictable, and we may not be able to obtain adequate remedies for such breaches. We
also seek to preserve the integrity and confidentiality of our confidential proprietary information by maintaining physical security
of our premises and physical and electronic security of our information technology systems, but it is possible that these security
measures could be breached. In addition, courts outside the United States are sometimes less willing to protect trade secrets.
Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. Notably, proprietary
technology protected by a trade secret does not preempt the patenting of independently developed equivalent technology, even
if such equivalent technology is invented subsequent to the technology protected by a trade secret. If any of our confidential
proprietary information were to be lawfully obtained or independently developed by a competitor, we would have no right to
prevent such competitor from using that technology or information to compete with us, which could harm our competitive
position.
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Obtaining and maintaining patent protection depends on compliance with various procedural, document submission,
fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be
reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and applications
are required to be paid to the USPTO and various governmental patent agencies outside of the United States in several stages
over the lifetime of the patents and applications. The USPTO and various non-U.S. governmental patent agencies require
compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application
process and after a patent has issued. There are situations in which non-compliance can result in abandonment or lapse of the
patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such a
circumstance, competitors may be able to enter the market earlier than otherwise would be the case. Under the terms of some
of our current and future licenses, we may not have the ability to maintain patents or prosecute patent applications in the
portfolio, and may therefore have to rely on third parties to comply with these requirements.
Patent terms may be inadequate to protect our competitive position on our products for an adequate amount of time.
Patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a
patent is generally 20 years from its earliest non-provisional filing date. Various extensions may be available, but the life of a
patent, and the protection it affords, is limited. Given the amount of time required for the development, testing and regulatory
review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are
commercialized. We expect to seek extensions of patent terms in the United States and, if available, in other countries where we
are prosecuting patents. In the United States, the Drug Price Competition and Patent Term Restoration Act of 1984 permits a
patent term extension of up to seven and a half years beyond the normal expiration of the patent, which is limited to the
approved indication (or any additional indications approved during the period of extension). We might not be granted an
extension because of, for example, failure to apply within applicable periods, failure to apply prior to the expiration of relevant
patents or otherwise failure to satisfy any of the numerous applicable requirements. Moreover, the applicable authorities,
including the FDA and the USPTO in the United States, and any equivalent regulatory authority in other countries, may not
agree with our assessment of whether such extensions are available, and may refuse to grant extensions to our patents, or may
grant more limited extensions than we request. If this occurs, our competitors may be able to obtain approval of competing
products following our patent expiration by referencing our clinical and preclinical data and launch their product earlier than
might otherwise be the case. If this were to occur, it could have a material adverse effect on our ability to generate revenue.
Changes to 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 biopharmaceutical companies, our commercial success is heavily dependent on intellectual
property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involves both technological and
legal complexity and is therefore costly, time consuming and inherently uncertain. Wide-ranging patent reform legislation in the
United States, including the Leahy-Smith America Invents Act, or the America Invents Act, could increase those uncertainties
and costs. The America Invents Act was signed into law on September 16, 2011, and many of the substantive changes became
effective on March 16, 2013. The America Invents Act reforms United States patent law in part by changing the U.S. patent
system from a “first to invent” system to a “first inventor to file” system, expanding the definition of prior art, and developing a
post-grant review system. This legislation changes United States patent law in a way that may weaken our ability to obtain
patent protection in the United States for those applications filed after March 16, 2013.
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Further, the America Invents Act created new procedures to challenge the validity of issued patents in the United States,
including post-grant review and inter partes review proceedings, which some third parties have been using to cause the
cancellation of selected or all claims of issued patents of competitors. For a patent filed March 16, 2013 or later, a petition for
post-grant review can be filed by a third party in a nine-month window from issuance of the patent. A petition for inter partes
review can be filed immediately following the issuance of a patent if the patent has an effective filing date prior to March 16,
2013. A petition for inter partes review can be filed after the nine-month period for filing a post-grant review petition has expired
for a patent with an effective filing date of March 16, 2013 or later. Post-grant review proceedings can be brought on any ground
of invalidity, whereas inter partes review proceedings can only raise an invalidity challenge based on published prior art and
patents. These adversarial actions at the USPTO review patent claims without the presumption of validity afforded to U.S.
patents in lawsuits in U.S. federal courts, and use a lower burden of proof than used in litigation in U.S. federal courts.
Therefore, it is generally considered easier for a competitor or third party to have a U.S. patent invalidated in a USPTO post-
grant review or inter partes review proceeding than invalidated in a litigation in a U.S. federal court. If any of our patents are
challenged by a third party in such a USPTO proceeding, there is no guarantee that we or our licensors or collaborators will be
successful in defending the patent, which may result in a loss of the challenged patent right to us.
In addition, recent court rulings in cases such as Association for Molecular Pathology v. Myriad Genetics, Inc., BRCA1- &
BRCA2-Based Hereditary Cancer Test Patent Litigation, and Promega Corp. v. Life Technologies Corp. have narrowed the
scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. In
addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created
uncertainty with respect to the value of patents once obtained. Depending on 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.
We may not be able to enforce our intellectual property rights throughout the world.
Filing, prosecuting, enforcing and defending patents on our product candidate in all countries throughout the world would
be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive
than those in the United States. The requirements for patentability may differ in certain countries, particularly in developing
countries; thus, even in countries where we do pursue patent protection, there can be no assurance that any patents will issue
with claims that cover our products.
Moreover, our ability to protect and enforce our intellectual property rights may be adversely affected by unforeseen
changes in foreign intellectual property laws. Additionally, laws of some countries outside of the United States and Europe do
not afford intellectual property protection to the same extent as the laws of the United States and Europe. Many companies have
encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal
systems of some countries, including India, China and other developing countries, do not favor the enforcement of patents and
other intellectual property rights. This could make it difficult for us to stop the infringement of our patents 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. Consequently, we may not be able to prevent third parties from practicing our
inventions in certain countries outside the United States and Europe or from selling or importing products made from our
inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we
have not obtained patent protection to develop and market their own products and, further, may export otherwise infringing
products to territories where we have patent protection, if our ability to enforce our patents to stop infringing activities is
inadequate. 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.
Agreements through which we license patent rights may not give us sufficient rights to permit us to pursue enforcement of
our licensed patents or defense of any claims asserting the invalidity of these patents (or control of such enforcement or
defense) of such patent rights in all relevant jurisdictions as requirements may vary.
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Proceedings to enforce our patent rights, whether or not successful, could result in substantial costs and divert our efforts
and resources from other aspects of our business. Moreover, such proceedings could put our patents at risk of being invalidated
or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against
us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be
commercially meaningful. Furthermore, while we intend to protect our intellectual property rights in major markets for our
products, we cannot ensure that we will be able to initiate or maintain similar efforts in all jurisdictions in which we may wish to
market our products, if approved. Accordingly, our efforts to protect our intellectual property rights in such countries may be
inadequate.
Others may challenge inventorship or claim an ownership interest in our intellectual property which could expose it to
litigation and have a significant adverse effect on its prospects.
A third party or former employee or collaborator may claim an inventorship or ownership interest in one or more of our or
our licensors’ patents or other proprietary or intellectual property rights. A third party could bring legal actions against us and
seek monetary damages and/or enjoin clinical testing, manufacturing and marketing of the affected product or products. While
we are presently unaware of any claims or assertions by third-parties with respect to our patents or other intellectual property,
we cannot guarantee that a third party will not assert a claim or an interest in any of such patents or intellectual property. If we or
our licensors 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, intellectual property that is important to our product candidates.
Further, regardless of the outcome, if we become involved in any litigation, it could consume a substantial portion of our
resources, and cause a significant diversion of effort by our technical and management personnel.
If we are sued for infringing intellectual property rights of third parties, such litigation could be costly and time
consuming and could prevent or delay us from developing or commercializing our product candidates.
Our commercial success depends, in part, on our ability to develop, manufacture, market and sell our product candidate
without infringing the intellectual property and other proprietary rights of third parties. However, our research, development and
commercialization activities may be subject to claims that we infringe or otherwise violate patents or other intellectual property
rights owned or controlled by third parties. Third parties may have U.S. and non-U.S. issued patents and pending patent
applications relating to compounds, methods of manufacturing compounds and/or methods of use for the treatment of the
disease indications for which we are developing our product candidates. If any third-party patents or patent applications are
found to cover our product candidates or their methods of use or manufacture, we may not be free to manufacture or market our
product candidates as planned without obtaining a license, which may not be available on commercially reasonable terms, or at
all.
There is a substantial amount of intellectual property litigation in the biotechnology and pharmaceutical industries, and we
may become party to, or threatened with, litigation or other adversarial proceedings regarding intellectual property rights with
respect to our products candidates, including patent infringement lawsuits in the US or abroad, as well as interference,
derivation, inter partes review, and post-grant proceedings before the USPTO and opposition or other proceedings before
corresponding foreign patent offices. There may be third-party patents or patent applications with claims to materials,
formulations, methods of manufacture or methods for treatment related to the composition, use or manufacture of our product
candidates. We cannot guarantee that any of our patent searches or analyses including, but not limited to, the identification of
relevant patents, the scope of patent claims or the expiration of relevant patents are complete or thorough, nor can we be
certain that we have identified each and every patent and pending application in the United States and abroad that is relevant to
or necessary for the commercialization of our product candidates in any jurisdiction. Because patent applications can take many
years to issue, there may be currently pending patent applications which may later result in issued patents that our product
candidates may be accused of infringing. In addition, third parties may obtain patents in the future and claim that use of our
technologies infringes upon these patents. Accordingly, third parties may assert infringement claims against us
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based on intellectual property rights that exist now or arise in the future. The outcome of intellectual property litigation is subject
to uncertainties that cannot be adequately quantified in advance. The pharmaceutical and biotechnology industries have
produced a significant number of patents, and it may not always be clear to industry participants, including us, which patents
cover various types of products or methods of use or manufacture. The scope of protection afforded by a patent is subject to
interpretation by the courts, and the interpretation is not always uniform. If we were sued for patent infringement, we would need
to demonstrate that our product candidates, products or methods either do not infringe the patent claims of the relevant patent
or that the patent claims are invalid or unenforceable, and we may not be able to do this. Proving invalidity is difficult. For
example, in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome the
presumption of validity enjoyed by issued patents. Even if we are successful in these proceedings, we may incur substantial
costs and the time and attention of our management and scientific personnel could be diverted in pursuing these proceedings,
which could significantly harm our business and operating results. In addition, parties making claims against us may be able to
sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources,
and we may not have sufficient resources to bring these actions to a successful conclusion.
If we are found to infringe a third party’s intellectual property rights, we could be forced, including by court order, to cease
developing, manufacturing or commercializing the infringing product candidate or product. Alternatively, we may be required to
obtain a license from such third party in order to use the infringing technology and continue developing, manufacturing or
marketing the infringing product candidate or product. If we were required to obtain a license to continue to manufacture or
market the affected product, we may be required to pay substantial royalties or grant cross-licenses to our patents. We cannot,
however, assure you that any such license will be available on acceptable terms, if at all. Ultimately, we could be prevented from
commercializing a product, or be forced to cease some aspect of our business operations as a result of claims of patent
infringement or violation of other intellectual property rights, Further, the outcome of intellectual property litigation is subject to
uncertainties that cannot be adequately quantified in advance, including the demeanor and credibility of witnesses and the
identity of any adverse party. This is especially true in intellectual property cases that may turn on the testimony of experts as to
technical facts upon which experts may reasonably disagree. Furthermore, we may not be able to obtain any required license on
commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our
competitors access to the same technologies licensed to us; alternatively or additionally it could include terms that impede or
destroy our ability to compete successfully in the commercial marketplace. 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 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. Furthermore, because of the substantial amount of discovery
required in connection with intellectual property litigation or administrative proceedings, there is a risk that some of our
confidential information could be compromised by disclosure. In addition, any uncertainties resulting from the initiation and
continuation of any litigation could have material adverse effect on our ability to raise additional funds or otherwise have a
material adverse effect on our business, results of operations, financial condition and prospects.
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 current and former employees and our licensors’ current and former employees, including our senior
management, were previously employed at universities or at other biotechnology or pharmaceutical companies, including some
which may be competitors or potential competitors. Some of these employees, including members of our senior management,
may have executed proprietary rights, non-disclosure and non-competition agreements, or similar agreements, in connection
with such previous employment. Although we try to ensure that our employees 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 these employees have used or disclosed intellectual
property, including trade secrets or other proprietary information, of any such third party. Litigation may be necessary to defend
against such claims. If we fail in defending any such claims, in addition to paying monetary damages, we may sustain damages
or lose key personnel, valuable intellectual property rights or the personnel’s work product,
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which could hamper or prevent commercialization of our technology, which could materially affect our commercial development
efforts. Such intellectual property rights could be awarded to a third party, and we could be required to obtain a license from
such third party to commercialize our technology or products. Such a license may not be available on commercially reasonable
terms or at all. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a
distraction to management.
In addition, while we typically require our employees, consultants and contractors who may be involved in the
development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful
in executing such an agreement with each party who in fact develops intellectual property that we regard as our own, which may
result in claims by or against us related to the ownership of such intellectual property. If we fail in prosecuting or defending any
such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights. Even if we are
successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to our
senior management and scientific personnel.
We may become involved in lawsuits to protect or enforce our patent or other intellectual property, which could be
expensive, time consuming and unsuccessful.
Competitors may infringe our patent, trademarks, copyrights or other intellectual property. To counter infringement or
unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming and divert the
time and attention of our management and scientific personnel. Any claims we assert against perceived infringers could provoke
these parties to assert counterclaims against us alleging that we infringe their patents, in addition to counterclaims asserting that
our patents are invalid or unenforceable, or both. In any patent infringement proceeding, there is a risk that a court will decide
that a patent of ours is invalid or unenforceable, in whole or in part, and that we do not have the right to stop the other party from
using the invention at issue. There is also a risk that, even if the validity of such patents is upheld, the court will construe the
patent’s claims narrowly or decide that we do not have the right to stop the other party from using the invention at issue on the
grounds that our patent claims do not cover the invention. An adverse outcome in a litigation or proceeding involving our patent
could limit our ability to assert those patents against those parties or other competitors, and may curtail or preclude our ability to
exclude third parties from making and selling similar or competitive products. Similarly, if we assert trademark infringement
claims, a court may determine that the marks we have asserted are invalid or unenforceable, or that the party against whom we
have asserted trademark infringement has superior rights to the trademarks in question. In this case, we could ultimately be
forced to cease use of such trademarks.
Even if we establish infringement, the court may decide not to grant an injunction against further infringing activity and
instead award only monetary damages, which may or may not be an adequate remedy. Furthermore, because of the substantial
amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential
information could be compromised by disclosure during litigation. There could also be public announcements of the results of
hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be
negative, it could adversely affect the price of shares of our common stock. Moreover, there can be no assurance that we will
have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they
are concluded. Even if we ultimately prevail in such claims, the monetary cost of such litigation and the diversion of the attention
of our management and scientific personnel could outweigh any benefit we receive as a result of the proceedings.
Additionally, for certain of our existing and future in-licensed patent rights, we may not have the right to bring suit for
infringement and may have to rely on third parties to enforce these rights for us. If we cannot or choose not to take action
against those we believe infringe our intellectual property rights, we may have difficulty competing in certain markets where such
potential infringers conduct their business, and our commercialization efforts may suffer as a result.
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If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in
our trademarks of interest and our business may be adversely affected.
Our trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be
infringing on other marks. We rely on both registration and common law protection for our trademarks. We may not be able to
protect our rights to these trademarks and trade names or may be forced to stop using these names, which we need for name
recognition by potential partners or customers in our markets of interest. During trademark registration proceedings, we may
receive rejections. Although we would be given an opportunity to respond to those rejections, we may be unable to overcome
such rejections. In addition, in the USPTO and in comparable agencies in many foreign jurisdictions, third parties are given an
opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation
proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. Moreover, any name
we propose to use for our products in the United States must be approved by the FDA, regardless of whether we have
registered it, or applied to register it, as a trademark. The FDA typically conducts a review of proposed product names, including
an evaluation of potential for confusion with other product names. If the FDA objects to any of our proposed product names, we
may be required to expend significant additional resources in an effort to identify a usable substitute name that would qualify
under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA. If we are unable
to establish name recognition based on our trademarks and trade names, we may not be able to compete effectively and our
business may be adversely affected.
Risks Related to Employee Matters and Managing Growth
We depend heavily on our executive officers, principal consultants and others, and the loss of their services would
materially harm our business.
Our success depends, and will likely continue to depend, upon our ability to hire, retain the services of our current
executive officers, principal consultants and others, including Steven Paul, our President and Chief Executive Officer, Andrew
Miller, our Chief Operating Officer, Stephen Brannan, our Chief Medical Officer, and Troy Ignelzi, our Chief Financial Officer. We
have entered into employment agreements with Dr. Paul, Dr. Miller, Dr. Brannan and Mr. Ignelzi, but they may terminate their
employment with us at any time. The loss of their services might impede the achievement of our research, development and
commercialization objectives.
Our ability to compete in the biotechnology and pharmaceuticals industries depends upon our ability to attract and retain
highly qualified managerial, scientific and medical personnel. Our industry has experienced a high rate of turnover of
management personnel in recent years. Replacing executive officers or other key employees may be difficult and may take an
extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience
required to develop, gain regulatory approval of and commercialize products successfully.
Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these additional
key employees 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.
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 other entities and may have
commitments under consulting or advisory contracts with those entities that may limit their availability to us. If we are unable to
continue to attract and retain highly qualified personnel, our ability to develop and commercialize our product candidates will be
limited.
We only have a limited number of employees to manage and operate our business.
As of December 31, 2019, we had 19 full-time employees. Our focus on the development of KarXT requires us to optimize
cash utilization and to manage and operate our business in a highly efficient manner. We cannot assure you that we will be able
to hire and/or retain adequate staffing levels to develop KarXT or run our operations and/or to accomplish all of the objectives
that we otherwise would seek to accomplish.
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Our employees, independent contractors, consultants, collaborators and contract research organizations may engage
in misconduct or other improper activities, including non-compliance with regulatory standards and requirements,
which could cause significant liability for us and harm our reputation.
We are exposed to the risk that our employees, independent contractors, consultants, collaborators and contract research
organizations may engage in fraudulent conduct or other illegal activity. Misconduct by those parties could include intentional,
reckless and/or negligent conduct or disclosure of unauthorized activities to us that violates:
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FDA regulations or similar regulations of comparable non-U.S. regulatory authorities, including those laws requiring
the reporting of true, complete and accurate information to such authorities;
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federal and state healthcare fraud and abuse laws and regulations and similar laws and regulations established and
enforced by comparable non-U.S. regulatory authorities; and
laws that require the reporting of financial information or data accurately.
Activities subject to these laws also involve the improper use or misrepresentation of information obtained in the course of
clinical trials, creating fraudulent data in our preclinical studies or clinical trials or illegal misappropriation of product materials,
which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter
misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or
unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a
failure to be in compliance with such laws, standards or regulations. Additionally, we are subject to the risk that a person or
government could allege such fraud or other misconduct, even if none occurred. If any such actions are instituted against us,
and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our
business and results of operations, including the imposition of civil, criminal and administrative penalties, damages, monetary
fines, disgorgement, integrity oversight and reporting obligations, possible exclusion from participation in Medicare, Medicaid
and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and
curtailment of our operations, any of which could have a material adverse effect on our ability to operate our business and our
results of operations.
We expect to expand our organization, 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 regulatory affairs and sales, marketing and distribution, as well as to support our public company operations. To
manage these growth activities, 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. Our management may need to devote a
significant amount of its attention to managing these growth activities. Moreover, our expected growth could require us to
relocate to a different geographic area of the country. 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 or relocation of our operations, retain key employees, or identify, recruit and train additional qualified personnel. Our
inability to manage the expansion or relocation of our operations effectively may result in weaknesses in our infrastructure, give
rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining
employees. Our expected growth could also require significant capital expenditures and may divert financial resources from
other projects, such as the development of additional product candidates. If we are unable to effectively manage our expected
growth, our expenses may increase more than expected, our ability to generate revenues could be reduced and we may not be
able to implement our business strategy, including the successful commercialization of our product candidates.
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Risks Related to Our Common Stock
An active trading market for our common stock may not be sustainable, and investors may not be able to resell their
shares at or above the purchase price and our ability to raise capital in the future may be impaired.
In June 2019, we closed our initial public offering. Prior to our initial public offering, there was no public market for our
common stock. Although we completed our initial and follow-on public offerings and shares of our common stock are listed on
The Nasdaq Global Market, an active trading market for our shares may not be maintained. If an active market for our common
stock is not maintained, it may be difficult for our investors to resell their shares without depressing the market price for the
shares or at all. An inactive trading market may also impair our ability to raise capital to continue to fund operations by selling
shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.
The trading price of our common stock is likely to continue to be highly volatile. Securities class action or other
litigation involving our company or members of our management team could also substantially harm our business,
financial condition and results of operations.
Our stock price is volatile. The stock market in general and the market for smaller pharmaceutical and biotechnology
companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of
particular companies. The market price for our common stock may be influenced by many factors, including:
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the success of existing or new competitive products or technologies;
regulatory actions with respect to our product candidates or our competitors’ products and product candidates;
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures,
collaborations or capital commitments;
the timing and results of clinical trials of KarXT and any other product candidates;
commencement or termination of collaborations for our development programs;
failure or discontinuation of any of our development programs;
results of clinical trials of product candidates of our competitors;
regulatory or legal developments in the United States and other countries;
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 clinical development programs;
the results of our efforts to develop additional product candidates or products;
actual or anticipated changes in estimates as to financial results or development timelines;
announcement or expectation of additional financing efforts;
sales of our common stock by us, our insiders or other stockholders;
variations in our financial results or those of companies that are perceived to be similar to us;
changes in estimates or recommendations by securities analysts, if any, that cover us;
changes in the structure of healthcare payment systems;
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general economic, industry and market conditions; and
the other factors described in this “Risk Factors” section.
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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 biopharmaceutical companies, which have experienced significant stock
price volatility in recent years.
If securities analysts publish negative evaluations of our stock, the price of our stock could decline.
The trading market for our common stock depends in part on the research and reports that industry or securities analysts
publish about us or our business. If one or more of the analysts who cover us issues an adverse opinion about our company, our
stock price would likely decline. If one or more of these analysts ceases research coverage of us or fails to regularly publish
reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to
decline.
We are an “emerging growth company” and a “smaller reporting company,” and the reduced disclosure requirements
applicable to emerging growth and smaller reporting companies may make our common stock less attractive to
investors.
We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we may
choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to
“emerging growth companies.” We could remain an “emerging growth company” until December 31, 2024, or until the earliest of
(1) the last day of the first fiscal year in which our annual gross revenue exceeds $1.07 billion, (2) the date that we become a
“large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market
value of our common stock that is held by non-affiliates exceeds $700.0 million as of the last business day of our most recently
completed second fiscal quarter or (3) the date on which we have issued more than $1.0 billion in non-convertible debt during
the preceding three-year period. So long as we remain an “emerging growth company,” we expect to avail ourselves of the
exemption from the requirement that our independent registered public accounting firm attest to the effectiveness of our internal
control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404. When our independent
registered public accounting firm is required to undertake an assessment of our internal control over financial reporting, the cost
of our compliance with Section 404 will correspondingly increase. Moreover, if we are not able to comply with the requirements
of Section 404 applicable to us in a timely manner, or if we or our independent registered public accounting firm identifies
deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our
stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which
would require additional financial and management resources.
We are also a “smaller reporting company” as defined in the Exchange Act, and have elected to take advantage of certain
of the scaled disclosures available to smaller reporting companies.
We 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 will
continue to incur, significant legal, accounting and other expenses that we did not incur as a private company, including costs
associated with public company reporting requirements. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform
and Consumer Protection Act, the listing requirements of the Nasdaq Global Market and other applicable securities rules and
regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure
and financial controls and corporate governance practices. Our management and other personnel will need to devote a
substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and
financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that these
rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, which
in turn could make it more difficult for us to attract and retain qualified members of our board of directors.
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We are currently evaluating and monitoring developments with respect to these rules, and 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.
Pursuant to Section 404, we will be required to furnish a report by our management on our internal control over financial
reporting beginning with our Annual Report on Form 10-K for the year ending December 31, 2020. However, while we remain an
emerging growth company, we will not be required to include an attestation report on internal control over financial reporting
issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed
period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both
costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside
consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting,
continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented
and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts,
there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial
reporting is effective as required by Section 404. If we identify one or more material weaknesses, 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.
Sales of a substantial number of our common stock in the public market could cause our share price to fall.
Sales of a substantial number of our common stock in the public market or the perception that these sales might occur
could depress the market price of our common shares, could make it more difficult for you to sell your common stock at a time
and price that you deem appropriate and could impair our ability to raise capital through the sale of additional equity securities.
We are unable to predict the effect that sales may have on the prevailing market price of our common stock.
We do not anticipate paying any cash dividends on our capital stock in the foreseeable future. Accordingly,
stockholders must rely on capital appreciation, if any, for any return on their investment.
We have never declared nor paid cash dividends on our capital stock. We currently plan to retain all of our future earnings,
if any, to finance the operation, development and growth of our business. In addition, the terms of any future debt or credit
agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your
sole source of gain for the foreseeable future.
Concentration of ownership of our common stock among our existing executive officers, directors and principal
stockholders may prevent new investors from influencing significant corporate decisions.
Based upon 26,082,710 shares outstanding as of March 13, 2020, our executive officers and directors, combined with our
stockholders who own more than 5% of our outstanding common stock and their affiliates, in the aggregate, beneficially own
shares representing approximately 56.1% of our common stock. In particular, PureTech Health owns approximately 20.4% of our
common stock and is our largest stockholder. As a result, if PureTech Health along with stockholders who own more than 5% of
our outstanding common stock, were to choose to act together, they would be able to control all matters submitted to our
stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together,
would control the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets.
This concentration of ownership control may:
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delay, defer or prevent a change in control;
entrench our management or the board of directors; or
impede a merger, consolidation, takeover or other business combination involving us that other stockholders may
desire.
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Some of these persons or entities may have interests different than yours. For example, because many of these
stockholders purchased their shares at prices substantially below the price at which shares were sold in our public offerings and
have held their shares for a longer period, they may be more interested in selling our company to an acquirer than other
investors or they may want us to pursue strategies that deviate from the interests of other stockholders.
Provisions in our corporate charter documents and under Delaware law may prevent or frustrate attempts by our
stockholders to change our management or hinder efforts to acquire a controlling interest in us.
Provisions in our corporate charter and our bylaws may discourage, delay or prevent a merger, acquisition or other change
in control of us 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:
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establish a classified board of directors such that all members of the board are not elected at one time;
allow the authorized number of our directors to be changed only by resolution of our board of directors;
limit the manner in which stockholders can remove directors from the board;
establish advance notice requirements for nominations for election to the board of directors or for proposing matters
that can be acted on at stockholder meetings;
require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our
stockholders by written consent;
limit who may call a special meeting of stockholders;
authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute
a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing
acquisitions that have not been approved by our board of directors; and
require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to
amend or repeal certain provisions of our charter or bylaws.
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. This could
discourage, delay or prevent someone from acquiring us or merging with us, whether or not it is desired by, or beneficial to, our
stockholders. This could also have the effect of discouraging others from making tender offers for our common stock, including
transactions that may be in your best interests. These provisions may also prevent changes in our management or limit the price
that investors are willing to pay for our stock.
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If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately
report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other
public reporting, which would harm our business and the trading price of our common stock.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together
with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or
improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In
addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act of 2002, or any subsequent
testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial
reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our consolidated
financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause
investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our
stock.
We are required to disclose changes made in our internal controls and procedures on a quarterly basis and our
management is required to assess the effectiveness of these controls annually. However, for as long as we are an “emerging
growth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to the
effectiveness of our internal controls over financial reporting pursuant to Section 404. We could be an “emerging growth
company” for up to five years. An independent assessment of the effectiveness of our internal controls over financial reporting
could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal controls
over financial reporting could lead to financial statement restatements and require us to incur the expense of remediation.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
Upon the closing of our initial public offering in July 2019, we became subject to certain reporting requirements of the
Exchange Act. 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,
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 or insufficient disclosures due to error or fraud may occur and not be detected.
Our restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative
forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for most legal actions
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, employees or agents.
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 state law
claims brought against us by stockholders. Any person or entity purchasing or otherwise acquiring any interest in shares of our
capital stock shall be deemed to have notice of and to have consented to the provisions of our restated certificate of
incorporation described above.
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We believe this provision benefits 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. However, the provision may have the effect of
discouraging lawsuits against our directors, officers, employees and agents as it may limit any stockholder’s ability to bring a
claim in a judicial forum that such stockholder finds favorable for disputes with us or our directors, officers, employees or agents.
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 business, financial condition or results of operations.
ITEM 2.
PROPERTIES
Our headquarters are located at 33 Arch Street, Suite 3110, Boston, Massachusetts, where we occupied approximately
7,050 square feet of leased office space as of December 31, 2019. In January 2020, we executed an amendment to take
possession of approximately 4,175 square feet of additional leased office space on the same floor as our headquarters. This
lease expires in December 2023.
Additionally, in February 2020, we opened an office located at 11711 N. Meridian Street, Suite 430, Carmel, Indiana,
consisting of 5,050 square feet of leased office space. This lease expires in July 2023.
ITEM 3.
LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings.
93
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Certain Information Regarding the Trading of Our Common Stock
Our common stock trades under the symbol “KRTX” on the Nasdaq Global Market and has been publicly traded since
June 28, 2019. Prior to this time, there was no public market for our common stock.
Holders of Our Common Stock
As of March 13, 2020, there were approximately 13 holders of record of shares of our common stock. This number does
not include stockholders for whom shares are held in “nominee” or “street” name.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by Item 5 of Form 10-K regarding equity compensation plans is incorporated herein by reference
to Item 12 of Part III of this Annual Report.
Recent Sales of Unregistered Securities
We deemed the grants and exercises of stock options issued under our equity compensation plans prior to the completion
of our initial public offering in July 2019 to be exempt from registration in reliance on Rule 701 of the Securities Act as offers and
sales of securities under compensatory benefit plans and contracts relating to compensation. Each of the recipients of securities
in any transaction exempt from registration either received or had adequate access, through employment, business or other
relationships, to information about us.
Use of Proceeds from Registered Securities
On July 2, 2019, we completed the initial public offering, the IPO, of our common stock pursuant to which we issued and
sold 6,414,842 shares of our common stock at a price to the public of $16.00 per share. This included the full exercise of the
underwriters’ over-allotment option to purchase an additional 836,718 shares.
All of the shares issued and sold in the initial public offering were registered under the Securities Act pursuant to a
Registration Statement on Form S-1 (File Nos. 333-231863 and 333-232395), which were declared effective on June 27, 2019.
Following the sale of the shares in connection with the closing of our initial public offering, the offering terminated. Goldman
Sachs & Co. LLC, Citigroup and Wells Fargo Securities acted as joint book-running managers and Wedbush PacGrow acted as
co-manager of the IPO.
The aggregate net proceeds to us from the IPO, inclusive of proceeds from the over-allotment exercise, were
approximately $93.0 million after deducting underwriting discounts and commissions of $7.2 million and offering expenses of
approximately $2.4 million. None of the underwriting discounts and commissions or offering expenses were incurred or paid to
directors or officers of ours or their associates or to persons owning 10 percent or more of our common stock or to any of our
affiliates.
On November 25, 2019, we completed a follow-on public offering of our common stock pursuant to which we issued and
sold 2,600,000 shares of our common stock at a price to the public of $96.00 per share.
All of the shares issued and sold in the follow-on public offering were registered under the Securities Act pursuant to a
Registration Statement on Form S-1 (File No. 333-234756), which was declared effective by the SEC on November 20, 2019.
Following the sale of the shares in connection with the closing of our follow-on public offering, the offering terminated. Goldman
Sachs & Co. LLC, Citigroup and Stifel, Nicolaus & Company, Incorporated acted as joint book-running managers and JMP
Securities LLC acted as lead manager of our follow-on public offering.
94
The aggregate net proceeds to us from the follow-on public offering were approximately $234.2 million after deducting
underwriting discounts and commissions of $15.0 million and offering expenses of approximately $0.4 million. None of the
underwriting discounts and commissions or offering expenses were incurred or paid to directors or officers of ours or their
associates or to persons owning 10 percent or more of our common stock or to any of our affiliates.
Information related to use of proceeds from registered securities is incorporated herein by reference to the “Use of
Proceeds” sections of the our final prospectus related to the IPO and final prospectus related to the follow-on offering. There has
been no material change in our planned use of the net proceeds from the offerings as described in our these prospectus
documents filed pursuant to Rule 424(b)(4) under the Securities Act with the SEC on June 28, 2019 and November 21, 2019,
respectively.
Issuer Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
ITEM 6.
SELECTED FINANCIAL DATA
You should read the following selected financial data together with our consolidated financial statements and the related
notes appearing at the end of this Annual Report on Form 10-K and the “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” section. We have derived the statement of operations data for the years ended
December 31, 2019 and 2018 and the balance sheet data as of December 31, 2019 and 2018 from our audited consolidated
financial statements appearing at the end of this Annual Report on Form 10-K. Our historical results are not necessarily
indicative of the results that may be expected in the future.
Year Ended December 31,
2019
2018
(in thousands, except share and per share data)
Statement of Operations Data:
Revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest (expense) income
Interest income
Accretion of debt discount
Change in fair value of derivative
Total other income (expense), net
$
— $
24,536
20,869
45,405
(45,405)
11
2,517
(945)
(135)
1,448
(43,957) $
(3.68) $
—
11,536
2,974
14,510
(14,510)
(407)
25
(2,176)
(444)
(3,002)
(17,512)
(4,378,000)
Net loss before income taxes
Net loss per share—basic and diluted(1)
Weighted-average number of common shares used in net loss
per share—basic and diluted(1)
$
$
11,958,152
4
(1) See Note 2 in the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K,
for a description of the method used to calculate basic and diluted net loss per share.
95
Balance Sheet Data:
Cash, cash equivalents and short-term investments
Working capital(1)
Total assets
Redeemable convertible preferred stock
Total stockholders’ equity (deficit)
(1) We define working capital as current assets less current liabilities.
96
As of December 31,
2019
2018
$
389,397 $
389,748
393,024
—
389,916
13,887
14,400
15,857
41,965
(29,922)
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the
“Selected Financial Data” section of this Annual Report on Form 10-K and our consolidated financial statements and the related
notes included at the end of this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form
10-K contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives,
expectations and intentions. As a result of many factors, including those factors set forth in the “Risk Factors” section of this
Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-
looking statements contained in the following discussion and analysis.
Overview
We are an innovative clinical-stage biopharmaceutical company committed to developing novel therapies with the potential
to transform the lives of people with disabling and potentially fatal neuropsychiatric disorders and pain. Our pipeline is built on
the broad therapeutic potential of our lead product candidate, KarXT, an oral modulator of muscarinic receptors that are located
both in the central nervous system, or CNS, and various peripheral tissues. KarXT is our proprietary product candidate that
combines xanomeline, a novel muscarinic agonist, with trospium, an approved muscarinic antagonist, to preferentially stimulate
muscarinic receptors in the CNS. We recently announced topline results from our Phase 2 clinical trial of KarXT for the
treatment of acute psychosis in patients with schizophrenia, in which KarXT met the trial’s primary endpoint and was observed
to be well tolerated. We are also developing KarXT as a potential treatment for dementia-related psychosis, or DRP, and pain. In
the fourth quarter of 2019, we initiated two Phase 1b clinical trials of KarXT. One trial is evaluating the safety and tolerability of
KarXT in healthy elderly volunteers as a precursor to KarXT’s development in a DRP patient population. The second trial is
evaluating the effect of KarXT on experimentally induced pain in healthy volunteers. We have assembled a team whose
members have extensive expertise in the research, development and commercialization of numerous CNS agents, as well as
deep familiarity with the biology of neuropsychiatric disorders, such as schizophrenia and DRP, including the role of muscarinic
receptors in potential treatment of these diseases. We plan to leverage this expertise to develop a pipeline of product candidates
targeting a broad range of psychiatric and neurological conditions.
Since our inception in 2009, we have focused substantially all of our efforts and financial resources on organizing and
staffing our company, acquiring and developing our technology, raising capital, building our intellectual property portfolio,
undertaking preclinical studies and clinical trials and providing general and administrative support for these activities.
On June 27, 2019, our registration statement on Form S-1 relating to our initial public offering, or IPO, of our common
stock was declared effective by the Securities and Exchange Commission, or SEC. In the IPO, which closed on July 2, 2019, we
issued and sold 6,414,842 shares of our common stock, including full exercise of the underwriters’ over-allotment option to
purchase an additional 836,718 shares, at a public offering price of $16.00 per share. The aggregate net proceeds to us from
the IPO, inclusive of proceeds from the over-allotment exercise, were approximately $93.0 million after deducting underwriting
discounts and commissions of $7.2 million and offering expenses of approximately $2.4 million.
On November 20, 2019, our registration statement on Form S-1 relating to our follow-on public offering of our common
stock was declared effective by the SEC. In this offering, which closed on November 25, 2019, we issued and sold 2,600,000
shares of our common stock at a public offering price of $96.00 per share. The aggregate net proceeds to us from the follow-on
offering were approximately $234.2 million after deducting underwriting discounts and commissions of $15.0 million and offering
expenses of approximately $0.4 million. Prior to the initial and follow-on public offerings, we have funded our operations
primarily with proceeds from the sales of redeemable convertible preferred stock and the issuance of convertible notes.
97
We have never generated revenue and have incurred significant net losses since inception. Our net losses were
$44.0 million and $17.5 million for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019, we
had an accumulated deficit of $75.5 million. Our net losses may fluctuate significantly from quarter to quarter and year to year.
We expect to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our
operating expenses and capital expenditures will increase substantially, particularly as we:
•
•
•
•
•
invest significantly to further develop KarXT for our current and future indications;
advance additional product candidates into preclinical and clinical development;
seek regulatory approvals for any product candidates that successfully complete clinical trials;
require the manufacture of larger quantities of our product candidates for clinical development and potential
commercialization;
hire additional clinical, scientific, management and administrative personnel;
• maintain, expand and protect our intellectual property portfolio;
•
•
acquire or in-license other assets and technologies; and
add additional operational, financial and management information systems and processes to support our ongoing
development efforts, any future manufacturing or commercialization efforts and our transition to operating as a public
company.
We do not expect to generate revenue from product sales unless and until we successfully complete development and
obtain regulatory approval for a product candidate or enter into collaborative agreements with third parties, which we expect will
take a number of years, if ever, and the outcome of which is subject to significant uncertainty. Additionally, we currently use third
parties such as contract research organizations, or CROs, and contract manufacturing organizations, or CMOs, to carry out our
preclinical and clinical development activities, and we do not yet have a sales organization. If we obtain regulatory approval for
any product candidates, we expect to incur significant commercialization expenses related to product sales, marketing,
manufacturing and distribution.
As a result, we will need substantial additional funding to support our continuing operations and pursue our growth
strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations
through a combination of private and public equity offerings, debt financings, collaborations, strategic alliances and marketing,
distribution or licensing arrangements with third parties. We may be unable to raise additional funds or enter into such other
agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements
as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of
one or more of our product candidates.
As of December 31, 2019, we had cash, cash equivalents and short-term investments of $389.4 million. We believe that
our existing cash, cash equivalents and short-term investments will be sufficient to meet our anticipated operating and capital
expenditure requirements through at least the next 36 months. We have based this estimate on assumptions that may prove to
be wrong, and we could exhaust our available capital resources sooner than we expect. See “—Liquidity and Capital
Resources.”
Components of Our Results of Operations
Revenue
To date, we have not generated any revenue and do not expect to generate any revenue in the foreseeable future, if at all.
If our development efforts for our product candidates are successful and result in regulatory approval, we may generate revenue
in the future from product sales. If we enter into license or collaboration agreements for any of our product candidates or
intellectual property, we may generate revenue in the future from payments as a result of such license or collaboration
agreements. We cannot predict if, when, or to what extent we will generate revenue from the commercialization and sale of our
product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates.
98
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for the development of our product candidates
and our drug discovery efforts, which include:
•
•
•
•
•
personnel costs, including salaries and the related costs, and stock-based compensation expense, for employees
engaged in research and development functions;
expenses incurred in connection with the preclinical and clinical development of our product candidates, including
under agreements with CROs;
expenses incurred in connection with CMOs that manufacture drug products for use in our preclinical and clinical
trials;
formulation costs and chemistry, manufacturing and controls, or CMC, costs; and
expenses incurred under agreements with consultants who supplement our internal capabilities.
We expense all research and development costs in the periods in which they are incurred. Costs for certain development
activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data
provided to us by our vendors and third-party service providers.
We do not track our internal research and development expenses on an indication-by-indication basis as they primarily
relate to personnel, early research and consumable costs, which are deployed across multiple projects under development.
These costs are included in unallocated research and development expenses in the table below. A portion of our research and
development costs are external costs, such as fees paid to consultants, central laboratories, contractors, CMOs and CROs in
connection with our clinical development activities, which costs we do track on an indication-by-indication basis. Formulation
costs and CMC costs and preclinical expenses consist of external costs associated with activities to support our current and
future clinical programs, but are not allocated on an indication-by-indication basis due to the overlap of the potential benefit of
those efforts across multiple indications that utilize KarXT. The following table summarizes our research and development
expenses:
Schizophrenia clinical trials
Pain clinical trials
Dementia-related psychosis clinical trials
Formulation and CMC
Preclinical
Unallocated expenses
Total research and development expense
Year Ended December 31,
2019
2018
$
$
13,455 $
619
381
1,871
1,908
6,302
24,536 $
8,160
—
—
1,130
540
1,706
11,536
We expect our research and development expenses to increase substantially for the foreseeable future as we continue to
invest in research and development activities related to developing our product candidates, including investments in
manufacturing, as our programs advance into later stages of development and we continue to conduct clinical trials. The
process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the
successful development of our product candidates is highly uncertain.
99
Because of the numerous risks and uncertainties associated with conducting product development, we cannot determine
with certainty the duration and completion costs of our current or future preclinical studies and clinical trials or if, when, or to
what extent we will generate revenues from the commercialization and sale of our product candidates. We may never succeed
in achieving regulatory approval for our product candidates. The duration, costs and timing of preclinical studies and clinical
trials and development of our product candidates will depend on a variety of factors, if and as we:
•
•
•
•
•
•
continue to develop and conduct clinical trials for KarXT for our current and future indications;
initiate and continue research, preclinical and clinical development efforts for future product candidates;
seek to identify additional product candidates;
seek regulatory approvals for KarXT for our current and future indications as well as any other product candidates that
successfully complete clinical development;
add operational, financial and management information systems and personnel, including personnel to support our
product development and help us comply with our obligations as a public company;
hire and retain additional personnel, such as clinical, quality control, scientific, commercial and administrative
personnel;
• maintain, expand and protect our intellectual property portfolio;
•
•
•
establish sales, marketing, distribution, manufacturing, supply chain and other commercial infrastructure in the future
to commercialize various products for which we may obtain regulatory approval, if any;
add equipment and physical infrastructure to support our research and development; and
acquire or in-license other product candidates and technologies.
A change in the outcome of any of these variables with respect to the development of any of our product candidates would
significantly change the costs and timing associated with the development of that product candidate. We may never succeed in
obtaining regulatory approval for any of our product candidates.
We do not believe that it is possible at this time to accurately project total indication-specific expenses through
commercialization. There are numerous factors associated with the successful commercialization of any of our product
candidates, including future trial design and various regulatory requirements, many of which cannot be determined with
accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our
control will impact our clinical development programs and plans.
General and Administrative Expenses
General and administrative expenses consist primarily of employee-related costs for personnel in executive, finance and
administrative functions, costs related to maintenance and filing of intellectual property, facility-related costs, insurance costs,
and other expenses for outside professional services, including legal, human resources, data management, audit and
accounting services. Personnel costs consist of salaries, benefits, travel expense and stock-based compensation expense.
We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to
support our continued research activities and development of our product candidates. We also anticipate that we will incur
increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public
relations expenses associated with operating as a public company.
100
Other Income (Expense)
Interest Income (Expense). Interest income (expense) consists of interest accrued, net of any interest forgiven, on the
principal balance of convertible notes that were issued and outstanding during 2019 and 2018. In August 2018, March 2019, and
April 2019 all outstanding convertible notes were converted into redeemable convertible preferred stock. A portion of the
accrued interest was forgiven with respect to certain convertible notes upon their conversion into redeemable convertible
preferred stock, and the forgiven interest was recorded as a reduction to interest expense in the years ended December 31,
2019 and 2018.
Interest Income. Interest income consists of interest income from our cash equivalents and short-term investments.
Accretion of Debt Discount. Upon issuance of our convertible notes, each note was recorded at cost, net of the
derivative liability (see “—Critical Accounting Polices and Estimates”). This discount on each outstanding note, if any, was
amortized as interest expense to the date such note was expected to convert using the effective interest rate method and is
reflected in the statements of operations as accretion of debt discount.
Change in Fair Value of Derivatives. Our convertible notes contained conversion options at a significant premium that
were deemed to be embedded derivatives that are required to be bifurcated and accounted for separately from the convertible
note. We remeasured the derivative liability to fair value at each reporting date, and we recognized changes in the fair value of
the derivative liabilities in our statements of operations. As part of the conversion of outstanding convertible notes into
redeemable convertible preferred stock, all derivatives were settled in 2019.
Results of Operations
Comparison of the Years Ended December 31, 2019 and 2018
Revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Total other income (expense), net
Net loss attributable to common stockholders
Year Ended December 31,
2018
2019
(in thousands)
Change
$
— $
— $
—
24,536
20,869
45,405
(45,405)
1,448
(43,957) $
11,536
2,974
14,510
(14,510)
(3,002)
(17,512) $
13,000
17,895
30,895
(30,895)
4,450
(26,445)
$
101
Research and Development Expenses
Direct research and development expenses:
Schizophrenia clinical trials
Pain clinical trials
Dementia-related psychosis clinical trials
Formulation and CMC
Preclinical
Unallocated expenses:
Personnel related (including stock-based compensation)
Consultant fees and other expenses
Total research and development expense
Year Ended December 31,
2018
2019
(in thousands)
Change
$
$
13,455 $
619
381
1,871
1,908
3,495
2,807
24,536 $
8,160 $
-
-
1,130
540
947
759
11,536 $
5,295
619
381
741
1,368
2,548
2,048
13,000
Expenses related to our schizophrenia clinical trials increased by $5.3 million due to the progress of our Phase 2 clinical
trial, for which topline data was announced in November 2019. The $0.6 million and $0.4 million in expenses related to pain and
dementia-related psychosis clinical trials, respectively, consist of study preparation and startup costs for Phase 1b clinical trials
incurred in the year ended December 31, 2019. Formulation and CMC expenses increased by $0.7 million due to an increase in
formulation development activities. Preclinical expenses increased by $1.4 million due to the initiation and execution of
toxicology studies. The increase of $2.5 million in personnel-related costs was primarily a result of an increase in headcount.
The increase of $2.0 million in consultant fees and other expenses was due to a combination of an increase in consulting
activities as well as costs associated with our discovery programs.
General and Administrative Expenses
Personnel-related (including stock-based compensation)
Professional and consultant fees
Other
Total general and administrative expense
Year Ended December 31,
2018
2019
(in thousands)
Change
$
$
15,750 $
2,130
2,989
20,869 $
1,564 $
999
411
2,974 $
14,186
1,131
2,578
17,895
The increase of $14.2 million in personnel-related costs was primarily due to an increase in stock-based compensation of
$11.2 million, which was primarily attributable to certain grants near or at the time of our IPO that fully vested in 2019 on an
accelerated schedule. The increase of $1.1 million in professional and consultant fees was primarily due to an increase in audit
fees, legal costs, public relations consulting fees, and recruiting costs related to our preparations to be, and our ongoing
business activities as, a public company. The increase of $2.6 million in other costs was primarily due to insurance costs and our
facility lease in Boston, Massachusetts.
102
Other Income (Expense), Net
Interest income (expense)
Interest income
Accretion of debt discount
Change in fair value of derivative
Total other income (expense), net
Year Ended December 31,
2018
2019
(in thousands)
Change
$
$
11 $
2,517
(945)
(135)
1,448 $
(407) $
25
(2,176)
(444)
(3,002) $
418
2,492
1,231
309
4,450
Interest income (expense) for the year ended December 31, 2019 reflects the excess of interest forgiven upon conversion
of all outstanding convertible notes at the time of our Series B convertible preferred stock financing over interest expense
accrued on such convertible notes during the period. Interest income (expense) for the year ended December 31, 2018
represents the excess of interest expense accrued on convertible notes that were outstanding during the period over interest
forgiven upon conversion of all convertible notes outstanding at the time of our Series A convertible preferred stock financing.
Interest income is attributable to interest earned on our cash equivalents and short-term investments, which were
purchased beginning in November 2018.
The accretion of debt discount for the year ended December 31, 2019 was attributable to convertible notes that were
outstanding prior to the conversion of the associated notes in March 2019 into shares of our Series B convertible preferred
stock. The accretion of debt discount for the year ended December 31, 2018 was attributable to convertible notes that were
outstanding prior to the conversion of the associated notes in August 2018 into shares of our Series A convertible preferred
stock, and convertible notes that were issued after such conversion. All related debt discounts were fully accreted at the time of
each respective conversion.
The change in fair value of derivative for the year ended December 31, 2019 reflects the mark-to-market of the convertible
note derivative liabilities prior to the conversion of the associated notes in March 2019 into shares of our Series B convertible
preferred stock. The change in fair value of derivative for the year ended December 31, 2018 reflects the mark-to-market of the
convertible note derivative liabilities prior to the conversion of the associated notes in August 2018 into shares of our Series A
convertible preferred stock, and the mark-to-market of the convertible note derivative liabilities for associated notes that were
issued after such conversion.
Income Taxes
We have not recorded any income tax benefits for the net losses we incurred or for the research and development tax
credits we generated during the years ended December 31, 2019 and 2018 as we believed, based upon the weight of available
evidence, that it was more likely than not that all of the net operating loss carryforwards and tax credits will not be realized. At
December 31, 2019, we had federal net operating loss carryforwards totaling $51.8 million, of which $9.7 million begin to expire
in 2029 and $42.1 million can be carried forward indefinitely. At December 31, 2019, we had state net operating loss
carryforwards totaling $51.6 million which begin to expire in 2030. The federal and state operating loss carryforwards may be
available to offset future income tax liabilities. As of December 31, 2019, we also had federal and state research and
development tax credit carryforwards of $2.8 million and $0.3 million, respectively, which begin to expire in 2038 and 2033,
respectively. Through December 31, 2019, we had recorded a full valuation allowance against our net deferred tax assets at
each balance sheet date.
We filed federal and state taxes as part of a controlled group with PureTech Health LLC, or PureTech Health, a related
party, until the closing of our Series A financing in August 2018. Following the financing, we no longer met the requirements to
be included in the controlled group filing, as PureTech Health no longer held 80% of our outstanding voting securities, thereby
requiring us to file a separate U.S. federal income tax return for the period beginning on that date going forward. On July 2,
2019, PureTech no longer held 50% of the outstanding shares of the Company and therefore, beginning on this date, we will file
separate state income tax returns.
103
Liquidity and Capital Resources
Since our inception, we have incurred significant operating losses. We have not yet commercialized any of our product
candidates and we do not expect to generate revenue from sales of any product candidates for several years, if at all. To date,
we have funded our operations primarily with proceeds from the sale of redeemable convertible preferred stock, issuance of
convertible notes, and sales of our common stock. Through December 31, 2019, our operations have been financed by gross
proceeds of $24.1 million from the issuance of convertible notes, $91.0 million from the sale of shares of our redeemable
convertible preferred stock, $93.0 million from the sale of our common stock in our initial public offering, and $234.2 million from
the sale of our common stock in a follow-on public offering. As of December 31, 2019, we had $389.4 million in cash, cash
equivalents and short-term investments, and an accumulated deficit of $75.5 million.
Our primary use of cash has been to fund operating expenses, which consist of research and development and general
and administrative expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these
expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented:
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net increase in cash, cash equivalents and restricted cash
Cash Flows from Operating Activities
Year Ended December 31,
2019
2018
(in thousands)
$
$
(30,923) $
(174,335)
405,283
200,025 $
(15,377)
(5,115)
27,577
7,085
Cash used in operating activities for the year ended December 31, 2019 was $30.9 million, consisting of a net loss of
$44.0 million partially offset by noncash items, including stock-based compensation expense of $12.6 million, the accretion of
debt discount related to the convertible notes of $0.9 million, and $0.1 million resulting from the change in fair value of the
convertible note derivative liabilities. Net loss was also adjusted for $1.3 million of non-cash interest income. The change in our
net operating assets and liabilities was due to an increase in accrued expenses of $1.8 million as well as $0.1 million related to
an increase in deferred lease obligation and increase to accounts payable of $0.3 million, partially offset by an increase in
prepaid expenses and other current assets of $1.6 million due primarily to timing of payment of general and administrative
expenses.
Cash used in operating activities for the year ended December 31, 2018 was $15.4 million, consisting of a net loss of
$17.5 million partially offset by noncash items, including the accretion of debt discount related to the convertible notes of
$2.2 million, stock-based compensation expense of $1.0 million, $0.4 million resulting from the change in fair value of the
convertible note derivative liabilities and non-cash interest expense of $0.4 million. The change in our net operating assets and
liabilities was due primarily to an increase in prepaid expenses of $1.5 million as a result of increased clinical activities and a
decrease in accounts payable of $0.5 million primarily due to payment timing, which was partially offset by an increase in
accrued expenses of $0.1 million due to timing of payment of general and administrative expenses and an increase in deferred
lease obligation of $0.1 million.
104
Cash Flows from Investing Activities
Cash used in investing activities for the year ended December 31, 2019 was $174.3 million, consisting primarily of $231.7
million for the purchase of short-term investments with a duration of under one year, partially offset by maturities of short-term
investments of $50.0 million and sales of short-term investments of $7.5 million.
Cash used in investing activities for the year ended December 31, 2018 was approximately $5.1 million and consisted of
$5.0 million for the purchases of short-term investments with a duration of under one year, and $0.1 million for the purchase of
property and equipment.
Cash Flows from Financing Activities
Cash provided by financing activities for the year ended December 31, 2019 was $405.3 million and was related primarily
to $234.6 million of proceeds from the sale of our common stock in our follow-on public offering (net of $15.0 million in
underwriting discounts and commissions) partially offset by $0.4 million in payments of follow-on offering costs, $95.5 million of
proceeds from the sale of our common stock in our initial public offering (net of $7.2 million in underwriting discounts and
commissions) partially offset by $2.4 million in payments of initial public offering costs, $74.8 million of net proceeds from the
issuance of redeemable convertible preferred stock, as well as $3.1 million related to proceeds from the issuance of convertible
notes.
Cash provided by financing activities for the year ended December 31, 2018 was $27.6 million and was related to the
$15.9 million of proceeds from the issuance of redeemable convertible preferred stock, net of issuance costs and $11.7 million
of proceeds from the issuance of convertible notes.
Future Funding Requirements
We expect our expenses to increase substantially in connection with our ongoing activities, in particular as we continue to
advance our product candidates through clinical trials. In addition, we expect to incur additional costs associated with operating
as a public company.
As of December 31, 2019, we had cash and cash equivalents and short-term investments of $389.4 million. Based on our
current plans, we believe that our existing cash, cash equivalents and short-term investments will be sufficient to meet our
anticipated operating and capital expenditure requirements through at least the next 36 months.
We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital
resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with research,
development and commercialization of pharmaceutical product candidates, we are unable to estimate the exact amount of our
working capital requirements. Our future funding requirements will depend on and could increase significantly as a result of
many factors, including:
•
•
•
•
•
•
the scope, progress, results and costs of researching and developing KarXT for our current and future indications as
well as other product candidates we may develop;
the timing of, and the costs involved in, obtaining marketing approvals for KarXT for our current and future indications
as well as future product candidates we may develop and pursue;
the number of future indications and product candidates that we pursue and their development requirements;
if approved, the costs of commercialization activities for KarXT for the approved indication, or any other product
candidate that receives regulatory approval to the extent such costs are not the responsibility of any future
collaborators, including the costs and timing of establishing product sales, marketing, distribution and manufacturing
capabilities;
subject to receipt of regulatory approval, revenue, if any, received from commercial sales of KarXT for any program or
revenues received from any future product candidates;
the extent to which we in-license or acquire rights to other products, product candidates or technologies;
105
•
•
•
our headcount growth and associated costs as we expand our research and development and establish a commercial
infrastructure;
the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property
rights including enforcing and defending intellectual property related claims; and
the costs of operating as a public company.
A change in the outcome of any of these or other variables with respect to the development of any of our product
candidates could significantly change the costs and timing associated with the development of that product candidate. Further,
our operating plans may change in the future, and we may need additional funds to meet operational needs and capital
requirements associated with such operating plans.
Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operations through a
combination of equity financings, debt financings, collaborations with other companies or other strategic transactions. We do not
currently have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or
convertible debt securities, our stockholders’ ownership interest will be diluted, and the terms of these securities may include
liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity
financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions,
such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends. If we raise additional funds
through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to
relinquish valuable rights to our technologies, future revenue streams, research programs or 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 or
other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, product development or
future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to
develop and market ourselves.
Further, our operating plans may change, and we may need additional funds to meet operational needs and capital
requirements for clinical trials and other research and development activities. We currently have no credit facility or committed
sources of capital. Because of the numerous risks and uncertainties associated with the development and commercialization of
our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures
associated with our current and anticipated product development programs.
Contractual Obligations and Other Commitments
The following table summarizes our outstanding contractual obligations as of payment due date by period at
December 31, 2019.
Operating lease commitments(1)
Total
Total
Less Than
1 Year
Payments Due by Period
1 to 3
Years
(in thousands)
3 to 5
Years
More than
5 Years
$
$
1,605 $
1,605 $
499 $
499 $
1,020 $
1,020 $
86 $
86 $
—
—
(1) Reflects payments due for our lease of office space in Boston, Massachusetts under an operating lease agreement that
expires in February 2023, as amended.
We enter into contracts in the normal course of business with CROs, CMOs and other third parties for clinical trials,
preclinical research studies and testing and manufacturing services. These contracts are cancelable by us upon prior written
notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including
noncancelable obligations of our service providers, up to the date of cancellation. These payments are not included in the
preceding table as the amount and timing of such payments are not known.
106
We are also party to certain license and collaboration agreements with PureTech Health and Eli Lilly and Company. We
have not included future payments under these agreements in the table of contractual obligations above since obligations under
these agreements are contingent upon future events such as our achievement of specified development, regulatory and
commercial milestones, or royalties on net product sales. As of December 31, 2019, we were unable to estimate the timing or
likelihood of achieving these milestones or generating future product sales.
Critical Accounting Polices and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our
consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting
principles, or U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements, as well as the expenses incurred during the reporting periods. Our estimates are
based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements
appearing elsewhere in this Annual Report on Form 10-K, we believe that the accounting policies discussed below are critical to
understanding our historical and future performance, as these policies relate to the more significant areas involving
management’s judgments and estimates.
Research and Development Contract Costs and Accruals
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued
research and development expenses. We accrue for estimated costs of research and development activities conducted by third-
party service providers, which include the conduct of preclinical studies and clinical trials, and contract manufacturing activities.
We record the estimated costs of research and development activities based upon the estimated amount of services provided
and include these costs in accrued liabilities in the balance sheets and within research and development expense in the
statements of operations. When evaluating the adequacy of the accrued liabilities, we analyze progress of the research studies
or clinical trials and manufacturing activities, including the phase or completion of events, invoices received and contracted
costs. Significant judgments and estimates may be made in determining the accrued balances at the end of any reporting
period. Actual results could differ from our estimates. Our historical accrual estimates have not been materially different from the
actual costs.
Convertible Notes and Derivative Liabilities
In June 2018, the Company entered into an agreement with Wellcome Trust to receive up to $8.0 million in gross proceeds
from the issuance of convertible notes. The Company received $2.0 million of proceeds in July 2018, $2.7 million in November
2018, $1.6 million in March 2019, and $1.6 million in April 2019.
In addition, since inception and through December 31, 2018, the Company has issued $14.0 million of convertible notes to
other parties, of which $13.5 million were issued to PureTech Health, a related party (see Note 13 to our consolidated financial
statements appearing elsewhere in this Annual Report on Form 10-K). During the year ended December 31, 2018, the Company
issued Convertible Notes to PureTech Health with principal totaling $7.0 million.
All outstanding convertible notes were converted to Series A convertible preferred stock and Series B convertible
preferred stock in August 2018 and March 2019. As of December 31, 2019, there were no convertible notes outstanding. See
Note 5 to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for additional detail.
107
The convertible notes issued contained conversion options at a significant discount that we determined to be embedded
derivatives, which were recorded as liabilities on our balance sheet and remeasured to fair value at each reporting date until
each derivative was settled. Changes in the fair value of the derivative liabilities were recognized as change in fair value of
derivative in the statement of operations. The fair value of the derivative liabilities was determined at each period by assessing
the likelihood and timing of events that would result in either a conversion or change-of-control feature being triggered, as well
as changes in market conditions.
Stock-Based Compensation Expense
Prior to our IPO, the estimated fair value of our common stock had been determined by our board of directors as of the
date of each award grant, with input from management, considering our most recently available third-party valuations of
common stock and our board of directors’ assessment of additional objective and subjective factors that it believed were
relevant and which may have changed from the date of the most recent valuation through the date of the grant. Subsequent to
our IPO, the fair value of our common stock is based on quoted market prices. The determination of the fair value of share-
based payment awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including
expected volatility, expected life, risk-free interest rate and expected dividends.
Expected Term—We have opted to use the “simplified method” for estimating the expected term of employee options,
whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option
(generally 10 years).
Expected Volatility—Due to our limited operating history and a lack of company specific historical and implied volatility
data, we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are
publicly traded. The historical volatility data was computed using the daily closing prices for the selected companies’ shares
during the equivalent period of the calculated expected term of the stock-based awards.
Risk-Free Interest Rate—The risk-free rate assumption is based on the U.S. Treasury instruments with maturities similar
to the expected term of our stock options.
Expected Dividend—We have not issued any dividends and do not expect to issue dividends over the life of the options.
As a result, we have estimated the dividend yield to be zero.
The estimated fair value of stock options granted to employees and non-employee service providers are expensed over
the requisite service period (generally the vesting term) on a straight-line basis. We account for the impact of forfeitures as they
occur.
The assumptions underlying these valuations represent management’s best estimates, which involve inherent
uncertainties and the application of management judgment. As a result, if factors or expected outcomes change and we use
significantly different assumptions or estimates, our share-based compensation expense could be materially different.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as
defined in the rules and regulations of the Securities and Exchange Commission.
108
JOBS Act Accounting Election
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act.
Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent
to the enactment of the JOBS Act until such time as those standards apply to private companies. Other exemptions and reduced
reporting requirements under the JOBS Act for emerging growth companies include presentation of only two years audited
financial statements in a registration statement for an initial public offering, an exemption from the requirement to provide an
auditor’s report on internal controls over financial reporting pursuant to the Sarbanes-Oxley Act of 2012, an exemption from any
requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation,
and less extensive disclosure about our executive compensation arrangements. We have elected to use the extended transition
period for complying with new or revised accounting standards that have different effective dates for public and private
companies until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and
irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements
may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company
effective dates.
We would cease to be an emerging growth company upon the earliest of: (1) the last day of the fiscal year ending after the
fifth anniversary of our initial public offering; (2) the last day of the fiscal year in which we have more than $1.07 billion in annual
revenue; (3) the last day of the fiscal year in which we qualify as a “large accelerated filer,” with at least $700.0 million of equity
securities held by non-affiliates as of the prior June 30th; or (4) the issuance, in any three-year period, by our company of more
than $1.0 billion in non-convertible debt securities held by non-affiliates.
Recently Issued and Adopted Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results
of operations is disclosed in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report on Form
10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates. Our primary exposure to market risk is interest rate
sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our cash equivalents and
short-term investments are primarily invested in short-term U.S. Treasuries. However, because of the short-term nature of the
investments in our portfolio, an immediate one percentage point change in market interest rates would not have a material
impact on the fair market value of our investment portfolio or on our financial position or results of operations.
We are not currently exposed to significant market risk related to changes in foreign currency exchange rates; however,
we have contracted with and may continue to contract with vendors that are located outside of the United States. As a result, our
operations may be subject to fluctuations in foreign currency exchange rates in the future.
Inflation generally affects us by increasing our cost of labor. We do not believe that inflation had a material effect on our
business, financial condition or results of operations during the years ended December 31, 2019 and 2018.
ITEM 8.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
109
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the years ended December 31, 2019 and 2018
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2019 and 2018
Consolidated Statement of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the years
ended December 31, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018
Notes to Consolidated Financial Statements
111
112
113
114
115
116
117
110
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Karuna Therapeutics, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Karuna Therapeutics, Inc. and subsidiary (the Company) as
of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive loss, redeemable
convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the years then ended, and the related
notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations
and its cash flows for each of the years then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated 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 consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2018.
Boston, Massachusetts
March 24, 2020
111
KARUNA THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Prepaid expenses and other current assets
Total current assets
Restricted cash
Property and equipment, net
Total assets
Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity
(Deficit)
Current liabilities:
Accounts payable (includes $51 and $112 at December 31, 2019 and 2018,
respectively, due to related parties)
Accrued expenses
Deferred lease obligation, short term portion
Derivative liability
Total current liabilities
Non-current convertible notes, net of discount
Deferred lease obligation, long term portion
Total liabilities
Commitments and Contingencies (Note 11)
Redeemable convertible preferred stock
Redeemable convertible preferred stock, (Series Seed, A and B) $0.0001 par value;
0 and 7,539,200 shares authorized and outstanding at December 31, 2019 and 2018,
respectively
Stockholders’ equity (deficit):
Preferred stock, $0.0001 par value; 10,000,000 and 0 shares authorized as of
December 31, 2019 and 2018, respectively; 0 shares outstanding at
December 31, 2019 and 2018
Common stock, $0.0001 par value; 150,000,000 and 12,337,650 shares authorized at
December 31, 2019 and 2018, respectively; 26,012,754 and 12 shares issued and
outstanding at December 31, 2019 and 2018, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ equity (deficit)
Total liabilities, redeemable convertible preferred stock and stockholders’
equity (deficit)
December 31,
2019
December 31,
2018
$
$
208,929 $
180,468
3,309
392,706
123
195
393,024 $
547 $
2,353
58
—
2,958
—
150
3,108
8,904
4,983
1,709
15,596
123
138
15,857
269
538
—
389
1,196
2,516
102
3,814
—
41,965
—
—
3
465,420
(75,512)
5
389,916
—
1,633
(31,555)
—
(29,922)
$
393,024 $
15,857
The accompanying notes are an integral part of these consolidated financial statements
112
KARUNA THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
Revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income (expense) (Note 5)
Interest income
Accretion of debt discount
Change in fair value of derivative
Total other income (expense), net
Net loss before income taxes
Income tax provision
Net loss attributable to common stockholders
Net loss per share, basic and diluted (Note 8)
Year Ended
December 31,
2019
2018
$
—
24,536 $
20,869
45,405
(45,405)
11
2,517
(945)
(135)
1,448
(43,957)
—
$
$
(43,957) $
(3.68) $
—
11,536
2,974
14,510
(14,510)
(407)
25
(2,176)
(444)
(3,002)
(17,512)
—
(17,512)
(4,378,000)
Weighted average common shares outstanding used in computing net loss
per share, basic and diluted
11,958,152
4
The accompanying notes are an integral part of these consolidated financial statements
113
KARUNA THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Net loss
Other comprehensive income:
Unrealized gains on short-term investments
Comprehensive loss
Year Ended December 31,
2019
2018
(43,957) $
(17,512)
5
(43,952) $
—
(17,512)
$
$
The accompanying notes are an integral part of these consolidated financial statements
114
KARUNA THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’
EQUITY (DEFICIT)
(In thousands, except share data)
Series Seed, A and
B Redeemable
Convertible Preferred
Stock
Common Stock
Value
Shares
Value
Shares
4,412,500 $
1
— $
— $
675 $
(14,043) $
— $
(13,368)
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
Total
Stockholders’
Equity
(Deficit)
3,126,700
41,964
—
—
—
—
—
—
—
7,539,200 $
—
—
—
41,965
—
12
—
12 $
—
—
—
— $
958
—
—
1,633 $
—
—
(17,512)
(31,555) $
—
—
—
—
— $
—
958
—
(17,512)
(29,922)
5,422,845
81,927
—
—
—
—
—
—
—
—
6,414,842
1
93,043
(12,962,045)
(123,892)
16,833,790
2
123,890
—
—
—
93,044
—
123,892
—
—
2,600,000
—
234,224
—
—
234,224
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
19,986
38,961
105,163
—
—
26,012,754 $
—
—
—
—
—
—
3 $
12,568
58
4
—
—
—
465,420 $
—
—
—
—
—
(43,957)
(75,512) $
—
—
—
—
5
—
5 $
12,568
58
4
—
5
(43,957)
389,916
Balance, December 31, 2017
Issuance of Series A
redeemable convertible
preferred stock, net of
issuance costs of $120
Stock-based compensation
expense
Exercise of common warrants
Net loss
Balance, December 31, 2018
Issuance of Series B
redeemable convertible
preferred stock, net of
issuance costs of $175
Issuance of common stock
upon initial public offering,
net of $7,285 in under-
writing discounts and
commissions and $2,409
in offering costs
Automatic conversion of
preferred stock
Issuance of common stock
upon secondary public
offering, net of $14,976
in under- writing
discounts and commissions
and $400 in offering
costs
Stock-based compensation
expense
Exercise of common warrants
Exercise of common options
Vesting of restricted stock units
Other comprehensive income
Net loss
Balance, December 31, 2019
The accompanying notes are an integral part of these consolidated financial statements
115
KARUNA THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Year Ended
December 31,
2019
2018
$
(43,957) $
(17,512)
Stock-based compensation expense
Accretion of debt discount
Non-cash interest income
Change in fair value of derivative liability
Depreciation and amortization expense
Non-cash interest (income) expense
Changes in operating assets and liabilities:
Prepaid expenses and other current assets
Accounts payable
Accrued expenses
Deferred lease obligation
Net cash used in operating activities
Cash flows from investing activities
Purchases of short-term investments
Sales of short-term investments
Maturities of short-term investments
Acquisition of property and equipment
Net cash used in investing activities
Cash flows from financing activities
Proceeds from secondary public offering, net of underwriting discounts and
commissions
Payment of secondary public offering costs
Proceeds from initial public offering, net of underwriting discounts and
commissions
Payment of initial public offering costs
Proceeds from issuance of Series B redeemable convertible preferred stock,
net of issuance costs
Proceeds from issuance of Series A redeemable convertible preferred stock,
net of issuance costs
Proceeds from issuance of convertible notes
Proceeds from exercise of warrant
Proceeds from exercise of stock options
Net cash provided by financing activities
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash at end of period
Supplemental disclosures of cash flows information
Conversion of redeemable convertible preferred stock into common stock
Conversion of convertible notes, accrued interest and discount upon
conversion to preferred stock
12,568
945
(1,260)
135
58
(11)
(1,600)
278
1,815
106
(30,923)
(231,718)
7,498
50,000
(115)
(174,335)
234,624
(400)
95,453
(2,409)
74,825
—
3,128
58
4
405,283
200,025
9,027
209,052 $
958
2,176
—
444
6
407
(1,534)
(529)
105
102
(15,377)
(4,983)
—
—
(132)
(5,115)
—
—
—
—
—
15,877
11,700
—
—
27,577
7,085
1,942
9,027
123,892 $
-
7,102 $
26,087
$
$
$
The accompanying notes are an integral part of these consolidated financial statements
116
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of the Business
Karuna Therapeutics, Inc. (the “Company”) was incorporated under the laws of the State of Delaware in July 2009 as
Karuna Pharmaceuticals, Inc. and is headquartered in Boston, Massachusetts. In March 2019, the Company changed its name
to Karuna Therapeutics, Inc. The Company is focused on developing novel therapies with the potential to transform the lives of
people with disabling and potentially fatal neuropsychiatric disorders and pain.
Since the Company’s inception, it has focused substantially all of its efforts and financial resources on organizing and
staffing the Company, acquiring and developing its technology, raising capital, building its intellectual property portfolio,
undertaking preclinical studies and clinical trials and providing general and administrative support for these activities. The
Company has not generated any product revenue related to its primary business purpose to date and is subject to a number of
risks similar to those of other early stage companies, including dependence on key individuals, regulatory approval of products,
uncertainty of market acceptance of products, competition from substitute products and larger companies, compliance with
government regulations, protection of proprietary technology, dependence on third parties, product liability and the need to
obtain adequate additional financing to fund the development of its product candidates.
Forward Stock Split
On June 14, 2019, the Company effected a one-for-1.2987 stock split of its issued and outstanding shares of common
stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s redeemable convertible
preferred stock (see Note 6). Accordingly, all share and per share amounts for all periods presented in the accompanying
consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this stock split
and adjustment of the redeemable convertible preferred stock conversion ratios.
Initial Public Offering
On June 27, 2019, the Company’s registration statement on Form S-1 relating to its initial public offering of its common
stock (“IPO”) was declared effective by the Securities and Exchange Commission (“SEC”). In the IPO, which closed on July 2,
2019, the Company issued and sold 6,414,842 shares of common stock, including full exercise of the underwriters’ over-
allotment option to purchase an additional 836,718 shares, at a public offering price of $16.00 per share. The aggregate net
proceeds to the Company from the IPO, inclusive of proceeds from the over-allotment exercise, were approximately
$93.0 million after deducting underwriting discounts and commissions of $7.2 million and offering expenses of $2.4 million. Upon
closing of the IPO, all 12,962,045 shares of the Company’s redeemable convertible preferred stock then outstanding converted
into an aggregate of 16,833,790 shares of common stock.
Secondary Public Offering
On November 20, 2019, the Company’s registration statement on Form S-1 relating to its secondary public offering of its
common stock was declared effective by the SEC. In this offering, which closed on November 25, 2019, the Company issued
and sold 2,600,000 shares of common stock at a public offering price of $96.00 per share. The aggregate net proceeds were
approximately $234.2 million after deducting underwriting discounts and commissions of $15.0 million and offering expenses of
$0.4 million.
Liquidity
The Company’s financial statements have been prepared on the basis of continuity of operations, realization of assets and
the satisfaction of liabilities in the ordinary course of business. The Company experienced negative operating cash flows of
$30.9 million for the year ended December 31, 2019 and had an accumulated deficit of $75.5 million as of December 31, 2019.
The Company expects to continue to generate operating losses for the foreseeable future.
117
The Company expects that its cash and cash equivalents and short-term investments of $389.4 million as of December
31, 2019 will be sufficient to fund its operating expenses and capital expenditure requirements through at least 12 months from
the date of issuance of these consolidated financial statements. The future viability of the Company beyond that point is
dependent on its ability to raise additional capital to fund its operations.
If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate some or all of its
research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its
business prospects, or the Company may be unable to continue operations. Although management continues to pursue these
plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the
Company to fund continuing operations, if at all.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Use of Estimates
The accompanying consolidated financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America (“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 Standards
Codification (“ASC”) and Accounting Standards Updates (“ASUs”) of the Financial Accounting Standards Board (“FASB”).
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and
assumptions reflected in these consolidated financial statements include, but are not limited to, the accrual of research and
development expenses, the valuation of common stock and the associated stock-based awards prior to the Company’s IPO, and
the valuation of liabilities associated with financial instruments and derivatives. Estimates are periodically reviewed in light of
changes in circumstances, facts and experience. Actual results could differ from the Company’s estimates.
The consolidated financial statements include the accounts of Karuna Therapeutics, Inc. and its wholly owned subsidiary,
Karuna Securities Corporation. All inter-company transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments with maturities of 90 days or less at acquisition date to be
cash equivalents.
Short-term Investments
The Company’s short-term investments are classified as available-for-sale and are carried at fair value with the unrealized
gains and losses reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized
gains and losses and declines in value judged to be other than temporary are included as a component of other income
(expense), net based on the specific identification method.
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Concentration of Manufacturing Risk
The Company is dependent on third-party manufacturers to supply products for research and development activities in its
programs. In particular, the Company relies and expects to continue to rely on a small number of manufacturers to supply it with
its requirements for the active pharmaceutical ingredients and formulated drugs related to these programs. These programs
could be adversely affected by a significant interruption in the supply of active pharmaceutical ingredients and formulated drugs.
Deferred Offering Costs
The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with
in-process equity financings as deferred offering costs until such financings are consummated. After consummation of the equity
financing, these costs are recorded in stockholders’ equity (deficit) as a reduction of additional paid-in capital generated as a
result of the offering. Should the in-process equity financing be abandoned, the deferred offering costs will be expensed
immediately as a charge to operating expenses in the statements of operations. As of December 31, 2019 and 2018, there were
no deferred offering costs outstanding. All deferred offering costs accumulated during 2019 and associated with the Company’s
IPO and secondary public offering were recorded as a reduction of additional paid-in capital upon the close of the Company’s
public offerings on July 2, 2019 and November 25, 2019, respectively.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash equivalents, short-term investments, accounts payable, accrued
expenses, convertible notes and derivatives embedded within the convertible notes. The carrying amount of accounts payable,
accrued expenses and convertible notes are considered a reasonable estimate of their fair value, due to the short-term maturity
of these instruments. The Company’s cash equivalents, short-term investments and derivative liabilities are carried at fair value,
determined according to the fair value hierarchy described below (see Note 10).
The Company follows the guidance in FASB ASC 820, Fair Value Measurements and Disclosures, which defines fair value
and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value
hierarchy are described below:
Level 1:Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the
ability to access at the measurement date.
Level 2:Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable,
either directly or indirectly.
Level 3:Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
To the extent that 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.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-
specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions reflect
those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and
inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market
dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an
instrument to be reclassified from Level 1 to Level 2 or Level 2 to Level 3.
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Convertible Notes and Derivative Liabilities
In connection with the issuance of the Wellcome Trust Convertible Notes and the Convertible Notes (see Note 5), the
Company had identified embedded derivatives, which were recorded as liabilities on the Company’s balance sheet and were
remeasured to fair value at each reporting date until the derivative was settled. Changes in the fair value of the derivative
liabilities were recognized as change in fair value of derivative in the statements of operations. The fair value of the derivative
liabilities were determined at each period end using a with and without method, which assesses the likelihood and timing of
events that would result in either a conversion or change-of-control feature being triggered, as well as changes in the market
conditions.
Upon issuance of the notes, each note was recorded at cost, net of the derivative liability. The discount on each note was
amortized as interest expense to the date such note was expected to convert using the effective interest rate method and was
reflected in the statements of operations as accretion of debt discount.
The Company classified its derivative liabilities in the balance sheet as current or non-current based on its expectation of
when the derivative will be settled, consistent with the assumptions used when determining the fair value of the derivative
liabilities.
In 2019, all notes were converted into redeemable convertible preferred stock and the associated derivative liabilities were
settled in connection with the Company’s issuance of Series B redeemable convertible preferred stock. There were no
convertible notes or derivative liabilities outstanding as of December 31, 2019.
Redeemable Convertible Preferred Stock
Prior to the IPO, the Company recorded all shares of redeemable convertible preferred stock at their respective fair values
on the dates of issuance, net of issuance costs. The redeemable convertible preferred stock was recorded outside of permanent
equity because upon the occurrence of certain deemed liquidation events, the majority of the holders could opt to redeem the
shares at the liquidation preference and these events, including a merger, acquisition or sale of substantially all of the assets,
was considered not solely within the Company’s control. Prior to the IPO, the Company had not adjusted the carrying values of
the redeemable convertible preferred stock to its redemption value because it was uncertain whether or when a deemed
liquidation event would occur. Upon closing of the IPO, all 12,962,045 shares of the Company’s redeemable convertible
preferred stock then outstanding converted into an aggregate of 16,833,790 shares of common stock.
Leases
Leases are classified at their inception as either operating or capital leases based on the economic substance of the
agreement. The Company recognizes rent expense for its operating leases, inclusive of rent escalation provisions and rent
holidays, on a straight-line basis over the respective lease term. Additionally, the Company recognizes tenant improvement
allowances under the operating leases as a deferred lease obligation and amortizes the tenant improvement allowances as a
reduction to rent expense on a straight-line basis over the respective lease term. At December 31, 2019 and 2018, no capital
leases were recorded in the balance sheets.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development costs include salaries and
bonuses, stock compensation, employee benefits, consulting costs and external contract research and development and
manufacturing expenses.
Upfront payments and milestone payments made for the licensing of technology are expensed as research and
development in the period in which they are incurred. Advance payments for goods or services to be received in the future for
use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the
related goods are delivered or the services are performed.
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Research Contract Costs and Accruals
The Company accrues for estimated costs of research and development activities conducted by third-party service
providers, which include the conduct of preclinical studies and clinical trials, and contract manufacturing activities. The Company
records the estimated costs of research and development activities based upon the estimated amount of services provided and
includes these costs in accrued liabilities in the balance sheets and within research and development expense in the statements
of operations. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the research studies
or clinical trials and manufacturing activities, including the phase or completion of events, invoices received and contracted
costs. Significant judgments and estimates may be made in determining the accrued balances at the end of any reporting
period. Actual results could differ from the Company’s estimates. The Company’s historical accrual estimates have not been
materially different from the actual costs.
Stock-Based Compensation
The Company measures all stock options and other stock-based awards to employees, directors and non-employees
based on the fair value on the date of the grant and recognizes compensation expense of those awards over the requisite
service period, which is generally the vesting period of the respective award. The Company has mainly issued stock options with
service-based vesting conditions and records the expense for these awards using the straight-line method. The Company has
also issued stock options with performance-based vesting conditions and records the expense for these awards at the time that
the achievement of the performance becomes highly probable or complete. The Company recognizes adjustments to stock-
based compensation expense for forfeitures as they occur. The Company classifies stock-based compensation expense in its
statements of operations in the same manner in which the award recipient’s payroll costs are classified or in which the award
recipients’ service payments are classified.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model.
The Company has historically been a private company and lacks company-specific historical and implied volatility information.
Therefore, expected stock volatility has been calculated based on the historical volatility of a publicly traded set of peer
companies. The Company expects to continue to use such methodology until such time as it has adequate historical data
regarding the volatility of its own publicly traded stock price.
The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that
qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect
at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield
is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the
foreseeable future.
The fair value for each restricted common stock award is estimated on the date of grant based on the fair value of the
Company’s common stock on that same date.
Net Loss Per Share
In July 2019, upon closing of the IPO, all outstanding shares of the Company’s redeemable convertible preferred stock
automatically converted to common stock. Prior to this conversion, the Company followed the two-class method when
computing net income (loss) per share, as the Company had issued shares that met the definition of participating
securities. The two-class method determines net income (loss) per share for each class of common and participating securities
according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method
requires income available to common stockholders for the period to be allocated between common and participating securities
based upon their respective rights to receive dividends as if all income for the period had been distributed.
121
Basic net income (loss) per share attributable to common stockholders is computed by dividing the net income (loss)
attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period.
Diluted net income (loss) attributable to common stockholders is computed by adjusting income (loss) attributable to common
stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities, including outstanding stock
options. Diluted net income (loss) per share attributable to common stockholders is computed by dividing the diluted net income
(loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period,
including potential dilutive common shares assuming the dilutive effect of outstanding stock options.
Prior to the IPO, the Company’s outstanding redeemable convertible preferred stock contractually entitled the holders of
such shares to participate in distributions but contractually did not require the holders of such shares to participate in losses of
the Company. Accordingly, in periods in which the Company reports a net loss attributable to common stockholders, diluted net
loss per share attributable to common stockholders is the same as basic net loss per share attributable to common
stockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.
The Company reported a net loss attributable to common stockholders for the years ended December 31, 2019 and 2018.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net loss as well as other changes in stockholders’ equity (deficit) that result from
transactions and economic events other than those with stockholders. For the year ended December 31, 2019, the Company’s
only element of other comprehensive income (loss) was unrealized gains on short-term investments.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with
Customers (Topic 606) (“ASC 606”), and further updated through ASU 2016-12, which amends the existing accounting
standards for revenue recognition. For public business entities, this standard is effective for annual reporting periods beginning
after December 15, 2017, including interim periods within that reporting period. For all other entities, this standard is effective for
annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after
December 15, 2019. Early adoption is permitted. Effective January 1, 2017, the Company adopted ASC 606, using the full
retrospective method. The adoption did not have an impact on the Company’s consolidated financial statements as the
Company has historically not had contracts with customers or recorded revenue to date.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases, which will replace the existing guidance in ASC 840, “Leases”.
In addition, in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, and in March 2019
issued ASU 2019-01, Leases (Topic 842): Codification Improvements. The new leasing standards generally requires lessees to
recognize operating and financing lease liabilities and corresponding right-of-use assets on the consolidated balance sheet and
to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing
arrangements. We will adopt the new standard effective January 1, 2020 and will not restate comparative periods. Presentation
of leases within the consolidated statements of operations and consolidated statements of cash flows will be generally
consistent with the current lease accounting guidance. We will elect the package of practical expedients permitted under the
transition guidance and as such, the adoption of this ASU will not change the classification of any of our existing leases. We will
elect to combine lease and non-lease components, elect not to record leases with an initial term of 12 months or less on the
balance sheet and recognize the associated lease payments in the consolidated statements of operations on a straight-line
basis over the lease term. We estimate that approximately $1.5 million will be recognized as total lease liabilities and
approximately $1.2 million will be recognized as total right-of-use assets on our consolidated balance sheet as of January 1,
2020. Otherwise, we do not expect the new standard to have a material impact on our consolidated financial statements.
122
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). The new standard
adjusts the accounting for assets held at amortized cost basis, including marketable securities accounted for as available for
sale. The standard eliminates the probable initial recognition threshold and requires an entity to reflect its current estimate of all
expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of
the financial assets to present the net amount expected to be collected. For public entities, the guidance is effective for annual
reporting periods beginning after December 15, 2019 and for interim periods within those fiscal years. For nonpublic entities and
emerging growth companies that choose to take advantage of the extended transition period, the guidance was effective for
annual reporting periods beginning after December 15, 2020. Early adoption is permitted for all entities. In November 2019, the
FASB issued ASU 2019-10, which deferred the effective date for nonpublic entities to annual reporting periods beginning after
December 15, 2022, including interim periods within those fiscal years. The Company does not believe the guidance will have a
material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). ASU 2018-13 modifies fair value
disclosure requirements, specifically around level transfers and valuation of Level 3 assets and liabilities. ASU 2018-13 is
effective for financial statements issued for annual and interim periods beginning after December 15, 2019 for all entities. Early
adoption of all or part of ASU 2018-13 is permitted. The Company does not expect that the adoption of this new standard will
have a material impact on its disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income
Taxes. The new standard simplifies the accounting for income taxes by removing certain exceptions within the guidance and
making various other amendments. ASU 2019-12 is effective for financial statements issued for annual and interim periods
beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period for which financial
statements have not yet been issued. An entity that elects to early adopt in an interim period should reflect any adjustments as
of the beginning of the annual period that includes that interim period. In addition, an entity that early adopts must adopt all
amendments of ASU 2019-12 in the same period and apply each amendment on either a retrospective modified-retrospective
basis as applicable. The Company does not expect that the adoption of this new standard will have a material impact on its
consolidated financial statements.
Note 3. Property and Equipment, Net
Property and equipment, net, consisted of the following (in thousands):
Leasehold improvements
Computer equipment
Software
Furniture and fixtures
Office equipment
Laboratory equipment
Total property and equipment
Less: accumulated depreciation
Property and equipment, net
December 31,
2019
December 31,
2018
$
$
115 $
87 $
38
10
2
—
252
(57)
195 $
106
8
—
—
—
31
145
(7)
138
Depreciation expense was less than $0.1 million for the years ended December 31, 2019 and 2018.
123
Note 4. Prepaid Expenses and Other Current Assets and Accrued Expenses
Prepaid expenses and other current assets consisted of the following (in thousands):
Prepaid insurance
Prepaid research and development expenses
Other
Total prepaid expenses and other current assets
Accrued expenses consisted of the following (in thousands):
Accrued payroll and related expenses
Accrued research and development expenses
Professional fees
Other
Total accrued expenses
Note 5. Convertible Notes Payable
Wellcome Trust Convertible Notes
December 31,
2019
December 31,
2018
2,130 $
694
485
3,309 $
23
1,686
—
1,709
December 31,
2019
December 31,
2018
1,823 $
344
142
44
2,353 $
311
100
75
52
538
$
$
$
$
In June 2018, the Company entered into a second Company Funding Agreement with Wellcome Trust to receive up to
$8.0 million in gross proceeds from the issuance of a convertible note (the “2018 Convertible Note”). The Company received
$2.0 million of proceeds in July 2018, $2.7 million in November 2018, $1.6 million in March 2019, and $1.6 million in April 2019.
The 2018 Convertible Note had a stated interest rate of 2% per annum above the three-month Dollar LIBOR rate, which
was not payable until settlement of the principal. The notes were subject to redemption upon written demand by Wellcome Trust
any time after the fifth anniversary of the effective date, resulting in their classification as long-term liabilities as of December 31,
2018. The principal due under the 2018 Convertible Note converts into the class of the Company’s stock issued in the
Company’s next qualified financing or upon event of default at a discounted conversion price between 0% and 25% of the
purchase price per share of such securities issued. The accrued interest in such a circumstance would be forgiven.
At inception, the Company concluded that the Wellcome Trust Notes contained a conversion option at a significant
discount that was deemed to be an embedded derivative, which is required to be bifurcated and accounted for separately from
the debt host. There were no debt issuance costs associated with the 2018 Convertible Note.
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The Company recognized the following changes in the debt related to the 2018 Convertible Note during the years ended
December 31, 2019 and 2018 (in thousands):
Balance, December 31, 2017
Issuance of 2018 Convertible Note
Accretion to settlement value
Accrued interest
Interest forgiven upon conversion
Conversion of Wellcome Trust Convertible Notes to redeemable
convertible preferred stock
Balance, August 1, 2018 (date of conversion)
Issuance of 2018 Convertible Note
Allocation of proceeds to derivative liability
Accretion to settlement value
Accrued interest
Balance, December 31, 2018
Issuance of 2018 Convertible Note
Allocation of proceeds to derivative liability
Accretion to settlement value
Accrued interest
Interest forgiven upon conversion
Conversion of Wellcome Trust Convertible Notes to redeemable
convertible preferred stock
Balance, December 31, 2019
Convertible Notes
Financial statement
impacted
$
3,985
2,000 Balance sheet
51 Statement of operations
102 Statement of operations
(289) Statement of operations
(5,849) Balance sheet
—
2,700 Balance sheet
(375) Balance sheet
180 Statement of operations
11 Statement of operations
2,516
3,128 Balance sheet
(750) Balance sheet
945 Statement of operations
29 Statement of operations
(40) Statement of operations
(5,828) Balance sheet
$
—
Since inception, the Company has issued $14.0 million of convertible notes (the “Convertible Notes”), of which $13.5
million were issued to PureTech Health LLC (“PureTech Health”), a related party (see Note 13). During the year ended
December 31, 2018, the Company issued Convertible Notes to PureTech Health with principal totaling $7.0 million. There were
no debt issuance costs associated with the Convertible Notes.
The Company concluded that the Convertible Notes contained a conversion option at a significant premium that was
deemed to be an embedded derivative, which is required to be bifurcated and accounted for separately from the debt host.
In August 2018, the outstanding Convertible Notes were converted to Series A Preferred Stock.
125
The Company recognized the following changes in the debt related to the Convertible Notes during the year ended
December 31, 2018 (in thousands):
Balance, December 31, 2017
Issuance of new notes
Allocation of proceeds to derivative liability
Accretion to settlement value
Accrued interest
Interest forgiven upon conversion
Conversion of Convertible Notes to redeemable convertible
preferred stock
Balance, December 31, 2018
$
Financial statement impacted
7,674
7,000 Balance sheet
(1,418) Balance sheet
1,945 Statement of operations
630 Statement of operations
(47) Statement of operations
(15,784) Balance sheet
$
—
There were no Convertible Notes outstanding as of December 31, 2018 or issued during the year ended December 31,
2019.
Note 6. Redeemable Convertible Preferred Stock
Series Seed Redeemable Convertible Preferred Stock
Between 2009 and 2011, the Company authorized and issued 4,412,500 shares of Series Seed Preferred Stock at an
issuance price of $0.0001 per share, for total proceeds of less than $0.1 million.
There were no issuance costs in connection with the Series Seed Preferred Stock issuance.
Series A Redeemable Convertible Preferred Stock
In August 2018, the Company authorized 3,126,700 shares of Series A Preferred Stock. The Company then issued
1,188,707 shares of Series A Preferred Stock at an issuance price of $13.46 per share resulting in gross proceeds of
approximately $16.0 million. There were $0.1 million of issuance costs associated with the Series A Preferred Stock.
In conjunction with the August 2018 issuance of Series A Preferred Stock, all outstanding principal and accrued interest
under the Wellcome Trust Notes and Convertible Notes converted to 1,937,993 shares of Series A Preferred Stock.
Series B Redeemable Convertible Preferred Stock
In March 2019, the Company authorized 5,422,845 shares of Series B Preferred Stock. The Company then issued
4,953,758 shares of Series B Preferred Stock at an issuance price of $15.14 per share resulting in gross proceeds of
approximately $75.0 million. There were $0.2 million of issuance costs associated with the Series B Preferred Stock.
In conjunction with the March 2019 issuance of Series B Preferred Stock, all outstanding principal and accrued interest
under the Wellcome Trust Notes converted to 331,344 shares of Series B Preferred Stock. In April 2019, the Company received
$1.6 million from the issuance of the Wellcome Trust Notes, which were subsequently converted into 137,743 shares of Series B
redeemable convertible preferred stock.
Upon closing of the Company’s IPO, the then-outstanding shares of the Series Seed, Series A and Series B redeemable
convertible preferred stock converted into common stock. As of December 31, 2019, there were no shares of redeemable
convertible preferred stock authorized, issued or outstanding.
126
Note 7. Stockholders’ Equity (Deficit)
Preferred Stock
On July 2, 2019, in connection with the closing of the Company’s IPO, the Company filed its restated Certificate of
Incorporation, which authorizes the Company to issue up to 10,000,000 shares of preferred stock, $0.0001 par value per share.
There are no shares of preferred stock outstanding as of December 31, 2019.
Common Stock
As of December 31, 2019, the Company’s Certificate of Incorporation authorized the Company to issue 150,000,000
shares of common stock, $0.0001 par value per share.
Holders of the common stock are entitled to one vote for each share of common stock held at all meetings of stockholders
and written actions in lieu of meetings. The holders of common stock shall be entitled to receive dividends out of funds legally
available, as declared by the board of directors. These dividends are subject to the preferential dividend rights of the holders of
the Company’s preferred stock. Through December 31, 2019 and 2018, no cash dividends have been declared or paid.
Upon completion of the Company’s IPO on July 2, 2019, all outstanding shares of Series Seed, Series A, and Series B
Redeemable Convertible Preferred Stock converted to common stock.
As of December 31, 2019, there were 26,012,754 shares of common stock outstanding.
Note 8. Net Loss per Share
Net Loss per Share
The following table sets forth the computation of basic and diluted net loss per share of common stock for the year ended
December 31, 2019 (in thousands, except share and per share data):
Net Loss
Weighted-average shares used in computing net loss per share
Net loss per share, basic and diluted
Year Ended
December 31,
$
$
2019
(43,957)
11,958,152
(3.68)
$
$
2018
(17,512)
4
(4,378,000)
The Company’s potentially dilutive securities, which include stock options and convertible preferred stock, have been
excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore,
the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share
attributable to common stockholders is the same.
Prior to the IPO, the Company’s outstanding shares of Preferred Stock contractually entitled the holders of such shares to
participate in distributions but contractually did not require the holders of such shares to participate in losses of the Company.
Accordingly, these shares have not been included in the denominator used to calculate net loss per share.
127
Common Stock Equivalents
The following common stock equivalents presented based on amounts outstanding at each period end, have been
excluded from the calculation of diluted net loss per share because including them would have had an anti-dilutive impact:
Redeemable convertible preferred stock (as converted to common stock)
Stock options to purchase common stock
Warrants to purchase common stock
December 31,
2019
—
4,614,544
—
4,614,544
2018
9,791,151
2,310,369
19,986
12,121,506
Note 9. Stock-based Compensation
Stock Options
In September 2009, the Company’s board of directors approved the 2009 Stock Incentive Plan (the “2009 Plan”) which
provides for the grant of incentive stock options to employees and non-statutory stock options to directors, consultants, and non-
employees of the Company. The aggregate common shares issuable were 3,911,138 under the 2009 Plan, as amended. The
2009 Plan terminated in July 2019 effective upon the completion of the Company’s IPO. No additional options will be granted
under the 2009 Plan. At December 31, 2019, there were 3,703,183 options and restricted stock units (“RSUs”) outstanding
under the 2009 Plan.
In May 2019, the board of directors approved the 2019 Stock Option and Incentive Plan (the “2019 Plan”) which became
effective on June 26, 2019, the date immediately prior to the date on which the registration statement related to the IPO was
declared effective by the SEC. The 2019 Plan will expire in May 2029. Under the 2019 Plan, the Company may grant incentive
stock options, non-statutory stock options, restricted stock awards, RSUs and other stock-based awards. There were 1,709,832
shares of the Company’s common stock initially reserved for issuance under the 2019 Plan. The number of shares of common
stock underlying awards that expire, or are terminated, surrendered, canceled or forfeited without having been fully exercised
under the 2009 Plan will be added to the shares of common stock available for issuance under the 2019 Plan. In addition, the
number of shares available for issuance automatically increase on January 1, 2020 and each January 1 thereafter by 4% of the
number of shares of common stock outstanding on the immediately preceding December 31, subject to limitation. As of
December 31, 2019, there were 829,670 common shares available for issuance and 1,016,524 options outstanding under the
2019 Plan.
Options under the 2019 Plan generally vest based on the grantee’s continued service with the Company during a specified
period following a grant as determined by the board of directors and expire ten years from the grant date. In general, awards
typically vest in four years, but vesting conditions can vary based on the discretion of the Company’s board of directors.
128
A summary of the Company’s stock option activity and related information is as follows:
Outstanding as of December 31, 2018
Granted
Exercised
Forfeited
Outstanding as of December 31, 2019
Options vested and expected to vest as of
December 31, 2019
Options exercisable as of December 31, 2019
Weighted-
Average
Exercise
Price
Per Share
Weighted-
Average
Remaining
Contractual
Term
(Years)
Number of
Shares
2,310,369 $
2,633,146
(38,961)
(290,010)
4,614,544 $
4.49
12.03
0.11
2.70
8.94
Aggregate
Intrinsic Value
(in thousands)
6,420
7.1 $
8.3 $
306,395
4,614,544 $
3,123,519 $
8.94
8.39
8.3 $
7.9 $
306,395
209,130
The aggregate intrinsic values of options outstanding, exercisable, vested and expected to vest were calculated as the
difference between the exercise price of the options and the publicly traded stock price of the Company’s common stock as of
December 31, 2019.
As of December 31, 2019, there was $6.0 million of unrecognized compensation cost, which is expected to be recognized
over a weighted-average period of 2.6 years.
The fair value of all option activity was estimated at the date of grant using the Black-Scholes model with the following
assumptions:
Fair value of options
Fair value of common stock
Expected term (in years)
Expected volatility
Risk-free interest rate
Expected dividend yield
$
$
Year Ended
December 31,
2019
3.84 - 8.05
9.20 - 20.02
5.02 - 6.16
43.54% - 48.22%
1.59% - 2.44%
0.00%
On May 16, 2019, the Company issued 105,163 fully vested restricted common stock units. The average grant date fair
value was $10.97 per share. As of December 31, 2019, there was no unrecognized compensation expense related to unvested
RSUs.
Warrants
In October 2016, PureTech Health, a related party, agreed to provide management services to the Company in exchange
for a warrant to purchase up to 19,998 shares of the Company’s common stock. The warrant vested monthly as services were
performed over a 24-month period and had a purchase price of $2.92 per share. The total expense for the years ended
December 31, 2019 and 2018 for the warrant was less than $0.1 million. The warrant was fully vested as of October 2018.
There was no unrecognized compensation cost related to the warrants as of December 31, 2019 and 2018.
In August 2018, PureTech Health exercised the warrant to purchase 12 shares resulting in a nominal amount of proceeds
to the Company. In March 2019, PureTech Health exercised the warrant to purchase the remaining 19,986 shares resulting in
proceeds to the Company of $0.1 million. There are no outstanding warrants as of December 31, 2019.
129
Stock-based Compensation Expense
Stock-based compensation expense is classified in the statements of operations for the years ended December 31, 2019
and 2018 as follows (in thousands):
Research and development
General and administrative
Total stock based compensation expense
Year Ended
December 31,
2019
2018
$
$
580 $
11,988
12,568 $
107
851
958
Note 10. Fair Value of Financial Assets and Liabilities
The following table presents information about the Company’s assets and liabilities as of December 31, 2019 and 2018
that are measured at fair value on a recurring basis and indicates the level of the fair value hierarchy utilized to determine such
fair values (in thousands):
Assets:
Cash equivalents (Money Market Fund)
Short-term investments (US Treasuries)
Total
Assets:
Cash equivalents (US Treasuries)
Short-term investments (US Treasuries)
Total
Liabilities:
Derivative instrument
Total
Fair Value Measurement
at December 31, 2019 Using
Level 1
Level 2
Level 3
Total
$
$
197,303 $
180,468
377,771 $
— $
—
— $
— $
—
— $
197,303
180,468
377,771
Fair Value Measurement
at December 31, 2018 Using
Level 1
Level 2
Level 3
Total
$
$
$
$
5,042 $
4,983
10,025 $
— $
— $
— $
—
— $
— $
— $
— $
—
— $
5,042
4,983
10,025
389 $
389 $
389
389
During the years ended December 31, 2019 and 2018, there were no transfers between Level 1, Level 2 and Level 3.
130
The estimated fair value and amortized cost of the Company’s short-term investments by contractual maturity are
summarized as follows (in thousands):
Due in one year or less
Total
Due in one year or less
Total
Amortized
Cost
180,463 $
180,463 $
$
$
December 31, 2019
Unrealized
Gains
Unrealized
Losses
Fair Value
5 $
5 $
— $
— $
180,468
180,468
December 31, 2018
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
$
$
4,984 $
4,984 $
— $
— $
(1) $
(1) $
4,983
4,983
The derivative liability was considered a Level 3 liability because its fair value measurement was based, in part, on
significant inputs not observed in the market. The Company determined the fair value of the liability as described in Note 5. Any
reasonable changes in the assumptions used in the valuation could materially affect the financial results of the Company. The
Company recognized the following changes in the fair value of derivative liabilities during the years ended December 31, 2019
and 2018 (in thousands):
Balance, December 31, 2017
Allocation of note issuance proceeds to derivative
Change in fair value of derivative
Conversion of convertible debt to Series A preferred stock
Balance, August 1, 2018 (date of conversion)
Allocation of note issuance proceeds to derivative
Change in fair value of derivative
Balance, December 31, 2018
Allocation of note issuance proceeds to derivative
Change in fair value of derivative
Conversion of convertible debt to Series B preferred stock
Balance, December 31, 2019
Note 11. Commitments and Contingencies
Leases
$
$
2,606
1,418
430
(4,454)
—
375
14
389
750
135
(1,274)
—
The Company entered into a 51-month lease for office space in Boston, Massachusetts that began in December 2018 and
expires in February 2023. The Company is required to maintain a cash balance of $0.1 million to secure a letter of credit
associated with this lease. The amount was classified as restricted cash in the consolidated balance sheets at December 31,
2019 and 2018.
131
The Company recorded rent expense of $0.4 million and less than $0.1 million during the years ended December 31, 2019
and 2018, respectively. Future minimum lease payments under non-cancelable operating lease agreements as of December 31,
2019, are as follows (in thousands):
As of December 31,
2020
2021
2022
2023
2024 and thereafter
Total
Minimum Lease
Payments
499
506
514
86
—
1,605
$
$
Intellectual Property License with Eli Lilly and Company
In May 2012, the Company entered into an exclusive license agreement (the “Lilly License Agreement”) with Eli Lilly,
pursuant to which Eli Lilly assigned to us all of its rights to certain patents (now expired), regulatory documentation, data records
and materials related to xanomeline. The Company is also entitled to sublicense or otherwise transfer the rights granted in
connection with the Lilly License Agreement.
Under the Lilly License Agreement, the Company is obligated to use commercially reasonable efforts to develop,
manufacture, commercialize and seek and maintain regulatory approval for xanomeline, in any formulation, for use in humans.
The Company paid Eli Lilly an upfront payment of $0.1 million and has agreed to make milestone payments to Eli Lilly of
up to an aggregate of $16 million upon the achievement of specified regulatory milestones and up to an aggregate of $54 million
in commercial milestones. In addition, the Company is obligated to pay Eli Lilly tiered royalties, at rates in the low to mid single-
digit percentages, on the worldwide net sales of any commercialized product on a country-by-country basis until the expiration of
the applicable royalty term, which is the longer of six years from the date of first commercial sale of each licensed product within
a country or data exclusivity in such country. During the royalty term, Eli Lilly is prohibited from granting any third-party rights to
the patents, regulatory documentation, data records and materials that have been licensed to us under the Lilly License
Agreement.
The Lilly License Agreement will expire on the later of (i) the expiration of the last-to-expire royalty term on a
licensed product-by-licensed product basis or (ii) the date on which the Company has made all milestone payments pursuant to
the terms of the Lilly License Agreement, unless terminated earlier by the parties. In no event will the term of the Lilly License
Agreement exceed 15 years past the anniversary of the first commercial sale of a xanomeline product. The Company may
terminate the Lilly License Agreement for any reason with proper prior notice to Eli Lilly. Either party may terminate the Lilly
License Agreement upon an uncured material breach by the other party.
The initial upfront payment of $0.1 million was expensed when incurred in May 2012. As of December 31, 2019, no
milestones have been reached, and accordingly, no milestone payments have been made.
132
Intellectual Property License with PureTech Health
In March 2011, the Company entered into an exclusive license agreement (the “Patent License Agreement”) with
PureTech Health, pursuant to which PureTech Health granted us an exclusive license to patent rights relating to combinations of
a muscarinic activator with a muscarinic inhibitor for the treatment of central nervous system disorders.
In connection with the Patent License Agreement, the Company has agreed to make milestone payments to PureTech
Health of up to an aggregate of $10 million upon the achievement of specified development and regulatory milestones. In
addition, the Company is obligated to pay PureTech Health low single-digit royalties on the worldwide net sales of any
commercialized product covered by the licenses granted under the Patent License Agreement. In the event that the Company
sublicenses any of the patent rights granted under the Patent License Agreement, the Company will be obligated to pay
PureTech Health royalties within the range of 15% to 25% on any income we receive from the sublicensee, excluding royalties.
The Company may terminate the Patent License Agreement for any reason with proper prior notice to PureTech Health.
Either party may terminate the Patent License Agreement upon an uncured material breach by the other party.
The Company incurred no expenses related to the Patent License provided by PureTech Health during the years ended
December 31, 2019 and 2018. The Company had no outstanding liabilities to PureTech Health related to the Patent License at
December 31, 2019 and 2018.
Indemnification
In the normal course of business, the Company enters into contracts and agreements that contain a variety of
representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is
unknown because it involves claims that may be made against the Company in the future but have not yet been made. To date,
the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However,
the Company may incur charges in the future as a result of these indemnification obligations.
Contingencies
From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business
activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made, and such
expenditures can be reasonably estimated.
Litigation
The Company is not a party to any litigation and does not have contingency reserves established for any litigation liabilities
as of December 31, 2019.
133
Note 12. Income Taxes
A reconciliation of the differences between the effective tax rates of the Company and the U.S. federal statutory tax rate
are as follows:
Statutory tax rate
State taxes, net of federal benefit
Share-based compensation
Change in derivative liability
Non-deductible interest expense
Other
Tax credits
Change in valuation allowance
Impact of 2018 tax rate changes on temporary differences
Effective Income tax rate
Year Ended December 31,
2019
2018
21.0%
6.7%
0.0%
-0.1%
-0.4%
0.3%
4.9%
-32.4%
0.0%
0.0%
21.0%
5.0%
-1.0%
-0.5%
-3.1%
0.0%
3.0%
-24.4%
0.0%
0.0%
During the years ended December 31, 2019 and 2018, the Company recorded no income tax benefit for the net operating
losses incurred or for the research and development tax credits generated in each year, due to the full valuation allowance
maintained against the Company’s net deferred tax assets.
Significant components of the Company’s deferred tax assets and liabilities at December 31, 2019 and December 31,
2018 are as follows:
Deferred tax assets:
Operating tax losses
Tax Credit Carryforwards
Accrued expenses
Share-based compensation
Deferred tax assets
Valuation allowance
Deferred tax liabilities:
Depreciation
Deferred tax liabilities
Net Deferred Tax Asset / (Liability)
134
December 31,
2019
2018
14,145
3,028
580
3,613
21,366
6,288
537
134
166
7,125
(21,339)
(7,122)
(27)
(27)
-
(3)
(3)
-
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amount used for income tax purposes. The Company applied the separate
return method for allocation of current and deferred tax expense. As of August 1, 2018, PureTech no longer held 80% of the
outstanding shares of the Company and therefore, beginning on this date, we filed a separate U.S. federal income tax return. As
of July 2, 2019, PureTech no longer held 50% of the outstanding shares of the Company and therefore, beginning on this date,
we will file separate state income tax returns. At December 31, 2019, on a separate return method, the Company has federal net
operating loss carryforwards totaling $51.8 million of which $9.7 million begin to expire in 2029 and $42.1 million can be carried
forward indefinitely. In addition, we had state net operating loss carryforwards totaling $51.6 million which begin to expire in
2030. Lastly, the Company has federal research credits of $2.8 million and state research credits of $0.3 million which begin to
expire in 2035 and 2031, respectively. Because the Company had historically been a subsidiary of PureTech, $51.4 million and
$16.7 million of the federal and state net operating loss carryforwards, respectively, can be used to offset income on our future
tax returns. In addition, $2.7 million and $0.3 million of the federal and state tax credit carryforwards, respectively, can be used
to offset tax due on our future tax returns. Our net operating loss and tax credit carryforwards could, in whole or in part, expire
unused and be unavailable to offset future income tax liabilities.
Management has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets,
which are comprised principally of net operating loss carryforwards and tax credit carryforwards. Under the applicable
accounting standards, management has considered the Company's history of losses and concluded that it is more likely than
not that the Company will not recognize the benefits of deferred tax assets. Accordingly, a full valuation allowance has been
established against the net deferred tax assets at December 31, 2019. The valuation allowance increased by $14.2 million
during the year ended December 31, 2019 which primarily relates to the current year operating loss and tax credits generated.
Under the provisions of the Internal Revenue Code, the net operating loss and tax credit carryforwards are subject to
review and possible adjustment by the Internal Revenue Service and state tax authorities. Net operating loss and tax credit
carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of
significant shareholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal
Revenue Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized
annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of
the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in
future years. The Company has completed financings since its inception which may have resulted in a change in control as
defined by Section 382 and 383 of the Internal Revenue Code, and it may complete future financings that could result in a
change in control in the future which may limit the amount of tax attributes available to offset future tax liabilities.
The Company accounts for uncertain tax positions pursuant to ASC 740 which prescribes a recognition threshold and
measurement process for financial statement recognition of uncertain tax positions taken or expected to be taken in a tax return.
If the tax position meets this threshold, the benefit to be recognized is measured as the tax benefit having the highest likelihood
of being realized upon ultimate settlement with the taxing authority. As of December 31, 2019, the Company has not recorded
any unrecognized tax benefits. The Company has not, as yet, completed a study of research and development tax credit
carryforwards. This study may result in an adjustment to the Company’s research and development credit carryforwards;
however, until a study is completed, and any adjustment is known, no amounts are being presented as an uncertain tax position.
A full valuation allowance has been provided against the Company’s research and development tax credits and, if an adjustment
is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the
balance sheets or statements of operations and comprehensive loss if an adjustment was required. The Company does not
expect any material change in unrecognized tax benefits within the next twelve months. The Company’s policy is to record
interest and penalties as a component of income tax expense. As of December 31, 2019, the Company has not accrued interest
or penalties related to any uncertain tax positions.
We are subject to taxation in the United States federal and certain state jurisdictions. The Company has incurred operating
losses since inception, and therefore, the losses in all periods may be adjusted by taxing jurisdictions in future periods in which
they are utilized.
135
Note 13. Related Party Transactions
PureTech Health Management Consulting Services and Overhead Agreement
The Company engages PureTech Health, a related party, to provide, among other things, management expertise, strategic
advice, administrative support, computer and telecommunications services and office infrastructure. In exchange for providing
such services, the Company pays PureTech Health a monthly fee. In addition, PureTech Health periodically invoices the
Company for out-of-pocket expenses reasonably incurred in connection with providing such business services.
The Company incurred general and administrative costs for management services provided by PureTech Health totaling
less than $0.1 million and $0.2 million in the years ended December 31, 2019 and 2018, respectively. The Company had
outstanding current liabilities to PureTech Health of less than $0.1 million at December 31, 2019 and 2018, which are recorded
as accounts payable in the consolidated balance sheets.
Note 14. 401(k) Savings Plan
The Company has a 401(k) retirement plan in which substantially all U.S. employees are eligible to participate. Eligible
employees may elect to contribute up to the maximum limits, as set by the Internal Revenue Service, of their eligible
compensation. The total contribution matching expense for the Company was less than $0.1 million for each of the years ended
December 31, 2019 and 2018.
Note 15. Subsequent Events
In January 2020, the Company amended its current lease for office space in Boston, Massachusetts to acquire
approximately 4,175 in additional square feet and to extend the original lease term through December 2023. Annual base rent
under the amended lease is approximately $0.8 million and will be subject to annual increases in accordance with the terms of
the lease agreement through 2023.
In February 2020, the Company entered into an agreement to lease approximately 5,050 square feet of office space in
Carmel, Indiana. The term of the lease will commence in June 2020 and expires in July 2023, with the option to renew for an
additional three-year term. Annual base rent under the lease is approximately $0.2 million and is subject to annual increases in
accordance with the terms of the lease agreement through July 2023.
136
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended, or the Exchange Act, that are designed to ensure that information required to be disclosed
in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by 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. In designing and evaluating our
disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its
judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, who serve as our
principal executive officer and principal financial and accounting officer, respectively, has evaluated the effectiveness of our
disclosure controls and procedures as of December 31, 2019. Based on such evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level
as of December 31, 2019.
Internal Control Over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting
This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over
financial reporting or an attestation report of our independent registered public accounting firm due to a transition period
established by rules of the SEC for newly public companies.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) during the fiscal quarter ended December 31, 2019 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
137
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 will be included in our definitive proxy statement to be filed with the SEC with
respect to our 2020 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item 11 will be included in our definitive proxy statement to be filed with the SEC with
respect to our 2020 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this Item 12 will be included in our definitive proxy statement to be filed with the SEC with
respect to our 2020 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 will be included in our definitive proxy statement to be filed with the SEC with
respect to our 2020 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 will be included in our definitive proxy statement to be filed with the SEC with
respect to our 2020 Annual Meeting of Stockholders and is incorporated herein by reference.
138
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
1. Consolidated Financial Statements
The following documents are included in this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Financial statement schedules have been omitted because they are either not required or not applicable or the information
is included in the consolidated financial statements or the notes thereto.
3. Exhibits
The exhibits required by Item 601 of Regulation S-K and Item 15(b) of this Annual Report on Form 10-K are listed in the
Exhibit Index immediately preceding the signature page of this Annual Report on Form 10-K. The exhibits listed in the Exhibit
Index are incorporated by reference herein.
139
Exhibit
Number
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#
10.10+
10.11+
10.12
10.13*
EXHIBIT INDEX
Description of Exhibit
Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Current
Report on Form 8-K, filed with the SEC on July 3, 2019, and incorporated by reference herein)
Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.2 to the Registrant’s Current Report on Form 8-
K, filed with the SEC on July 3, 2019, and incorporated by reference herein)
Specimen stock certificate evidencing the shares of common stock (filed as Exhibit 4.1 to the Registrant’s
Registration Statement on Form S-1, filed with the SEC on June 17, 2019, and incorporated by reference herein)
Amended and Restated Investors’ Rights Agreement, dated as of March 15, 2019, among the Registrant and the
other parties thereto (filed as Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1, filed with the SEC
on May 31, 2019, and incorporated by reference herein)
Description of Capital Stock
2009 Stock Incentive Plan, as amended, and forms of award agreements thereunder (filed as Exhibit 10.1 to the
Registrant’s Registration Statement on Form S-1, filed with the SEC on May 31, 2019, and incorporated by
reference herein)
2019 Stock Option and Incentive Plan (filed as Exhibit 10.2 to the Registrant’s Registration Statement on Form S-
1, filed with the SEC on June 17, 2019, and incorporated by reference herein)
Form of Incentive Stock Option Agreement under the Registrant’s 2019 Stock Option and Incentive Plan (filed as
Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1, filed with the SEC on May 31, 2019, and
incorporated by reference herein)
Form of Non-Qualified Stock Option Agreement for Company Employees under the Registrant’s 2019 Stock Option
and Incentive Plan (filed as Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1, filed with the SEC
on May 31, 2019, and incorporated by reference herein)
Form of Non-Qualified Stock Option Agreement for Non-Employee Directors under the Registrant’s 2019 Stock
Option and Incentive Plan (filed as Exhibit 10.5 to the Registrant’s Registration Statement on Form S-1, filed with the
SEC on May 31, 2019, and incorporated by reference herein)
Form of Restricted Stock Award Agreement under the Registrant’s 2019 Stock Option and Incentive Plan (filed as
Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1, filed with the SEC on May 31, 2019, and
incorporated by reference herein)
Form of Restricted Stock Unit Award Agreement for Company Employees under the Registrant’s 2019 Stock Option
and Incentive Plan (filed as Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1, filed with the SEC
on May 31, 2019, and incorporated by reference herein)
Form of Restricted Stock Unit Award Agreement for Non-Employee Directors under the Registrant’s 2019 Stock
Option and Incentive Plan (filed as Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1, filed with the
SEC on May 31, 2019, and incorporated by reference herein)
2019 Employee Stock Purchase Plan (filed as Exhibit 10.9 to the Registrant’s Registration Statement on Form S-
1, filed with the SEC on June 17, 2019, and incorporated by reference herein)
License Agreement, dated as of May 9, 2012, by and between the Registrant and Eli Lilly and Company (filed as
Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1, filed with the SEC on May 31, 2019, and
incorporated by reference herein)
Exclusive Patent License Agreement, dated as of March 4, 2011, as amended on February 1, 2013 and February
25, 2015, by and between the Registrant and PureTech Health LLC (filed as Exhibit 10.11 to the Registrant’s
Registration Statement on Form S-1, filed with the SEC on May 31, 2019, and incorporated by reference herein)
Office Lease, dated as of November 2, 2018, by and between the Registrant and T-C 33 Arch Street LLC (filed as
Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1, filed with the SEC on May 31, 2019, and
incorporated by reference herein)
Amendment to Office Lease, dated as of January 22, 2020, by and between the Registrant and T-C 33 Arch Street
LLC
140
Exhibit
Number
10.14
10.15#
10.16#
10.17#
10.18#
10.19#
10.20#
10.21#
21.1*
23.1*
31.1*
31.2*
32.1**
Description of Exhibit
Business Services, Personnel and Information Management Agreement, dated as of July 24, 2009, by and among
the Registrant, PureTech Management, Inc., PureTech Health LLC and PureTech
Health plc (filed as Exhibit 10.13 to the Registrant’s Registration Statement on Form S-1, filed with the SEC on
May 31, 2019, and incorporated by reference herein)
Employment Agreement, between the Registrant and Steven Paul (filed as Exhibit 10.14 to the Registrant’s
Registration Statement on Form S-1, filed with the SEC on May 31, 2019, and incorporated by reference herein)
Employment Agreement, between the Registrant and Andrew Miller (filed as Exhibit 10.15 to the Registrant’s
Registration Statement on Form S-1, filed with the SEC on May 31, 2019, and incorporated by reference herein)
Employment Agreement, between the Registrant and Stephen Brannan (filed as Exhibit 10.16 to the Registrant’s
Registration Statement on Form S-1, filed with the SEC on May 31, 2019, and incorporated by reference herein)
Amended and Restated Employment Agreement, dated July 3, 2019, by and between Karuna Therapeutics, Inc.
and Troy Ignelzi (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on
November 7, 2019, and incorporated by reference herein)
Form of Director Indemnification Agreement (filed as Exhibit 10.17 to the Registrant’s Registration Statement
on Form S-1, filed with the SEC on May 31, 2019, and incorporated by reference herein)
Form of Officer Indemnification Agreement (filed as Exhibit 10.18 to the Registrant’s Registration Statement
on Form S-1, filed with the SEC on May 31, 2019, and incorporated by reference herein)
Senior Executive Cash Incentive Bonus Plan (filed as Exhibit 10.19 to the Registrant’s Registration Statement
on Form S-1, filed with the SEC on May 31, 2019, and incorporated by reference herein)
List of Subsidiaries of the Registrant
Consent of KPMG LLP, independent registered public accounting firm
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 and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
*
**
+
#
Filed herewith
Furnished herewith
Certain portions of this exhibit have been omitted because they are not material and would likely cause competitive harm to the
registrant if disclosed.
Indicates a management contract or any compensatory plan, contract or arrangement.
141
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 24, 2020
Date: March 24, 2020
KARUNA THERAPEUTICS, INC.
By:
By:
/s/ Steven Paul, M.D.
Steven Paul, M.D.
Chief Executive Officer. President and Chairman
(Principal Executive Officer)
/s/ Troy Ignelzi
Troy Ignelzi
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ Steven Paul, M.D.
Steven Paul, M.D.
/s/ Troy Ignelzi
Troy Ignelzi
/s/ Edmund Harrigan, M.D.
Edmund Harrigan, M.D.
/s/ James Healy, M.D., Ph.D.
James Healy, M.D., Ph.D.
/s/ Jeffrey Jonas, M.D.
Jeffrey Jonas, M.D.
/s/ Robert Nelsen
Robert Nelsen
/s/ Atul Pande, M.D.
Atul Pande, M.D.
/s/ Heather Preston, M.D.
Heather Preston, M.D.
Chief Executive Officer, President and
Chairman (Principal Executive Officer)
Chief Financial Officer (Principal
Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
142
Date
March 24, 2020
March 24, 2020
March 24, 2020
March 24, 2020
March 24, 2020
March 24, 2020
March 24, 2020
March 24, 2020
DESCRIPTION OF CAPITAL STOCK
General
Exhibit 4.3
Our authorized capital stock consists of 150,000,000 shares of common stock, par value $0.0001 per share, and
10,000,000 shares of preferred stock, par value $0.0001 per share, all of which shares of preferred stock are undesignated.
As of December 31, 2019, 26,012,754 shares of our common stock were outstanding and held by 12 common
shareholders of record.
Common Stock
The holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of the
stockholders. The holders of our common stock do not have any cumulative voting rights. Holders of our common stock are
entitled to receive ratably any dividends declared by our board of directors out of funds legally available for that purpose, subject
to any preferential dividend rights of any outstanding preferred stock. Our common stock has no preemptive rights, conversion
rights or other subscription rights or redemption or sinking fund provisions.
In the event of our liquidation, dissolution or winding up, holders of our common stock will be entitled to share ratably in
all assets remaining after payment of all debts and other liabilities and any liquidation preference of any outstanding preferred
stock. The shares to be issued by us in this offering will be, when issued and paid for, validly issued, fully paid and non-
assessable.
Preferred Stock
Our board of directors has the authority, without further action by our stockholders, to issue up to 10,000,000 shares of
preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. These rights,
preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting, or the designation of, such series, any or all of which
may be greater than the rights of common stock. The issuance of our preferred stock could adversely affect the voting power of
holders of common stock and the likelihood that such holders will receive dividend payments and payments upon our liquidation.
In addition, the issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of our
company or other corporate action.
Registration Rights
The holders of 15,879,157 shares of our common stock are entitled to rights with respect to the registration of these
securities under the Securities Act. These rights are provided under the terms of an amended and restated investors’ rights
agreement, or the investors’ rights agreement, between us and holders of our preferred stock. The investors’ rights agreement
includes demand registration rights, short-form registration rights and piggyback registration rights. All fees, costs and expenses
of underwritten registrations under this agreement will be borne by us and all selling expenses, including underwriting discounts
and selling commissions, will be borne by the holders of the shares being registered.
Demand Registration Rights
The holders of 15,879,157 shares of our common stock are entitled to demand registration rights. Under the terms of the
investors’ rights agreement, we will be required, upon the written request of the holders of at least 40% of our outstanding
registrable securities, as defined in the investors’ rights agreement, or a lesser percent if the total amount of registrable shares
requested to be registered has an anticipated aggregate offering price to the public, net of selling expenses, of least
$10.0 million, to file a registration statement and use commercially reasonable efforts to effect the registration of all or a portion
of their registrable securities for public resale. We are required to effect only two registrations pursuant to this provision of the
investors’ rights agreement.
Short-Form Registration Rights
Pursuant to the investor rights agreement, if we are eligible to file a registration statement on Form S-3, upon the written
request of the holders of our outstanding registrable securities, as defined in the investors’ rights agreement, may demand in
writing that we register their registrable securities under the Securities Act so long as the total amount of registrable shares
requested to be registered has an anticipated aggregate offering price to the public, net of selling expenses, of least $5.0 million.
We are required to effect only two registrations in any twelve-month period pursuant to this provision of the investors’ rights
agreement. The right to have such shares registered on Form S-3 is further subject to other specified conditions and limitations.
Piggyback Registration Rights
Pursuant to the investors’ rights agreement, if we register any of our securities either for our own account or for the
account of other security holders, the holders of these shares are entitled to include their shares in the registration. Subject to
certain exceptions contained in the investors’ rights agreement, we and the underwriters may limit the number of shares
included in the underwritten offering to the number of shares which we and the underwriters determine in our sole discretion will
not jeopardize the success of the offering. In connection with this offering, the holders of registrable securities were entitled to,
and the necessary percentage of holders waived, their rights to notice of this offering and to include their shares of registrable
securities in this offering.
Indemnification
Our investor rights agreement contains customary cross-indemnification provisions, under which we are obligated to
indemnify holders of registrable securities in the event of material misstatements or omissions in the registration statement
attributable to us, and they are obligated to indemnify us for material misstatements or omissions attributable to them.
Expiration of Registration Rights
The demand registration rights and short form registration rights granted under the investor rights agreement will
terminate on June 27, 2024.
Anti-Takeover Effects of our Certificate of Incorporation and Bylaws and Delaware Law
Our certificate of incorporation and bylaws include a number of provisions that may have the effect of delaying, deferring
or preventing another party from acquiring control of us and encouraging persons considering unsolicited tender offers or other
unilateral takeover proposals to negotiate with our board of directors rather than pursue non-negotiated takeover attempts.
These provisions include the items described below.
Board Composition and Filling Vacancies
Our certificate of incorporation provides for the division of our board of directors into three classes serving staggered
three-year terms, with one class being elected each year. Our certificate of incorporation also provides that directors may be
removed only for cause and then only by the affirmative vote of the holders of 75% or more of the shares then entitled to vote at
an election of directors. Further, any vacancy on our board of directors, however occurring, including a vacancy resulting from
an increase in the size of our board, may only be filled by the affirmative vote of a majority of our directors then in office even if
less than a quorum. The classification of directors, together with the limitations on removal of directors and treatment of
vacancies, has the effect of making it more difficult for stockholders to change the composition of our board of directors.
No Written Consent of Stockholders
Our certificate of incorporation provides that all stockholder actions are required to be taken by a vote of the stockholders
at an annual or special meeting, and that stockholders may not take any action by written consent in lieu of a meeting. This limit
may lengthen the amount of time required to take stockholder actions and would prevent the amendment of our bylaws or
removal of directors by our stockholders without holding a meeting of stockholders.
Meetings of Stockholders
Our certificate of incorporation and bylaws provide that only a majority of the members of our board of directors then in
office may call special meetings of stockholders and only those matters set forth in the notice of the special meeting may be
considered or acted upon at a special meeting of stockholders. Our bylaws limit the business that may be conducted at an
annual meeting of stockholders to those matters properly brought before the meeting.
Advance Notice Requirements
Our bylaws establish advance notice procedures with regard to stockholder proposals relating to the nomination of
candidates for election as directors or new business to be brought before meetings of our stockholders. These procedures
provide that notice of stockholder proposals must be timely given in writing to our corporate secretary prior to the meeting at
which the action is to be taken. Generally, to be timely, notice must be received at our principal executive offices not less than
90 days nor more than 120 days prior to the first anniversary date of the annual meeting for the preceding year. Our bylaws
specify the requirements as to form and content of all stockholders’ notices. These requirements may preclude stockholders
from bringing matters before the stockholders at an annual or special meeting.
Amendment to Certificate of Incorporation and Bylaws
Any amendment of our certificate of incorporation must first be approved by a majority of our board of directors, and if
required by law or our certificate of incorporation, must thereafter be approved by a majority of the outstanding shares entitled to
vote on the amendment and a majority of the outstanding shares of each class entitled to vote thereon as a class, except that
the amendment of the provisions relating to stockholder action, board composition, limitation of liability and the amendment of
our bylaws and certificate of incorporation must be approved by not less than 75% of the outstanding shares entitled to vote on
the amendment, and not less than 75% of the outstanding shares of each class entitled to vote thereon as a class. Our bylaws
may be amended by the affirmative vote of a majority of the directors then in office, subject to any limitations set forth in the
bylaws; and may also be amended by the affirmative vote of at least 75% of the outstanding shares entitled to vote on the
amendment, or, if our board of directors recommends that the stockholders approve the amendment, by the affirmative vote of
the majority of the outstanding shares entitled to vote on the amendment, in each case voting together as a single class.
Undesignated Preferred Stock
Our certificate of incorporation provides for 10,000,000 authorized shares of preferred stock. The existence of authorized
but unissued shares of preferred stock may enable our board of directors to discourage an attempt to obtain control of us by
means of a merger, tender offer, proxy contest or otherwise. For example, if in the due exercise of its fiduciary obligations, our
board of directors were to determine that a takeover proposal is not in the best interests of our stockholders, our board of
directors could cause shares of preferred stock to be issued without stockholder approval in one or more private offerings or
other transactions that might dilute the voting or other rights of the proposed acquirer or insurgent stockholder or stockholder
group. In this regard, our certificate of incorporation grants our board of directors broad power to establish the rights and
preferences of authorized and unissued shares of preferred stock. The issuance of shares of preferred stock could decrease the
amount of earnings and assets available for distribution to holders of shares of common stock. The issuance may also adversely
affect the rights and powers, including voting rights, of these holders and may have the effect of delaying, deterring or
preventing a change in control of us.
Exclusive Jurisdiction for Certain Actions
Our bylaws provide that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of
Delaware will be the sole and exclusive forum for state law claims for (i) any derivative action or proceeding brought on our
behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers and employees to us
or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law,
our certificate of incorporation or our bylaws, or (iv) any action asserting a claim that is governed by the internal affairs doctrine,
in each case subject to the Court of Chancery having personal jurisdiction over the indispensable parties named as defendants
therein. This provision will not apply to actions arising under the Securities Act or the Exchange Act. Although we believe this
provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it
applies, the provision may have the effect of discouraging lawsuits against our directors and officers. The enforceability of
similar exclusive forum provisions in other companies’ bylaws has been challenged in legal proceedings, and it is possible that a
court could rule that this provision in our bylaws is inapplicable or unenforceable.
Section 203 of the Delaware General Corporation Law
We are subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a
three-year period following the time that this stockholder becomes an interested stockholder, unless the business combination is
approved in a prescribed manner. Under Section 203, a business combination between a corporation and an interested
stockholder is prohibited unless it satisfies one of the following conditions:
• before the stockholder became interested, our board of directors approved either the business combination or the
transaction which resulted in the stockholder becoming an interested stockholder;
• upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the voting stock outstanding, shares owned by persons who are
directors and also officers, and employee stock plans, in some instances, but not the outstanding voting stock owned
by the interested stockholder; or
• at or after the time the stockholder became interested, the business combination was approved by our board of
directors and authorized at an annual or special meeting of the stockholders by
the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested
stockholder.
• Section 203 defines a business combination to include:
• any merger or consolidation involving the corporation and the interested stockholder; any sale, transfer, lease, pledge
or other disposition involving the interested stockholder of 10% or more of the assets of the corporation; subject to
exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to
the interested stockholder;
• subject to exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share
of the stock of any class or series of the corporation beneficially owned by the interested stockholder; and
• the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation.
In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by the entity or
person.
Our common stock is listed on The Nasdaq Global Market under the trading symbol “KRTX.”
Nasdaq Global Market Listing
The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, LLC.
Transfer Agent and Registrar
FIRST AMENDMENT TO LEASE
Exhibit 10.13
THIS FIRST AMENDMENT TO LEASE (this "Amendment") is made and entered into as of the 22nd day of January,
2020, by and between T-C 33 ARCH STREET LLC, a Delaware limited liability company (“Landlord”) and KARUNA
THERAPEUTICS, INC (formerly known as Karuna Pharmaceuticals, Inc.), a Delaware corporation (“Tenant”). Landlord and
Tenant hereby represent and agree as follows:
W I T N E S S E T H:
WHEREAS, Landlord and Tenant entered into that certain lease dated November 2, 2018 (the “Original Lease”) with
respect to certain premises consisting of 7,050 rentable square feet on the 31st floor, (the “Existing Premises”) in the building
having an address of 33 Arch Street, Boston, Massachusetts (the “Building”);
WHEREAS, the parties desire to amend the Original Lease in order to expand the Premises, extend the term of the
Original Lease, and make other agreements according to the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of Ten Dollars ($10.00), the covenants and agreements herein contained, and
other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1.
Capitalized Terms. All capitalized terms not otherwise modified or defined herein shall have the same meanings as are
ascribed to them in the Original Lease. All references herein to the “Lease” or “this Lease” or “the Lease” or “herein” or
“hereunder” or similar terms, or to any section thereof shall mean the Original Lease, or such section thereof, as amended by
this Amendment.
2.
Extension of Term. The current term of the Original Lease (the “Current Term”) is due to expire on February 28, 2023
(the “Original Expiration Date”). The Current Term is hereby extended for an additional term (the “Extension Term”)
commencing on March 1, 2023 (the “Extension Term Commencement Date”) and expiring on December 31, 2023 (the
“Extension Term Expiration Date”). As of the date of this Amendment, all references in the Lease to the word “Term” or “term”
or the phrase “Lease Term” shall be deemed to mean and refer to the Current Term together with the Extension Term. The
Extension Term shall be upon all of the same terms and conditions of the Lease for the Current Term, except as otherwise
provided in this Amendment. Tenant acknowledges that it is in possession of the Existing Premises and accepts the Existing
Premises in “AS IS, WHERE IS, WITH ALL FAULTS CONDITION,” without any representations or warranties by Landlord to
Tenant as to the condition of the Existing Premises.
3.
Existing Premises.
A.
Base Rent—Existing Premises-Current Term. Tenant shall continue to pay Base Rent for the
Existing Premises during the remainder of the Current Term (i.e. through February 28, 2023) at the respective rates,
and in the manner and at the times provided in the Original Lease.
B.
Base Rent—Existing Premises-Extension Term. Tenant shall pay Base Rent for Existing Premises
during the period commencing on the Extension Term Commencement Date (i.e., March 1, 2023) and continuing
through the Extension Term Expiration Date (i.e. December 31, 2023) at the rate of $73.00 per rentable square foot
per annum (i.e., $514,650.00 per annum; $42,887.50 per month) in the manner and at the times set forth in the
Original Lease.
{A0643042.8 }
C.
Operating Expenses and Taxes—Existing Premises. Tenant shall continue to pay Additional Rent
on account of Operating Expenses and Taxes with respect to the Existing Premises during the remainder of the Term
as extended by this Amendment (i.e., through December 31, 2023) as set forth in the Original Lease, it being
acknowledged that Tenant’s Proportionate Share, Base Year for Operating Expenses and Base Year for Real Estate
Taxes shall be as set forth in the Original Lease.
4.
Expansion Premises A.
A.
Delivery of Expansion Premises A. Landlord and Tenant have agreed to expand the Premises to include the
approximately 2,422 rentable square feet on the thirty-first (31st) floor of the Building, as shown on the plan attached hereto as
Exhibit A ("Expansion Premises A"). Landlord shall deliver Expansion Premises A to Tenant for completion of Tenant’s Work
(defined below) on or before February 1, 2020 vacant and broom clean and free of all personal property and with all Building
systems serving Expansion Premises A in good working order and condition (such date of delivery being referred to herein as
the “Expansion Premises A Commencement Date”). Tenant agrees that a delay by Landlord in delivering Expansion
Premises A to Tenant shall not be a default by Landlord hereunder, shall not entitle Tenant to terminate the Lease as to
Expansion Premises A or otherwise, and shall not entitle Tenant to any abatement of rent, damages, or any other remedy on
account of such delay provided, however, that if Landlord shall fail to deliver Expansion Premises A to Tenant on or before
February 15, 2020 (as extended due to Force Majeure and due to any Tenant Delay (defined below), the “Expansion Premises
A Extended Delivery Date”), Tenant shall be entitled to a day for day credit against the Expansion Premises A Base Rent
(defined below) payable hereunder for each day after the Expansion Premises A Extended Delivery Date that Landlord has
failed to deliver Expansion Premises A. For purposes of this Section 4 (A), a Tenant Delay shall be any delay in the actual
delivery of Expansion Premises A resulting from Tenant’s failure to timely perform any of its obligations under the Lease or
resulting from any act or omission of Tenant, its agents, employees or contractors. Landlord shall deliver Expansion Premises A
to Tenant, and, except as otherwise set forth herein, Tenant agrees to accept Expansion Premises A from Landlord in their then
existing “AS-IS”, “WHERE-IS” and “WITH ALL FAULTS” condition. Without limitation of the maintenance and repair obligations
imposed upon Landlord by the express terms of the Lease, Landlord shall have no obligation to refurbish or otherwise improve
the Premises throughout the Lease Term.
The Term of the Lease with respect to Expansion Premises A shall commence on Expansion Premises A Commencement
Date, Rent shall commence with respect to Expansion Premises A on the date that is two (2) months following the Expansion
Premises A Commencement Date (the “Expansion Premises A Rent Commencement Date”), and the Term shall expire on
the Extension Term Expiration Date, unless sooner terminated in accordance with the terms of the Lease. Effective as of the
Expansion Premises A Commencement Date, the “Premises” under the Lease shall be comprised of the Existing Premises and
Expansion Premises A, having a total of approximately 9,472 rentable square feet. Promptly upon the occurrence of the
Expansion Premises A Commencement Date, Landlord and Tenant shall execute and deliver a commencement date agreement
designating the Expansion Premises A Commencement Date and the Expansion Premises A Rent Commencement Date, but
the failure by either party to execute and deliver such an agreement shall have no effect on the Expansion Premises A
Commencement Date or Expansion Premises A Rent Commencement Date determined as above.
2
A.
Base Rent--Expansion Premises A. Beginning on the Expansion Premises A Rent Commencement Date
through the Extension Term Expiration Date, Tenant shall pay Base Rent with respect to Expansion Premises A (the
“Expansion Premises A Base Rent”) in the manner and at the times set forth in the Original Lease at the rates set forth below:
Period:
Annual
Base Rent for Expansion
Premises A:
Monthly
Base Rent for
Expansion Premises A
Per Rentable Square
Foot of Expansion
Premises A
$185,283.00
Expansion Premises A Rent
Commencement Date through
December 31, 2020
January 1, 2021-December 31, 2021 $189,909.02
January 1, 2022-December 31, 2022 $194,656.14
January 1, 2023-December 31, 2023 $199,524.36
$15,440.25
$15,825.75
$16,221.35
$16,627.03
*annualized
(2422 rsf)
$76.50
$78.41
$80.37
$82.38
C.
Operating Expenses and Taxes--Expansion Premises A. During the period beginning on the Expansion
Premises A Rent Commencement Date and continuing through the remainder of the Term as extended hereby, Tenant shall pay
Additional Rent on account of Operating Expenses and Taxes with respect to Expansion Premises A calculated based on a
Tenant’s Proportionate Share of 0.401%, a Base Year for Operating Expenses of Calendar Year 2020, and a Base Year for Real
Estate Taxes of Fiscal Year 2020, and otherwise calculated in the manner set forth in the Original Lease, payable in the manner
and at the times set forth in the Original Lease.
D.
Tenant Improvement Allowance—Expansion Premises A. Landlord shall provide to Tenant a Tenant
Improvement Allowance of up to $66,605.00 in the aggregate (“Expansion Premises A Tenant Improvement Allowance”) to
be applied to hard costs, and, subject to the limitations set forth below, soft costs, incurred by Tenant with respect to the
performance of Tenant’s Work in Expansion Premises A (“Tenant’s Expansion Premises A Work”) and to the hard costs and,
subject to the limitations set forth below, the soft costs, incurred by Tenant with respect to the performance of Tenant’s Work in
Expansion Premises B (“Tenant’s Expansion Premises B Work”, and together with Tenant’s Expansion Premises A Work,
collectively “Tenant’s Expansion Premises Work”) provided that requisitions are submitted by Tenant in accordance with the
provisions of this Amendment on or before the date that is eighteen (18) months after the Expansion Premises B
Commencement Date (the “Expansion Premises Outside Requisition Date”). The costs of Tenant’s Expansion Premises
Work shall not include costs arising from any default or from any facts or circumstances that could become a default after
applicable notice and cure periods, such as legal fees or bonding costs arising in connection with a mechanic’s lien placed on
the Premises or Tenant’s interest therein.
3
The portion of the Expansion Premises A Tenant Improvement Allowance that may be allocated by Tenant to soft
costs of Tenant’s Expansion Premises Work shall be limited to a maximum of twenty-five percent (25%) of the Expansion
Premises A Tenant Improvement Allowance.
Notwithstanding the foregoing, if any portion of the Expansion Premises A Tenant Improvement Allowance remains
after payment of the hard costs and soft costs of Tenant’s Expansion Premises Work Tenant may apply the remaining balance of
the Expansion Premises A Tenant Improvement Allowance to the installments of Base Rent (or portions thereof) payable under
the Lease, provided that, on or before the Expansion Premises Outside Requisition Date, Tenant shall notify Landlord in writing
of the amount of the remainder of the Expansion Premises A Tenant Improvement Allowance to be allocated to Base Rent (the
“Expansion Premises A Rent Allocation”). The Expansion Premises A Rent Allocation shall be credited to the next payable
installments of Base Rent (or portions thereof). Landlord shall not be obligated to disburse funds for materials stored off-site.
5.
Expansion Premises B
A.
Delivery of Expansion Premises B. Landlord and Tenant have agreed to expand the Premises to
include the approximately 1,751 rentable square feet on the thirty-first (31st) floor of the Building, as shown on the
plan attached hereto as Exhibit B ("Expansion Premises B"). Landlord agrees to deliver Expansion Premises B to
Tenant for completion of Tenant’s Expansion Premises Work (defined below), vacant and broom clean and free of all
personal property and with all Building systems serving Expansion Premises B in good working order and condition
(such date of delivery being referred to herein as the “Expansion Premises B Commencement Date”). Landlord
estimates that Expansion Premises B will be delivered to Tenant on or about July 1, 2020 (the “Estimated
Expansion Premises B Delivery Date”). Tenant agrees that a delay by Landlord in delivering Expansion Premises B
to Tenant shall not be a default by Landlord hereunder, shall not entitle Tenant to terminate the Lease as to
Expansion Premises B or otherwise, and shall not entitle Tenant to any abatement of rent, damages, or any other
remedy on account of such delay; provided, however, that (1) if Landlord shall fail to deliver Expansion Premises B to
Tenant in the condition provided herein on or before September 1, 2020 (as such date may be extended due to Force
Majeure and due to any Tenant Delay (defined below), the “Expansion Premises B Extended Delivery Date”),
Tenant shall be entitled to a day per day credit against the Expansion Premises B Base Rent otherwise payable
hereunder for each day after the Expansion Premises B Extended Delivery Date that delivery of Expansion Premises
B was delayed and (2) Landlord shall fail to deliver Expansion Premises B to Tenant in the condition provided herein
on or before December 31, 2020 as extended due to any Tenant Delay and due to Force Majeure (the “Expansion
Premises B Outside Delivery Date”), Tenant shall have the right to terminate the Lease as to Expansion Premises B
only, by written notice to Landlord given within ten (10) days following the Expansion Premises B Outside Delivery
Date. Landlord shall deliver Expansion Premises B to Tenant, and, except as otherwise set forth herein, Tenant
agrees to accept Expansion Premises B from Landlord in their then existing “AS-IS”, “WHERE-IS” and “WITH ALL
FAULTS” condition. Without limitation of the maintenance and repair obligations imposed upon Landlord by the
express terms of the Lease, Landlord shall have no obligation to refurbish or otherwise improve the Premises
throughout the Lease Term. For purposes of this Section 5 (A), a Tenant Delay shall be any delay in the actual
delivery of Expansion Premises B resulting from Tenant’s failure to timely perform any of its obligations under the
Lease or resulting from any act or omission of Tenant, its agents, employees or contractors.
4
The Term of the Lease with respect to Expansion Premises B shall commence on the Expansion Premises B
Commencement Date, Rent shall commence with respect to Expansion Premises B on the date that is two (2) months following
the Expansion Premises B Commencement Date (the “Expansion Premises B Rent Commencement Date”), and the Term
shall expire on the Extension Term Expiration Date, unless sooner terminated in accordance with the terms of the Lease.
Effective as of the Expansion Premises B Commencement Date, the “Premises” under the Lease shall be comprised of the
Existing Premises, Expansion Premises A, and Expansion Premises B, having a total of approximately 11,223 rentable square
feet. Promptly upon the occurrence of the Expansion Premises B Commencement Date, Landlord and Tenant shall execute and
deliver a commencement date agreement designating the Expansion Premises B Commencement Date and the Expansion
Premises B Rent Commencement Date, but the failure by either party to execute and deliver such an agreement shall have no
effect on the Expansion Premises B Commencement Date or the Expansion Premises B Rent Commencement Date determined
as above.
B.
Base Rent--Expansion Premises B. Beginning on the Expansion Premises B Rent Commencement Date
through the Extension Term Expiration Date, Tenant shall pay Base Rent with respect to Expansion Premises B (the
“Expansion Premises B Base Rent”) in the manner and at the times set forth in the Original Lease at the rates set forth below:
Period:
Annual
Base Rent for Expansion
Premises B
Monthly
Base Rent for
Expansion Premises B
Per Rentable Square
Foot of Expansion
Premises B
Expansion Premises B Rent
Commencement Date through
December 31, 2020
January 1, 2021-December 31, 2021
January 1, 2022-December 31, 2022
January 1, 2023-December 31, 2023
*annualized
$133,951.50
$11,162.63
$137,295.91
$140,727.87
$144,247.38
$11,441.33
$11,727.32
$12,020.62
(1751 rsf)
$76.50
$78.41
$80.37
$82.38
C.
Operating Expenses and Taxes-Expansion Premises B. During the period beginning on the Expansion
Premises B Rent Commencement Date and continuing through the remainder of the Term as extended hereby, Tenant shall pay
Additional Rent on account of Operating Expenses and Taxes with respect to Expansion Premises B calculated based on a
Tenant’s Proportionate Share of 0.290%, a Base Year for Operating Expenses of Calendar Year 2020, and a Base Year for Real
Estate Taxes of Fiscal Year 2020, and otherwise calculated in the manner set forth in the Original Lease, payable in the manner
and at the times set forth in the Original Lease.
5
D.
Tenant Improvement Allowance—Expansion Premises B. Landlord shall provide to Tenant a Tenant
Improvement Allowance of up to $48,152.50 in the aggregate (“Expansion Premises B Tenant Improvement Allowance”) to
be applied to hard costs, and, subject to the limitations set forth below, soft costs, incurred by Tenant with respect to the
performance of Tenant’s Expansion Premises Work provided that (i) the Expansion Premises B Tenant Improvement Allowance
shall not be made available to Tenant until the Expansion Premises B Commencement Date shall have occurred, and (ii)
requisitions must be submitted by Tenant in accordance with the provisions of this Amendment on or before the Expansion
Premises Outside Requisition Date. The portion of the Expansion Premises B Tenant Improvement Allowance that may be
allocated by Tenant to soft costs of Tenant’s Expansion Premises Work shall be limited to a maximum of twenty-five percent
(25%) of the Expansion Premises B Tenant Improvement Allowance.
Notwithstanding the foregoing, if any portion of the Expansion Premises B Tenant Improvement Allowance remains
after payment of the hard costs and soft costs of Tenant’s Expansion Premises Work Tenant may apply the remaining balance of
the Expansion Premises B Tenant Improvement Allowance to the installments of Base Rent (or portions thereof) payable under
the Lease, provided that, on or before the Expansion Premises Outside Requisition Date, Tenant shall notify Landlord in writing
of the amount of the remainder of the Expansion Premises B Tenant Improvement Allowance to be allocated to Base Rent (the
“Expansion Premises B Rent Allocation”). The Rent Allocation shall be credited to the next payable installments of Base Rent
(or portions thereof).
6.
General Construction Provisions.
A.
Requisitions. The Expansion Premises A Tenant Improvement Allowance and Expansion Premises
B Tenant Improvement Allowance, as the case may be, shall be payable by Landlord to Tenant (or, at Landlord’s
option, directly to Tenant’s contractor) upon written requisition to Landlord. Prior to payment of any such installment
Tenant shall deliver to Landlord a written request, which request shall be given no more frequently than once every
thirty (30) days, for such disbursement, which shall be accompanied by: (i) in the case of any payments to be made
to Tenant, and not as a direct payment to the contractor, copies of paid invoices from Tenant’s contractor, and partial
lien waivers or final lien waivers (in the case of a final installment) with respect to all invoices to be paid from such
requisition, (ii) in the case of any payments to be made as a direct payment to the contractor, invoices with respect to
the work for which payment is requested, and partial lien waivers with respect to such work (or final lien waivers in the
case of a final installment) conditioned only upon payment of such invoices; (iii) a certificate signed by the Tenant’s
architect certifying that the work represented by the aforementioned invoices has been completed substantially in
accordance with the plans previously approved by Landlord which may be on AIA form G702; (iv) when the work is
substantially complete, a certificate of substantial completion signed by Tenant’s architect which may be on AIA form
G704, and, if applicable, as-built plans for Tenant’s Expansion Premises A Work or Tenant’s Expansion Premises B
Work, as the case may be, prepared by Tenant’s architect (in the case of a final installment); and (v) all other
commercially reasonable information and materials reasonably requested by Landlord. Landlord shall pay each
installment within thirty (30) days of receiving the request for such disbursement together with the materials
enumerated in the previous sentence and satisfying the requirements thereof. Each installment by Landlord will be in
the amount of Landlord’s pro-rata share
6
based on the ratio of (A) the sum of the Expansion Premises A Tenant Improvement Allowance and Expansion
Premises B Tenant Improvement Allowance being allocated to by Tenant to the Tenant’s Expansion Premises Work
included in the relevant construction and design contract to (B) the total cost of the Tenant’s Expansion Premises
Work included in the relevant construction and design contract, as evidenced by reasonably detailed documentation
delivered to Landlord with the requisition first submitted by Tenant for such Work (subject to all conditions and
limitations set forth in this Amendment), less a retainage equal to the greater of the retainage set forth in the
construction and design contract or five percent (5%) of amount due under the construction contract. Tenant shall be
entirely responsible for the costs of Tenant’s Expansion Premises Work except to the extent required to be paid by
Landlord in accordance with the terms of this Amendment. In no event shall Landlord be required to pay more than
the Expansion Premises A Tenant Improvement Allowance and the Expansion Premises B Tenant Improvement
Allowance as provided in this Amendment or to pay either the Expansion Premises A Tenant Improvement Allowance
or the Expansion Premises B Tenant Improvement Allowance except as provided in this Amendment.
B.
Plans. Tenant shall prepare at its sole cost and expense, plans and specifications for the improvements
Tenant desires to make to the Premises (the “Plans”). The Plans shall be submitted to Landlord for Landlord’s reasonable
approval, such approval not to be unreasonably withheld, conditioned or delayed, and Landlord shall respond in writing to such
request within ten (10) business days after Tenant’s request. Any disapproval by Landlord of the Plans shall be accompanied by
a reasonably specific statement of reasons therefor. If disapproved by Landlord, Tenant shall cause the Plans to be revised in a
manner sufficient to remedy Landlord's objections and/or respond to Landlord's concerns and shall resubmit the revised the
Plans to Landlord. If Landlord shall again disapprove of the Plans, Tenant shall again revise such plans and resubmit them to
Landlord pursuant to the foregoing procedures until the Plans have been approved by Landlord. The final approved Plans shall
be stamped by a Massachusetts-registered architect and/or engineer, such architect and engineer being subject to Landlord's
reasonable approval, such approval not to be unreasonably withheld, conditioned or delayed, and shall comply with all
applicable laws, ordinances and regulations (including, without limitation, the applicable requirements of the Americans with
Disabilities Act of 1990 and the Massachusetts Architectural Access Board, as amended from time to time, and the regulations
promulgated thereunder) and shall be in a form satisfactory to appropriate governmental authorities responsible for issuing
permits, approvals and licenses required for construction. Landlord will not approve any alterations or additions that require
unusual expense to readapt the Premises to normal office use on expiration or termination of this Lease or increase the cost of
insurance on the Building, unless Tenant first gives assurances acceptable to Landlord that such readaptation will be made prior
to such expiration or termination without expense to Landlord and for payment of any such increased cost. Landlord reserves
the right to require Tenant to use Landlord’s engineer to prepare all engineering plans and drawings for any structural,
mechanical, electrical, plumbing, HVAC, life safety, and sprinkler portions of Tenant’s Expansion Premises Work. Tenant
acknowledges and agrees that any review or approval by Landlord of any plans and/or specifications with respect to Tenant’s
Expansion Premises A Work or Tenant’s Expansion Premises B Work is solely for Landlord’s benefit, and without any
representation or warranty whatsoever to Tenant with respect to the adequacy, correctness or efficiency thereof or otherwise.
7
C.
Performance of Tenant’s Work. Promptly after Landlord’s approval of the Plans therefor (the
“Approved Plans”) and receipt by Tenant of all required permits and approvals, Tenant shall commence and exercise
all reasonable efforts to complete Tenant’s Expansion Premises A Work or Tenant’s Expansion Premises B Work, as
the case may be (each referred to for purposes of this Section as “Tenant’s Work”) Tenant's Work shall be performed
by a general contractor reasonably approved by Landlord, such approval not to be unreasonably withheld,
conditioned or delayed, under a written construction contract. The approval by Landlord of Tenant's general
contractor shall not impose upon Landlord any responsibility or liability whatsoever to Tenant as a result of, or arising
out of, the defaults or other acts or omissions of the general contractor. Prior to commencing Tenant’s Work, Tenant
shall obtain and provide Landlord with copies of, all state, local and other necessary permits and shall carry such
insurance and require its contractors to carry such insurance as is required under the Lease (naming Landlord,
Landlord’s property manager, any holder of any Security Document and any other parties reasonably designated by
Landlord as additional insureds) and shall deliver insurance certificates with respect to such insurance. In addition,
Landlord may reasonably monitor the progress of Tenant's Work, including, without limitation, attend any weekly or
other periodic job meetings. Any review and monitoring of Tenant’s Work by Landlord shall not impose upon Landlord
any responsibility or liability whatsoever to Tenant as a result of, or arising out of, Tenant’s Work. Tenant shall pay to
Landlord, as additional rent, the reasonable costs of Landlord’s third party engineers and other third party consultants
(but not Landlord’s on-site management personnel) for the cost of monitoring Tenant’s Work and for the cost of review
of all plans, specifications and working drawings for the Tenant’s Work, within ten (10) business days after Tenant’s
receipt of invoices either from Landlord or such consultants. Within forty‑five (45) days after completion of any
Tenant's Work, Tenant shall provide to Landlord "as-built" plans of the Tenant's Work. Tenant shall provide Landlord
with copies of the certificate of occupancy for any Tenant's Work that requires a certificate of occupancy reasonably
promptly after completion of such Tenant's Work.
7.
Security Deposit. The parties hereby acknowledge that Landlord is currently holding a Security Deposit in the form of a
Letter of Credit in the amount of One Hundred Twenty-Three Thousand Three Hundred Seventy-Five and 00/100 Dollars
($123,375.00) pursuant to Paragraph 2 (c) of the Lease. Tenant shall, at the time that Tenant executes and delivers this
Amendment to Landlord, deliver an amendment to the Letter of Credit increasing the amount to $156,862.89 or deliver a
replacement letter of credit satisfying the requirements of the Lease from an issuer approved by Landlord in the amount of
$156,862.89.
Brokers. Each party represents to the other that it has not dealt with any broker in connection with this Amendment
8.
other than CBRE and JLL (the “Brokers”). Landlord agrees to pay the Brokers pursuant to a separate agreement. Each of
Landlord and Tenant warrants and represents that it has dealt with no broker in connection with the consummation of this
Amendment other than the Brokers, and, in the event of any brokerage claims against Landlord or Tenant, as
applicable, predicated upon prior dealings with the other party, such other party agrees to defend the same and indemnify
Landlord or Tenant, as applicable, against any such claim.
8
9.
Miscellaneous. All capitalized terms used herein, unless otherwise defined herein, shall have the same meaning as the
same capitalized terms used in the Original Lease. The conditions, covenants and agreements herein contained shall be binding
upon the parties hereto and their respective successors and assigns. This Amendment may be executed in two (2) or more
counterparts, each of which shall be an original but such counterparts together shall constitute one and the same instrument
notwithstanding that both Landlord and Tenant are not signatories to the same counterpart. This Amendment shall be governed
and construed in accordance with the laws of the Commonwealth of Massachusetts applicable to agreements made and to be
performed within such state without regard to principles of conflicts of law. The illegality, invalidity or unenforceability of any
provision of this Amendment under the laws of any jurisdiction shall not affect its legality, validity or enforceability under the laws
of any other jurisdiction, nor the legality, validity or enforceability of any other provision.
Ratification of Lease and Estoppel. Except as herein modified or amended, the provisions, conditions and terms of
10.
the Original Lease shall remain unchanged and in full force and effect. The Lease constitutes the entire agreement between
Landlord and Tenant and the Lease is in full force and effect. Tenant represents that a) neither Landlord nor Tenant is in default
under any of the terms, covenants or provisions of the Lease; b) there are no offsets or defenses to the payment of the Rent,
Additional Rent, or other sums payable by Tenant under the Lease; c) Landlord has completed any and all improvements or
other work required to be completed by Landlord under the Original Lease and has paid all improvement allowances or other
monetary concessions or payments required to be paid by Landlord under the Original Lease.
[SIGNATURE PAGES TO FOLLOW]
9
SIGNATURE PAGE TO OFFICE LEASE
BY AND BETWEEN T-C 33 ARCH STREET LLC, AS LANDLORD,
AND KARUNA THERAPEUTICS, INC., AS TENANT
Landlord and Tenant have executed this First Amendment to Lease as of the day and year first above written.
LANDLORD:
T-C 33 ARCH STREET LLC,
a Delaware limited liability company
By:Teachers Insurance and Annuity Association of America,
Managing Investor
By: /s/ William K. Arkamowitz
Name: William K. Arkamowitz
Title: Authorized Signatory
Date of Execution: ___________________
10
SIGNATURE PAGE TO OFFICE LEASE
BY AND BETWEEN T-C 33 ARCH STREET LLC, AS LANDLORD,
AND KARUNA THERAPEUTICS, INC., AS TENANT
TENANT:
KARUNA THERAPEUTICS, INC.,
a Delaware corporation
By: /s/ Troy A. Ignelzi
Name: Troy A. Ignelzi
Title: Chief Financial Officer
11
Legal Name
Karuna Securities Corporation
Exhibit 21.1
State of Organization
Massachusetts
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Karuna Therapeutics, Inc.:
We consent to the incorporation by reference in the registration statement (No. 333-232521) on Form S-8 of Karuna
Therapeutics, Inc., of our report dated March 24, 2020, with respect to the consolidated balance sheets of Karuna Therapeutics,
Inc. and subsidiary as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive loss,
redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the years then ended, and
the related notes which report appears in the December 31, 2019 annual report on Form 10-K of Karuna Therapeutics, Inc.
/s/ KPMG LLP
Boston, Massachusetts
March 24, 2020
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
RULE 13A-14(A) / RULE 15D-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Steven Paul, M.D., certify that:
1. I have reviewed this Annual Report on Form 10-K of Karuna Therapeutics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make 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;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) 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) (Paragraph omitted pursuant to SEC Release Nos. 33-8238/34-47986 and 33-8392/34-49313);
(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 24, 2020
/s/ Steven Paul
Steven Paul, M.D.
Chief Executive Officer, President and
Chairman
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
RULE 13A-14(A) / RULE 15D-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Troy Ignelzi, certify that:
1. I have reviewed this Annual Report on Form 10-K of Karuna Therapeutics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make 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;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) 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) (Paragraph omitted pursuant to SEC Release Nos. 33-8238/34-47986 and 33-8392/34-49313);
(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 24, 2020
/s/ Troy Ignelzi
Troy Ignelzi
Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL
FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with this Annual Report on Form 10-K of Karuna Therapeutics, Inc. (the “Company”) for the fiscal year ended
December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the
undersigned officers hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that to the best of his or her knowledge:
1.
2.
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: March 24, 2020
/s/ Steven Paul
Steven Paul, M.D.
Chief Executive Officer, President and Chairman
(Principal Executive Officer)
/s/ Troy Ignelzi
Troy Ignelzi
Chief Financial Officer
(Principal Financial and Accounting Officer)