Karuna Therapeutics
Annual Report 2021

Plain-text annual report

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, 2021 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) 99 High Street, 26th Floor 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ The aggregate market value of the registrant’s 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 30, 2021, was $3,026.7 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 February 15, 2022, there were 29,808,281 shares of the registrant’s Common Stock, $0.0001 par value per share, outstanding. Portions of the registrant’s Proxy Statement for its 2021 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, 2021, are incorporated by reference into Part III of this Annual Report on Form 10-K. DOCUMENTS INCORPORATED BY REFERENCE Item 1. Item 1A. Item 2. Item 3. Business Risk Factors Properties Legal Proceedings Karuna Therapeutics, Inc. Index PART I PART II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9A. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Consolidated Financial Statements and Supplementary Data Controls and Procedures PART III Item 10. Item 11. Item 12. Item 13. Item 14. Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services Item 15. Signatures Exhibits, Financial Statement Schedules PART IV 2 Page 5 51 107 107 108 108 109 123 123 159 161 161 161 161 161 162 166 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: • • • • • • • • • • • • • • • 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; the ability and efforts of our licensee, Zai Lab (Shanghai) Co., Ltd. (Zai), to successfully develop and commercialize KarXT, if approved, in mainland China, Hong Kong, Macau, and Taiwan, also referred to as Greater China, under the terms and conditions of our license agreement; our plans to enter into collaborations for the development and commercialization of product candidates and the potential benefits of any such future collaboration; 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. 3 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. The principal risks we face are as follows: Summary Risk Factors • 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. • Our business substantially depends upon the successful development of KarXT. If we are unable to obtain regulatory approval for or successfully commercialize KarXT, our business may be materially harmed. • Our operations in foreign jurisdictions, and those of our collaborators, may be impacted by economic, political and social conditions in such jurisdictions, as well as government policies, any of which could impact our ability to operate in such jurisdictions. • • 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. 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. • 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. • 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. • Our commercial success depends on our ability to protect our intellectual property and proprietary technology. • 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. 4 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 a clinical-stage biopharmaceutical company driven to create and deliver transformative medicines for people living with psychiatric and neurological conditions. Our pipeline is built on the broad therapeutic potential of our proprietary lead product candidate, KarXT (xanomeline-trospium), an oral modulator of muscarinic receptors that are located both in the central nervous system, or CNS, and various peripheral tissues. KarXT combines xanomeline, a novel muscarinic agonist, with trospium, an approved muscarinic antagonist, to preferentially stimulate muscarinic receptors in the CNS. We are initially developing KarXT for the treatment of psychosis in adults with schizophrenia as well as for the treatment of psychosis in Alzheimer's disease, or AD, which is the most prevalent subtype of dementia related psychosis, or DRP. 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. 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. It is estimated that more than 21 million people are living with schizophrenia worldwide, with approximately 2.7 million in the United States, or approximately 0.5% to 1.0% of the United States population. Patients with schizophrenia experience psychotic symptoms, also known as positive symptoms, such as hallucinations and delusions. As a result of the disease, patients with schizophrenia also experience negative symptoms, such as amotivation, flat affect and social withdrawal as well as cognitive impairment. Dementia affects an estimated 8.4 million people in the United States and includes subtypes of patients living with AD dementia, dementia with Lewy Body, vascular dementia, frontotemporal dementia and Parkinson’s disease dementia. Patients with DRP share many characteristics and often exhibit similar psychiatric symptoms irrespective of their underlying neurodegenerative disease. Our evaluation of KarXT for the treatment of dementia-related psychosis will initially focus on psychosis in AD, which is the most prevalent cause of dementia, accounting for an estimated 60% to 80% of all cases. Up to 50% of AD patients exhibit psychiatric symptoms, which often leads to institutional care in a hospital or nursing home. Our initial focus on the AD dementia subtype reflects various strategic development, regulatory and commercial considerations, and we remain interested in exploring KarXT in other dementia subtypes in future development programs. We plan to share details of our Phase 3 program evaluating KarXT for the treatment of psychosis in AD in the first half of 2022 prior to the program’s initiation in mid-2022. Worldwide sales of antipsychotic drugs exceeded $11 billion in 2019 and are expected to exceed $20 billion by 2026, 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, significant side effects and safety concerns. 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. 5 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 psychiatric conditions, including schizophrenia, 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 CNS as well as various peripheral tissues. The link between muscarinic receptor stimulation in the CNS, particularly the stimulation of M1 and M4 receptors, and the reduction of symptoms of psychosis and improvement in cognition, 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 symptoms, such as 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 psychiatric conditions and cognitive disorders. We are initially developing KarXT for the treatment of acute psychosis in adults 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 and procognitive 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. To our knowledge, xanomeline is the only muscarinic orthosteric agonist that has demonstrated therapeutic benefit in schizophrenia and AD. Like all muscarinic orthosteric 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 the combination xanomeline and trospium in KarXT 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. The EMERGENT program is our clinical program evaluating KarXT for the treatment of schizophrenia, and includes the completed positive Phase 2 EMERGENT-1 trial and four ongoing Phase 3 trials. In November 2019, we announced positive results from our EMERGENT-1 trial, a Phase 2 clinical trial evaluating KarXT for the treatment of acute psychosis in adults with schizophrenia. In this trial, KarXT met the trial’s primary endpoint with a statistically significant (p<0.0001) and clinically meaningful 11.6 point mean reduction in Positive and Negative Syndrome Scale, or PANSS, total 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 PANSS total score, PANSS-positive subscale, and the PANSS-negative subscale had statistically significant separation at every assessment throughout the trial. Following the positive results of our Phase 2 EMERGENT-1 trial, we had an End-of-Phase 2 meeting with the U.S. Food and Drug Administration, or FDA, in which the FDA confirmed that our completed Phase 2 EMERGENT-1 trial, along with one successful Phase 3 efficacy and safety trial, and additional safety data to meet regulatory requirements, would be acceptable to support a New Drug Application, or NDA, filing in schizophrenia. 6 In addition to our completed positive Phase 2 EMERGENT-1 trial, our EMERGENT program includes two Phase 3 trials evaluating the efficacy and safety of KarXT compared to placebo (EMERGENT-2 and EMERGENT-3, which are similar in design to EMERGENT-1), and two Phase 3 trials evaluating the long-term safety of KarXT (EMERGENT-4 and EMERGENT-5). All Phase 3 trials within our EMERGENT program are currently enrolling, with details as follows: • • • • EMERGENT-2: A five-week inpatient trial evaluating the efficacy and safety of KarXT compared to placebo in 246 adults with schizophrenia in the U.S. Enrollment for this trial began in December 2020 and we anticipate reporting topline data in mid-2022. EMERGENT-3: A five-week inpatient trial evaluating the efficacy and safety of KarXT compared to placebo in 246 adults with schizophrenia in the U.S. and Ukraine. Enrollment for this trial began in the second quarter of 2021 and we anticipate reporting topline data in the second half of 2022. EMERGENT-4: A 52-week outpatient, open-label extension trial evaluating the long-term safety and tolerability of KarXT in 350 adults with schizophrenia who completed EMERGENT-2 or EMERGENT-3. Enrollment for this trial began in the first quarter of 2021. EMERGENT-5: A 52-week outpatient, open-label trial evaluating the long-term safety and tolerability of KarXT in up to 600 adults with schizophrenia in the U.S. and Puerto Rico who were not enrolled in EMERGENT-2 or EMERGENT-3. Enrollment for this trial began in the second quarter of 2021. We plan to utilize the data from the EMERGENT clinical program to help guide future development plans for KarXT in negative and cognitive symptoms of schizophrenia, for which there are currently no approved treatments. Given the unique mechanism of action of KarXT in comparison to existing standard of care therapies, we believe there is the potential for therapeutic benefit as both a monotherapy and as an adjunctive therapy for the treatment of schizophrenia. In November 2021, we initiated our Phase 3 ARISE trial evaluating the safety and efficacy of KarXT compared to placebo as an adjunctive treatment in adults with schizophrenia who have an inadequate response to their current antipsychotic therapy. This six-week, 1:1 randomized, double-blind, placebo-controlled Phase 3 trial will enroll approximately 400 adults with schizophrenia who have not achieved an adequate response to their current atypical antipsychotic treatment. Upon completion of the trial at week 6, participants will have the opportunity to enroll in a 52-week outpatient, open-label extension trial evaluating the long- term safety and tolerability of KarXT when dosed with atypical antipsychotic treatment. We are also developing KarXT as a potential treatment for DRP, with an initial focus on psychosis in AD. In June 2021 we announced results from our multi-cohort, placebo-controlled Phase 1b trial evaluating the safety and tolerability of KarXT in healthy elderly volunteers. Results from the trial suggest that potentially therapeutic doses of KarXT can be administered to elderly adults while maintaining a favorable tolerability profile, and support the advancement of KarXT into a Phase 3 program. Our initial focus on the AD dementia subtype reflects various strategic development, regulatory and commercial considerations, and we remain interested in exploring KarXT in other dementia subtypes in future development programs. We plan to share details of our Phase 3 program evaluating KarXT for the treatment of AD psychosis in the first half of 2022 prior to the program’s initiation in mid-2022. 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. 7 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. We are leveraging our expertise and experience to explore the development of KarXT for additional CNS disorders, as well as advance our other muscarinic-targeted drug candidates and a target-agnostic drug discovery program through our collaboration with PsychoGenics, Inc. 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. 8 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. 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. 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. 9 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 of xanomeline, respectively. One patient who entered the trial was assigned to 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. 10 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, 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 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 11 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. 12 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 initially selected xanomeline based on the results of the two third-party, randomized, double-blind, placebo-controlled clinical trials, as well as the results of a wide variety of preclinical studies conducted by third parties, which supported 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 and Phase 2 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. 13 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 NDA. 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 % Reduction in Incidence Rates 64% 24% 15% 21% 49% 36% 34% 17% 6% 6% 20% 26% 46% 29% 62% 73% 59% 29% 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. 14 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. 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, or IND, application to the FDA for KarXT for the treatment of schizophrenia which went into effect in August 2016. 15 KarXT for the Treatment of Psychosis in Patients with Schizophrenia Schizophrenia is a chronic, severe and disabling brain disorder. In 2017, an estimated 2.7 million people living in the United States, 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 2019 and are expected to exceed $20 billion by 2026, 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. Current antipsychotics have modest efficacy in many patients and significant side effects and safety concerns. 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. 16 Our Phase 2 Clinical Trial for the Treatment of Acute Psychosis In September 2018, we initiated EMERGENT-1, 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 EMERGENT-1 trial, 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 PANSS total score 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 PANSS total score, PANSS-positive subscale, and the PANSS-negative subscale had statistically significant separation at every assessment throughout the trial. We also analyzed additional pre-specified secondary endpoints, including PANSS-Marder factor score, CGI-S frequency counts 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 different CGI-S frequency counts for KarXT compared to 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). Effect of KarXT on PANSS Total Score 17 Effect of KarXT on PANSS-positive subscale Effect of KarXT on PANSS-negative subscale Effect of KarXT on PANSS Marder factor 18 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 19 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 the Phase 2 EMERGENT-1 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 trial. 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. 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 and transient in nature. Placebo-adjusted rates of nausea, vomiting and dry mouth all decreased over time during the trial. 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. 20 Our Ongoing EMERGENT program for the Treatment of Acute Psychosis in Adults with Schizophrenia Following the positive results of EMERGENT-1, we had an End-of-Phase 2 meeting with the FDA in which the FDA confirmed that our completed EMERGENT-1 trial, along with one successful Phase 3 efficacy and safety trial, and additional safety data to meet regulatory requirements, would be acceptable to support an NDA filing. As such, we will conduct the following trials as part of our EMERGENT program, which together with additional preclinical, CMC, clinical and other related activities, will support our NDA filing for KarXT for the treatment of acute psychosis in adults with schizophrenia: • • • • EMERGENT-2: A five-week inpatient trial evaluating the efficacy and safety of KarXT compared to placebo in 246 adults with schizophrenia in the U.S. Enrollment for this trial began in December 2020 and we anticipate reporting topline data in mid-2022. EMERGENT-3: A five-week inpatient trial evaluating the efficacy and safety of KarXT compared to placebo in 246 adults with schizophrenia in the U.S. and Ukraine. Enrollment for this trial began in the second quarter of 2021 and we anticipate reporting topline data in the second half of 2022. EMERGENT-4: A 52-week outpatient, open-label extension trial evaluating the long-term safety and tolerability of KarXT in 350 adults with schizophrenia who completed EMERGENT-2 or EMERGENT-3. Enrollment for this trial began in the first quarter of 2021. EMERGENT-5: A 52-week outpatient, open-label trial evaluating the long-term safety and tolerability of KarXT in up to 600 adults with schizophrenia in the U.S. and Puerto Rico who were not enrolled in EMERGENT-2 or EMERGENT-3. Enrollment for this trial began in the second quarter of 2021. Our Ongoing ARISE program for KarXT as Adjunctive Therapy in Adults with Schizophrenia Given the unique mechanism of action of KarXT in comparison to existing standard of care therapies, we believe there is the potential for therapeutic benefit as both a monotherapy and as an adjunctive therapy for the treatment of schizophrenia. In November 2021, we initiated our Phase 3 ARISE trial to evaluate the safety and efficacy of KarXT compared to placebo as an adjunctive treatment in adults with schizophrenia who have an inadequate response to their current antipsychotic therapy. This six-week, 1:1 randomized, double-blind, placebo-controlled Phase 3 trial will enroll approximately 400 adults with schizophrenia who have not achieved an adequate response to their current atypical antipsychotic treatment. Participants in this trial will continue their currently prescribed atypical antipsychotic therapy at the same dose or regimen schedule as prior to entry in the study, and will receive a flexible dose of KarXT or placebo based on tolerability and clinical response as determined by a clinician. The primary outcome measure of the trial is change in PANSS total score of KarXT compared to placebo at week 6. Upon completion of the trial at week 6, participants will have the opportunity to enroll in a 52-week outpatient, open-label extension trial evaluating the long-term safety and tolerability of KarXT when dosed with atypical antipsychotic treatment. Our Planned Clinical Trials for the Negative and Cognitive Symptoms of Schizophrenia We plan to utilize the data from our EMERGENT clinical program to help guide future development plans for KarXT in negative and cognitive symptoms of schizophrenia, for which there are currently no approved treatments. In September 2020 we presented the results of an exploratory endpoint analysis evaluating the impact of KarXT on cognition in the Phase 2 EMERGENT-1 trial at the European College of Neuropsychopharmacology Annual Meeting. The analysis demonstrated trends towards improvements in cognition for patients receiving KarXT relative to placebo, with larger benefits seen in patients with greater cognitive impairment at baseline. We plan to collect data on the potential benefit of KarXT on negative and cognitive symptoms of schizophrenia as part of the ongoing EMERGENT program and our planned trial to evaluate KarXT in patients who have an inadequate response to current standard of care therapies described below, and will continue to evaluate the timing and design of potential trials specifically directed towards the negative and cognitive symptoms of schizophrenia. 21 KarXT for the Treatment of Psychosis in Alzheimer's Disease Approximately 8.4 million people in the United States are living with dementia. The prevalence of psychosis in diagnosed dementia patients varies by dementia subtypes between 10% and 75% 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. 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. 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. We plan to study KarXT in the AD psychosis population as the first indication in our DRP program. We plan to share details of our Phase 3 program evaluating KarXT for the treatment of psychosis in AD in the first half of 2022 prior to the program’s initiation in mid-2022. 22 Our Completed 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 dose-ranging clinical trial to assess the safety and tolerability of KarXT in healthy elderly volunteers. We utilized a flexible dosing protocol titrated over approximately two to three weeks in order to select the doses and titration protocol for future trials of KarXT in elderly patients with DRP. The placebo-controlled, inpatient Phase 1b dose-ranging trial consisted of three cohorts, each enrolling 16 healthy elderly volunteers, randomized 3:1 to receive KarXT or placebo. As part of the flexible dosing protocol, a volunteer’s dose was increased if they were tolerating KarXT well at the time of the potential dose increase, as determined by a clinician. In the trial, the majority of healthy elderly volunteers were titrated to xanomeline doses of 150 to 200 mg when dosed with KarXT three times per day. Pharmacokinetic data demonstrated that healthy elderly volunteers achieved mean xanomeline blood levels comparable to the mean xanomeline blood levels reported in the Phase 2 EMERGENT-1 trial evaluating KarXT in adults with schizophrenia. Previous trials of KarXT have demonstrated that the current formulation of KarXT results in xanomeline exposures, or blood levels, that are approximately 10% greater than blood levels seen in earlier trials of xanomeline alone. The treatment-related adverse events (AEs) were similar to those observed in prior trials of KarXT, and a majority (>80%) were rated mild in severity. One serious AE of urinary retention was reported in Cohort 1. We believe the report of urinary retention was related to a higher dose of trospium used in Cohort 1 compared to doses used in Cohorts 2 and 3, where urinary retention was not observed. No serious or severe AEs were observed in Cohorts 2 and 3. Consistent with prior trials of KarXT, blood pressure in healthy elderly volunteers receiving KarXT was similar to placebo, and no syncopal events were observed. Heart rate increases observed in the trial were also consistent with prior trials of KarXT. Data from the Phase 1b trial suggest that a lower dose ratio of trospium to xanomeline, compared to the ratios used in Phase 1 trials in healthy adult volunteers and in the Phase 2 EMERGENT-1 trial evaluating KarXT in adults with schizophrenia, was better tolerated by healthy elderly volunteers. 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. In November 2021, we initiated a Phase 1 study of an advanced formulation of KarXT. 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 and psychosis in AD. 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 2022. We believe we can optimize these compounds and advance their development through preclinical studies and into clinical development, given our expertise in this space. 23 In February 2020, we announced a drug discovery partnership with Charles River Laboratories to accommodate continued growth in our muscarinic receptor drug discovery efforts. In July 2020, we announced a drug discovery collaboration with Psychogenics, Inc. to discover novel drug candidates for the treatment of neuropsychiatric disorders. 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. We have established a robust supply chain to enable sufficient supply of the raw materials needed to conduct our EMERGENT and ARISE program, as well as support NDA application. We continue to expand our manufacturing network to ensure redundant supply of critical input materials. 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 Esteve Quimica, S.A., for the manufacture of xanomeline and source trospium from Procos, S.p.A. and Midas Pharmaceuticals, Inc. 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. 24 Psychosis in patients with schizophrenia The current standards of care for the psychotic symptoms of patients with schizophrenia are antipsychotic treatments that work primarily by inhibiting D2 dopamine and 5HT2-A serotonin 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., Caplyta, marketed by Intra-Cellular Therapies, Inc., and Lybalvi, marketed by Alkermes plc. 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 intended to provide an antipsychotic benefit, including product candidates being developed by Acadia Pharmaceuticals Inc., or Acadia, Sunovion Pharmaceuticals, Inc. and Cerevel Therapeutics Holdings, Inc. There are currently no FDA-approved drugs for the negative or cognitive symptoms of schizophrenia. However, we are aware of companies with product candidates in clinical development for the treatment of the negative and cognitive symptoms of schizophrenia, including Boehringer Ingelheim and Neurocrine Biosciences, Inc. for cognitive symptoms, Minerva and Roche for negative symptoms and Novartis for negative and cognitive symptoms. 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. In 2020, Acadia submitted an sNDA application for marketing authorization of its drug (currently approved for a different indication) for the treatment of hallucinations and delusions associated with DRP, and FDA issued a complete response letter in April 2021. Acadia has announced that it plans to resubmit this sNDA, for the treatment of hallucinations and delusions associated with dementia focused on Alzheimer’s disease psychosis, in the first quarter of 2022. 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. 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. 25 Product Candidates With regard to our KarXT product candidate, we exclusively license from PureTech Health LLC, or PureTech Health, a patent family comprising two issued U.S. patents with claims directed to an oral medicament comprising certain doses of xanomeline and/or the salt thereof and certain doses of trospium chloride, three issued U.S. patents with claims directed to methods for treating central nervous system disorders using an oral medicament comprising certain doses of xanomeline and/or salts thereof and certain doses of trospium chloride, issued patents in Canada, Europe, and Hong Kong, and a total of five patent applications pending, one in each of the U.S., Europe and Hong Kong, and two in Japan. The 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 two issued U.S. patents, an issued patent in Brazil, and three pending U.S. patent applications, and a total of 26 pending patent applications in Australia, Canada, Chile, China, Columbia, Costa Rica, Eurasia, Egypt, Europe, Hong Kong, Indonesia, India, Israel, Japan, South Korea, Mexico, New Zealand, the Philippines, Saudi Arabia, Singapore, Thailand, Ukraine, Vietnam, and South Africa with claims directed towards an oral pharmaceutical composition, comprising a plurality of xanomeline beads having a core comprising xanomeline or a salt thereof, and a plurality of trospium beads having a core comprising a salt of trospium. The patent and the pending patent applications, if issued, are expected to expire in 2039 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 the use of KarXT for treating schizophrenia or a disease related to schizophrenia in a patient in need thereof. The patent applications, 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. provisional application, one PCT application, and one Taiwanese application, with claims directed towards treating a disorder ameliorated by activating muscarinic receptors in an elderly patient in need thereof using xanomeline and/or a salt thereof and a salt of trospium. The pending patent applications, if issued, are expected to expire in 2042 without taking into account a possible PTE or any possible patent term adjustments. We also own three pending U.S. provisional applications and one pending European application with claims directed towards treating central nervous system disorders with xanomeline and/or a salt thereof and an antipsychotic. The pending patent applications, if issued, are expected to expire in 2042 without taking into account a possible PTE or any possible patent term adjustments. We also own two pending U.S. patent applications, one pending PCT application, and a total of eight pending applications in Australia, Brazil, Canada, China, Europe, India, Japan, and New Zealand with claims directed to compounds targeting muscarinic receptors and methods of treatment using such compounds. The patent applications claiming priority to and the benefit of these provisional applications, if issued, are expected to expire in 2040 or 2041 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 to treat 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. 26 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. 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, of which we paid PureTech Health a milestone payment of $2 million in 2020. No other milestone payments have been made under this agreement. 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 paid less than $0.1 million in sublicense income associated with the Zai License Agreement to PureTech Health in 2021. 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. License Agreement with Zai Lab In November 2021, we entered into a License Agreement, or the Zai License Agreement, with Zai Lab (Shanghai) Co., Ltd, or Zai, pursuant to which we granted to Zai the right to exclusively develop, manufacture and commercialize KarXT in mainland China, Hong Kong, Macau, and Taiwan, referred to as the Licensed Territory. 27 Under the terms of the Zai License Agreement, we received a $35 million upfront payment and are eligible to receive up to an additional $80 million in development and regulatory milestone payments. We are also eligible to receive up to $72 million in sales milestone payments and low double-digit to high-teens tiered royalties based on annual net sales of KarXT in the Licensed Territory, subject to reduction under specified circumstances. Zai will fund substantially all development, regulatory, and commercialization activities in the Licensed Territory. The Zai License Agreement will expire upon the latest of the following dates with respect to the last licensed product in any region in the Licensed Territory: (i) the date of expiration of the last valid claim covering such licensed product in such region, (ii) the date that is a specific period after the date of the first commercial sale of such licensed product in such region and (iii) the expiration date of any regulatory exclusivity for such licensed product in such region. Subject to the terms of the Zai License Agreement, Zai may terminate the Zai License Agreement for convenience by providing written notice to us, which termination will be effective following a prescribed notice period. In addition, we may terminate the Zai License Agreement under specified circumstances if Zai or certain other parties challenge our patent rights or if Zai or its affiliates fail to complete certain development activities with respect to the licensed product for a specified period of time, subject to specified exceptions. Either party may terminate the Zai License Agreement for the other party’s uncured material breach of the Zai License Agreement, with a customary notice and cure period, or insolvency. After termination or expiration of the Zai License Agreement, we are entitled to retain a worldwide, exclusive, and perpetual license from Zai to exploit the licensed product (which license would be non- exclusive after expiration (but not termination) of the Zai License Agreement), subject to a reasonable royalty to be agreed by the parties if the Zai License Agreement is terminated for our uncured material breach. 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: • • 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 IND which must take effect before human clinical trials may begin; 28 • • • • • • • • approval by an independent Institutional Review Board, or IRB, representing each clinical site before each clinical trial may be initiated at that site; 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. 29 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. 30 Post-approval, or Phase 4, 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. 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. 31 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. 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. 32 Second, a product may be designated as a Breakthrough Therapy if it is intended, either alone or in combination with one or more other products, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the product may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. The FDA may take certain actions with respect to Breakthrough Therapies, including holding meetings with the sponsor throughout the development process; providing timely advice to the product sponsor regarding development and approval; involving more senior staff in the review process; assigning a cross-disciplinary project lead for the review team; and taking other steps to design the clinical trials in an efficient manner. Third, the FDA may designate a product for priority review if it is a product that treats a serious 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. 33 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. 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, tracking and tracing requirements, 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: • • • 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; 34 • • 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. 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. 35 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. 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. 36 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. 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 In April 2014, the European Union adopted the new Clinical Trials Regulation, (EU) No 536/2014 (Clinical Trials Regulation), which replaced the Clinical Trials Directive 2001/20/EC on 31 January 2022. The Clinical Trials Regulation is directly applicable in all the EU Member States, meaning national implementing legislation in each EU Member State is not required. The transitory provisions of the new Clinical Trials Regulation offer sponsors the possibility to choose between the requirements of the previous Clinical Trials Directive and the Clinical Trials Regulation if the request for authorization of a clinical trial is submitted in the year after the new Clinical Trials Regulation became applicable. If the sponsor chooses to submit under the Clinical Trials Directive and the clinical trial continues for more than three years from the day on which the Clinical Trials Regulation became applicable, the Clinical Trials Regulation will at that time begin to apply to the clinical trial. The 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 through the Clinical Trials Information System, or CTIS; 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 contains scientific and medicinal product documentation and Part II contains the national and patient-level documentation). 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) of a draft report prepared by a Reference Member State. 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. 37 The United Kingdom has implemented Clinical Trials Directive 2001/20/EC into national law through the Medicines for Human Use (Clinical Trials) Regulations. Whether the United Kingdom will amend its legislation to align more closely with the new EU Regulation once that comes into effect is as yet unknown, however the Medicines and Healthcare products Regulatory Agency, or MHRA, the UK medicines regulator, has opened a consultation on a set of proposals designed to improve and strengthen the UK clinical trials legislation. Such consultation is open until 14 March 2022. Marketing Authorization To obtain a marketing authorization for a product in the European Union, 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. 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 in the additional Member States of the European Economic Area (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 medicinal products (gene-therapy, somatic cell-therapy or tissue-engineered medicines), 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 constitute 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 by the EMA 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 asked by the CHMP. Clock stops may extend the timeframe of evaluation of an MAA considerably beyond 210 days. Where the CHMP gives a positive opinion, it provides the opinion together with supporting documentation to the European Commission, who makes the final decision to grant a marketing authorization, which is issued within 67 days of receipt of the EMA’s recommendation. Accelerated evaluation might be granted by the CHMP in exceptional cases, when a medicinal product is expected to be 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, excluding clock stops, 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. 38 Unlike the centralized procedure, the decentralized 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. Under the above described procedures, before granting the marketing authorizations, the EMA or the competent authorities of the EU Member States of the make an assessment of the risk-benefit balance of the drug on the basis of scientific criteria concerning its quality, safety, and efficacy. Now that the United Kingdom has left the EU, Great Britain will no longer be covered by centralized marketing authorizations (under the Northern Ireland Protocol, centralized EU authorizations will continue to be recognized in Northern Ireland). All medicinal products with a current centralized authorization were automatically converted to Great Britain’s marketing authorizations on January 1, 2021. For a period of two years from January 1, 2021, the Medicines and Healthcare products Regulatory Agency (MHRA) may rely on a decision taken by the European Commission on the approval of a new marketing authorization in the centralized procedure, in order to more quickly grant a new Great Britain marketing authorization. A separate application will, however, still be required. The MHRA also has the power to have regard to marketing authorizations approved in EU Member States through the decentralized or mutual recognition procedures a view to more quickly granting a marketing authorization in the United Kingdom or Great Britain. Data and Market Exclusivity in the European Union In the EU, 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 with the centralized authorization procedure. Data exclusivity prevents applicants for authorization of generics of these innovative products from referencing the innovator’s pre-clinical and clinical trial data contained in the dossier of the reference product when applying for a generic marketing authorization in the EU, during a period of eight years from the date on which the reference product was first authorized in the EU. 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 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. There is no guarantee that a product will be considered by the EMA to be an innovative medicinal product, and products may not qualify for data exclusivity Even if a product is considered to be an innovative medicinal product 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. 39 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 for a nationally authorized product. Once subsequently definitively renewed, the marketing authorization shall be valid for an unlimited period, unless the European Commission or the national competent authority decides, on justified grounds relating to pharmacovigilance, to proceed with one additional five-year renewal period. Any authorization which is not followed by the actual placing of the medicinal product on the European Union market (in the case of the centralized procedure) or on the market of the authorizing EU Member State (for a nationally authorized product) within three years after authorization ceases to be valid (the so-called sunset clause). Regulatory Requirements after a Marketing Authorization has been Obtained If 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: • • • 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 Direct-to-consumer advertising of prescription medicines is prohibited across the EU. The aforementioned European Union rules are generally applicable in the European Economic Area, or EEA, which consists of the EU Member States, plus Norway, Liechtenstein and Iceland. 40 European General Data Protection 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 data including health information in the European Union is governed by the provisions of the General Data Protection Regulation, or GDPR, as well as national data protection laws. The GDPR imposes a broad range of strict requirements on companies subject to the GDPR, such as including requirements relating to having legal bases for processing personal data relating to identifiable individuals and transferring such information outside the European Economic Area, or EEA, including to the U.S. (see below), providing details to those individuals regarding the processing of their personal data, implementing safeguards to keep personal data secure, having data processing agreements with third parties who process personal data, providing information to individuals regarding data processing activities, responding to individuals’ requests to exercise their rights in respect of their personal data, obtaining consent of the individuals to whom the personal data relates, reporting security and privacy breaches involving personal data to the competent national data protection authority and affected individuals, appointing data protection officers, conducting data protection impact assessments, and record-keeping. The GDPR substantially increases the penalties to which we could be subject in the event of any non-compliance, including fines of up to €20,000,000 or 4% of total annual global revenue, whichever is greater. The GDPR increases the responsibility and liability of pharmaceutical companies in relation to processing personal data, and companies may be required to put in place additional mechanisms to ensure compliance with the new EU data protection rules. The GDPR introduced new data protection requirements in the EU and substantial fines for breaches of the data protection rules. The GDPR 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. In addition, the United Kingdom (UK) incorporated the GDPR (as it existed on December 31, 2020 but subject to certain UK specific amendments) into UK law (referred to as the 'UK GDPR'), following its exit from the EU in 2020. The UK GDPR and the UK Data Protection Act 2018 set out the UK’s data protection regime, which is independent from but aligned to the EU’s data protection regime. Non-compliance with the UK GDPR may result in monetary penalties of up to £17.5 million or 4% of worldwide revenue, whichever is higher. Although the UK is regarded as a third country under the EU’s GDPR, the European Commission (“EC”) has now issued a decision recognizing the UK as providing adequate protection under the EU GDPR and, therefore, transfers of personal data originating in the EU to the UK remain unrestricted. Like the EU GDPR, the UK GDPR restricts personal data transfers outside the UK to countries not regarded by the UK as providing adequate protection. The UK government has confirmed that personal data transfers from the UK to the EEA remain free flowing. 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 EU, commonly referred to as Brexit, and the UK formally left the EU on January 31, 2020. There was a transition period during which EU pharmaceutical laws continued to apply to the UK, which expired on December 31, 2020. However, the EU and the UK have concluded a trade and cooperation agreement, or TCA, which was provisionally applicable since January 1, 2021 and has been formally applicable since May 1, 2021. The TCA includes specific provisions concerning pharmaceuticals, which include the mutual recognition of GMP, inspections of manufacturing facilities for medicinal products and GMP documents issued, but does not foresee wholesale mutual recognition of UK and EU pharmaceutical regulations. At present, Great Britain has implemented EU legislation on the marketing, promotion and sale of medicinal products through the Human Medicines Regulations 2012 (as amended) (under the Northern Ireland Protocol, the EU regulatory framework will continue to apply in Northern Ireland). The regulatory regime in Great Britain therefore largely aligns with current EU regulations, however it is possible that these regimes will diverge in future now that Great Britain’s regulatory system is independent from the EU and the TCA does not provide for mutual recognition of UK and EU pharmaceutical legislation. 41 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: • • 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. Effective January 19, 2021, the Office of Inspector General, or OIG, added safe harbor protections under the Anti-Kickback Statute for certain coordinated care and value-based arrangements among clinicians, providers, and others; 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; 42 • • • • 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, 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 Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively 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 extend to include transfers of value made to certain non- physician providers such as physician assistants and nurse practitioners; and Price Reporting Laws— Federal government price reporting laws, which require us to calculate and report complex pricing metrics in an accurate and timely manner to government programs; 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. 43 • • California Consumer Privacy Act (CCPA) – The CCPA established a 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. In addition to the CCPA, new privacy and data security laws have been proposed in more than half of the states in the U.S. and in the U.S. Congress, reflecting a trend toward more stringent privacy legislation in the U.S., which trend may accelerate depending on the new U.S. presidential administration. The effects of the CCPA, and other similar state or federal laws, are potentially significant and may require us to modify our data processing practices and policies and to incur substantial costs and potential liability in an effort to comply with such legislation; and 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 GDPR, 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 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. 44 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 in recent 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: • • • • • • • 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. Since its enactment, there have been numerous judicial, administrative, executive, and legislative efforts to expand, repeal, replace or modify the ACA, some of which have been successful, in part, in modifying the law, as well as court challenges to the constitutionality of the law. On June 17, 2021, the U.S. Supreme Court dismissed the most recent judicial challenge to the ACA brought by several states without specifically ruling on the constitutionality of the ACA. Prior to the Supreme Court’s decision, President Biden issued an executive order to initiate a special enrollment period from February 15, 2021 through August 15, 2021 for purposes of obtaining health insurance coverage through the ACA marketplace. The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA. It is unclear how other healthcare reform measures of the Biden administration or other efforts, if any, to challenge, repeal or replace the ACA will impact our business. 45 In addition, other legislative and regulatory changes have been proposed and adopted in the United States since the ACA was enacted: • • • • • • On August 2, 2011, the U.S. Budget Control Act of 2011, among other things, included aggregate reductions of Medicare payments to providers of 2% per fiscal year. These reductions went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2030, with the exception of a temporary suspension from May 1, 2020 through March 31, 2022 due to the COVID-19 pandemic. Following the temporary suspension, a 1% payment reduction will occur beginning April 1, 2022 through June 30, 2022, and the 2% payment reduction will resume on July 1, 2022. On January 2, 2013, the U.S. American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several types of providers. On April 13, 2017, CMS published a final rule that gives states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold through such marketplaces. On May 30, 2018, the Right to Try Act, was signed into law. The law, among other things, provides a federal framework for certain patients to access certain investigational new drug products that have completed a Phase 1 clinical trial and that are undergoing investigation for FDA approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded access program. There is no obligation for a pharmaceutical manufacturer to make its drug products available to eligible patients as a result of the Right to Try Act. On May 23, 2019, CMS published a final rule to allow Medicare Advantage Plans the option of using step therapy for Part B drugs beginning January 1, 2020. On December 20, 2019, former President Trump signed into law the Further Consolidated Appropriations Act (H.R. 1865), which repealed 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. 46 Additionally, there has been increasing legislative and enforcement interest in the United States with respect to drug pricing practices. Specifically, there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several U.S. Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, and review the relationship between pricing and manufacturer patient programs. At a federal level, President Biden signed an Executive Order on July 9, 2021 affirming the administration’s policy to (i) support legislative reforms that would lower the prices of prescription drug and biologics, including by allowing Medicare to negotiate drug prices, by imposing inflation caps, and, by supporting the development and market entry of lower-cost generic drugs and biosimilars; and (ii) support the enactment of a public health insurance option. Among other things, the Executive Order also directs HHS to provide a report on actions to combat excessive pricing of prescription drugs, enhance the domestic drug supply chain, reduce the price that the Federal government pays for drugs, and address price gouging in the industry; and directs the FDA to work with states and Indian Tribes that propose to develop section 804 Importation Programs in accordance with the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and the FDA’s implementing regulations. FDA released such implementing regulations on September 24, 2020, which went into effect on November 30, 2020, providing guidance for states to build and submit importation plans for drugs from Canada. On September 25, 2020, CMS stated drugs imported by states under this rule will not be eligible for federal rebates under Section 1927 of the Social Security Act and manufacturers would not report these drugs for “best price” or Average Manufacturer Price purposes. Since these drugs are not considered covered outpatient drugs, CMS further stated it will not publish a National Average Drug Acquisition Cost for these drugs. If implemented, importation of drugs from Canada may materially and adversely affect the price we receive for any of our product candidates. Further, on November 20, 2020 CMS issued an Interim Final Rule implementing the Most Favored Nation, or MFN, Model under which Medicare Part B reimbursement rates would have been be calculated for certain drugs and biologicals based on the lowest price drug manufacturers receive in Organization for Economic Cooperation and Development countries with a similar gross domestic product per capita. However, on December 29, 2021 CMS rescinded the Most Favored Nations rule. Additionally, on November 30, 2020, HHS published a regulation removing safe harbor protection for price reductions from pharmaceutical manufacturers to plan sponsors under Part D, either directly or through pharmacy benefit managers, unless the price reduction is required by law. The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as well as a safe harbor for certain fixed fee arrangements between pharmacy benefit managers and manufacturers. Pursuant to court order, the removal and addition of the aforementioned safe harbors were delayed and recent legislation imposed a moratorium on implementation of the rule until January 1, 2026. Although a number of these and other proposed measures may require authorization through additional legislation to become effective, and the Biden administration may reverse or otherwise change these measures, both the Biden administration and Congress have indicated that they will continue to seek new legislative measures to control drug costs. 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. 47 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. EU 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 EU 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 99 High Street, Floor 26, Boston, Massachusetts, where we occupied approximately 25,443 square feet of leased office space as of December 31, 2021. This lease expires in December 2025. Additionally, we maintain offices 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. Human Capital We believe that our employees are critical to the success of our mission, and that our future success will depend in large part on our continued ability to attract, hire and retain qualified personnel. We continuously strive to ensure that employee morale remains strong, and conduct employee engagement satisfaction surveys and monitor employee turnover rates as part of this process. As of February 15, 2022, we had 118 full-time employees, including a total of 37 employees with M.D. and/or Ph.D. degrees. Of our workforce, 82 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. 48 Diversity, Equity and Inclusion We are committed to cultivating and preserving a culture of diversity, equity and inclusion, and aim to foster an inclusive environment through respect, collaboration, and open communication. We embrace and encourage the differences among our employees that make them unique, and believe that these differences, as well as corresponding diversity of opinions and thought, contribute to our success as a company. As we grow and mature, we will continue to implement initiatives to foster the diversity and inclusiveness of our workforce, and to ensure that employees of all backgrounds can thrive at Karuna. Compensation and Benefits To ensure our compensation and benefits programs are competitive, we engage a nationally recognized outside compensation and benefits consulting firm to independently evaluate the effectiveness of our programs and to provide benchmarking against our peers within the industry. Our pay-for-performance philosophy seeks to motivate and reward employees while accomplishing the Company’s short and long-term strategic goals. As part of a robust performance management process, employees are evaluated both on what they accomplished and how they demonstrated our core competencies. Annual salary increases and incentive bonuses are based on merit and include individual and corporate performance factors. We offer robust compensation packages, including competitive base pay, incentive compensation and equity programs, and provide a broad range of benefits, including 401(k) plan, healthcare and insurance benefits, a health savings account, paid time off, paid family and medical leave, and various health and wellness programs. Through our equity incentive plan, we aim to attract, retain and reward personnel through the granting of equity-based compensation awards in order to increase shareholder value and the success of our company by motivating such individuals to perform to the best of their abilities and achieve our objectives. In addition, we are committed to the professional development of our employees, who can take advantage of various learning opportunities and training programs. Health, Wellness and Safety Employee safety and well-being is very important to us, particularly in light of COVID-19. In response to the pandemic, we have taken extra precautions to reduce the risk of virus exposure for our employees. We implemented a work from home policy for all employees who are able to perform their duties remotely, and we provide protective equipment for those of our employees working on site. We have also implemented and continue to adapt safety protocols and procedures to ensure compliance with local, state and federal guidelines, as well as to keep the members of our workforce healthy and safe. For our remote employees, we provide collaboration tools and resources and support their information technology needs. Aligned with our mission and to support our employees’ mental health, we introduced an offering of online resources to assist with professional and financial coaching, wellness courses, and therapy services. Corporate Information We were incorporated under the laws of the State of Delaware in July 2009 as Karuna Pharmaceuticals, Inc. In March 2019, the Company changed its name to Karuna Therapeutics, Inc. Our principal corporate office is located at 99 High Street, Floor 26, Boston, Massachusetts. Our website address is www.karunatx.com. The information on our website is not incorporated by reference in this Annual Report on Form 10-K or in any other filings we make with the Securities and Exchange Commission, or SEC. We make available on or through our website certain reports and amendments to those reports that we file with or furnish to the SEC in accordance with the Securities Exchange Act of 1934, as amended, or the Exchange Act. These include our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. We make this information available on or through our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC. 49 The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding us and other issuers that file electronically with the SEC. The SEC’s Internet website address is http://www.sec.gov. 50 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 $143.8 million, $68.6 million and $44.0 million for the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, we had an accumulated deficit of $287.9 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: • • • • • • 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 our ongoing operations 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; 51 • • add equipment and physical infrastructure to support our research and development; and acquire or in-license other product candidates and technologies. 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 existing or 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 our existing or future collaborators may never succeed in these activities and, even if we do, or any existing or 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, 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 product 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. 52 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 collaborator. 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: • • • • • • • • • 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 an existing or future collaborator, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities; subject to the 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 and 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 available-for-sale investments as of December 31, 2021 will be sufficient to meet our anticipated operating and capital expenditure requirements for at least twelve months following the potential submission of a new drug application, or NDA, with the FDA for KarXT for the treatment of acute psychosis in patients with schizophrenia. 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. 53 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, including 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. At December 31, 2021 we had federal net operating loss carryforwards totaling $320.3 million, of which $9.8 million begin to expire in 2029 and $310.5 million can be carried forward indefinitely. In addition, we had state net operating loss carryforwards totaling $245.1 million which begin to expire in 2030. Lastly, we also had federal and state research and development tax credit carryforwards of $12.5 million and $1.6 million which begin to expire in 2031. Because we had historically been a subsidiary of PureTech, $319.8 million and $225.0 million of the federal and state net operating loss carryforwards, respectively, can be used to offset income on our future tax returns. In addition, $12.3 million and $1.6 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. We completed a Section 382 study during the year ended December 31, 2020, and while certain tax attributes are subject to annual limitations, none are expected to be restricted in their future utilization if we earn sufficient future profits to utilize the tax attributes. If an ownership change 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. 54 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; 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. Changes in tax law could adversely affect our business and financial condition. The rules dealing with U.S. federal, state, and local income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department. Changes to tax laws (which changes may have retroactive application) could adversely affect us or holders of our common stock. In recent years, many such changes have been made and changes are likely to continue to occur in the future. Future changes in tax laws could have a material adverse effect on our business, cash flow, financial condition or results of operations. We urge investors to consult with their legal and tax advisers regarding the implications of potential changes in tax laws on an investment in our common stock. 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. 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, and possibly other diseases. The future regulatory and commercial success of KarXT is subject to a number of risks, including the following: • • • • • 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; • maintaining existing collaborations and entry into new 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; 55 • obtaining and maintaining third-party insurance coverage and adequate reimbursement; • maintaining a continued acceptable safety profile of the products following approval; • • effectively competing with other therapies; and enforcing and defending intellectual property rights and claims. 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 existing or future collaborator. If we or any collaborator are unable to develop, receive regulatory approval for, or successfully commercialize KarXT for our initial or potential additional indications, 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 an 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. 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 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 and our collaborators may 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. 56 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, neither we nor our collaborator have 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 existing or 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. 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. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit, or prevent marketing approval of a product candidate. Our current and future product candidates could fail to receive regulatory approval for many reasons, including the following: • • • • • • 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; 57 • • 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 our current or 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. 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: • • • • 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 existing 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; 58 • • • we may have to amend a 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 a 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 ongoing Phase 3 EMERGENT clinical trials of KarXT for the treatment of psychosis in patients with schizophrenia, our ongoing Phase 3 ARISE program, 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 are conducting or 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 our initial or potential additional indications, or any other product candidate, may be adversely impacted. 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. 59 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 preclinical studies and clinical trials may not be predictive of future results from subsequent later-stage clinical trials. Initial data in our clinical trials may not be indicative of results obtained when these trials are completed. The results of preclinical studies or clinical trials of our product candidates may not be predictive of the results we or our collaborators may obtain from subsequent clinical trials of the same product candidate. For example, our completed Phase 2 EMERGENT-1 trial of KarXT in schizophrenia generated positive results that supported and informed the evaluation and development of KarXT in later-stage clinical trials in schizophrenia, including the Phase 3 trials in the ongoing EMERGENT program. The positive results seen in the Phase 2 EMERGENT-1 trial may not be predictive of future 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 experienced significant setbacks in clinical development even after achieving promising results in earlier-stage trials, and any such setbacks in our clinical development could have a material adverse effect on our business and operations. 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. 60 Patient enrollment is affected by many factors, including: • • • • • • • • • • 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; the impact of the COVID-19 coronavirus pandemic; the design of the trial; our ability to recruit clinical trial investigators with the appropriate competencies and experience; competing clinical trials; 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. 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. In 2019, we initiated a Phase 1b clinical trial 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. Topline results from this trial were expected by the end of 2020. However, as a result of COVID-19’s impact on enrollment, we were not able to announce topline results from this trial until the second quarter of 2021. 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, in our EMERGENT-1 trial, we used a co-formulation of KarXT, whereas previous clinical data were based on either xanomeline alone or xanomeline co- administered with trospium. We are currently exploring other formulations and modes of administration for KarXT. Such changes carry the risk that KarXT, or other product candidates that we may develop, will perform differently and could affect the results of clinical trials conducted with the modified product candidate. 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. 61 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 ongoing or planned Phase 3 clinical trials or in other future clinical trials. Similarly, in prior clinical trials of xanomeline, treatment was associated with transient increases in heart rate and liver function tests, both of which returned to baseline with continued treatment, and syncope. Electrocardiograms showed no meaningful changes in cardiac conductivity, including QTc interval. In completed KarXT trials to date, we have not observed any cardiac effects or liver function test results that are significantly different from placebo, and we have not observed any syncope associated with KarXT treatment. 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. 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, including comparable foreign regulatory authorities, safety or efficacy concerns in the medical community may hinder market acceptance. 62 Efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources, including management of 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: • • • • • • • • • • • 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; 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 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. 63 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: • • • • • • 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. 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 and DRP 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 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. 64 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 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., Latuda, marketed by Sumitomo Dainippon Pharma Co., Ltd., Caplyta, marketed by Intra-Cellular Therapies, Inc., and Lybalvi, marketed by Alkermes plc. Similarly, while there are currently no FDA-approved treatments for DRP, including psychosis related to Alzheimer’s Disease, or AD, patients with DRP are commonly treated with antipsychotic medications that are indicated and approved for schizophrenia. Acadia Pharmaceuticals Inc., or Acadia, is seeking approval of its drug (currently approved for a different indication) for the treatment of hallucinations and delusions associated with DRP. 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. 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. For example, we are aware of several product candidates in clinical development that are intended to provide an antipsychotic benefit, including product candidates being developed by Acadia, Sunovion Pharmaceuticals, Inc. and Cerevel Therapeutics Holdings, Inc. We are also aware of companies with product candidates in clinical development for the treatment of the negative and cognitive symptoms of schizophrenia, including Boehringer Ingelheim and Neurocrine Biosciences, Inc. for cognitive symptoms, Minerva and Roche for negative symptoms and Novartis for negative and cognitive symptoms. Our competitors may have significantly increased financial resources, a more established presence in the market and greater 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. 65 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. 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. Competitive products may make any products we develop obsolete or noncompetitive before we recover the expense of developing and commercializing our product candidates. 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 qualified scientific and management personnel and establishing clinical trial sites, as well as in acquiring technologies complementary to, or necessary for, our programs. Our competitors could also recruit our employees, which could negatively impact our level of expertise and our ability to execute our business plan. 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. 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. Karuna has several patents and a pending patent application directed to combinations of xanomeline and trospium chloride. These patents, however, would not prevent a third-party from creating, making, and marketing alternative combination therapies that fall outside the patent claim scope. There can be no assurance that any alternative combination therapies with xanomeline, or xanomeline as a single therapeutic, will not be therapeutically equivalent or commercially feasible. If 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. 66 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 KarXT as an NCE and, therefore, afford us with 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. We currently have limited 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 limited 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. 67 Factors that may inhibit our efforts to commercialize our products on our own include: • • • our inability to recruit and retain adequate numbers of effective sales, marketing and market access personnel; the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe any future products; 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 existing or 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 existing or 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 existing or 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. 68 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: • • • • • • • • • • • • • • • 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. 69 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 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 collaborators 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. 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. 70 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: • • • • • • • • • • decreased demand for any of our future approved products; injury to our reputation; withdrawal of clinical trial participants; 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. 71 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 existing or 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 existing or 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 existing or 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 existing or future collaborators, receive regulatory approval for one or more of our product candidates, we, and any 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. If we, and any existing or future collaborators, are not able to comply with post-approval regulatory requirements, we, and any collaborators, could have the regulatory approvals for our products withdrawn by regulatory authorities and our, or any 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. 72 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. In addition, transparency laws and patient privacy laws can apply to the activities of pharmaceutical manufactures. See the section entitled, “Business — Healthcare and Privacy Laws and Regulation”. 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 and 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, and 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. 73 The collection and processing of personal data—including health data—is governed by the European Union-wide General Data Protection Regulation, or GDPR, which applies to any business, regardless of its location, that provides goods or services to residents in the EU. 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. The 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. Our activities in Europe are currently limited, but under the GDPR we are subject to evolving and strict rules on the transfer of personal data out of the European Union to the United States, and may be required to put in place additional mechanisms ensuring compliance with the GDPR. 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. These potential fines, and any costs associated with ensuring compliance with the GDPR, may be onerous and could adversely affect our business, financial condition, results of operations and prospects. Additionally, in the event we decide to conduct clinical trials in the European Union, we will be subject to additional privacy restrictions and our costs associated with ensuring compliance with the GDPR in such jurisdictions would increase. 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. See the section entitled “Business — Pharmaceutical Insurance Coverage and Healthcare Reform”. Moreover, there has been heightened governmental scrutiny recently over the manner in which drug manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products. However, none of these executive orders make immediate policy changes. For policies contained within the executive orders to have any effect, agencies would need to take additional administrative action. How these executive orders will be implemented and their impact on the industry remain uncertain. Depending on the details of further administrative actions, some of these proposals could have significant impacts for drug manufacturers and providers. 74 Individual states in the United States have also become increasingly active in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain drug access and marketing cost disclosure and transparency measures, and designed to encourage importation from other countries and bulk purchasing. Legally mandated price controls on payment amounts by third-party payors or other restrictions could harm our business, financial condition, results of operations and prospects. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other healthcare programs. This could reduce the ultimate demand for our drugs or put pressure on our drug pricing, which could negatively affect our business, financial condition, results of operations and prospects. 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: • • • • • 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. 75 Any product candidates we develop may become subject to unfavorable third-party coverage and reimbursement practices, as well as pricing regulations. Patients rely on insurance coverage by third-party payors (third-party payors include Medicare and Medicaid (government payors) and commercial insurance companies such as Blue Cross Blue Shield, Humana, Cigna, etc.) to reimburse all or part of the costs associated with their treatment. The availability and extent of coverage and adequate reimbursement by third-party payors, including government health administration authorities, private health coverage insurers, managed care organizations and other third-party payors is essential for most patients to be able to afford expensive treatments and is critical to new product acceptance. Sales of any of our product candidates that receive marketing approval will depend substantially, both in the U.S. and internationally, on the extent to which the costs of such product candidates will be covered and reimbursed by third-party payors. No uniform policy exists for coverage and reimbursement in the U.S. If reimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize our product candidates. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us to establish or maintain pricing sufficient to realize an adequate return on our investment. Coverage and reimbursement may impact the demand for, or the price of, any product candidate for which we obtain marketing approval. If coverage and reimbursement are not available or reimbursement is available only to limited levels, we may not successfully commercialize any product candidate for which we obtain marketing approval. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. See the section entitled “Business — Pharmaceutical Insurance Coverage and Healthcare Reform”. There is significant uncertainty related to third-party payor coverage and reimbursement of newly approved products. In the U.S., for example, principal decisions about reimbursement for new products 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. CMS decides whether and to what extent a new product will be covered and reimbursed under Medicare, and private third-party payors often follow CMS’s decisions regarding coverage and reimbursement to a substantial degree. However, one third-party payor’s determination to provide coverage for a product candidate does not assure that other payors will also provide coverage for the product candidate. As a result, the coverage determination process is often time-consuming and costly. Factors payors consider in determining reimbursement are based on whether the product is: (i) a covered benefit under its health plan; (ii) safe, effective and medically necessary; (iii) appropriate for the specific patient; (iv) cost-effective; and (v) neither experimental nor investigational. This process will require us to provide scientific and clinical support for the use of our products to each third- party payor separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance. As federal and state governments implement additional health care cost containment measures, including measures to lower prescription drug pricing, we cannot be sure that our products, if approved, will be covered by private or public payors, and if covered, whether the reimbursement will be adequate or competitive with other marketed products. For example, former President Trump previously signed executive orders aimed at lowering prescription drug prices. Such other actions by federal and state governments and health plans may put additional downward pressure on pharmaceutical pricing and health care costs, which could negatively impact coverage and reimbursement for our products if approved, our revenue, and our ability to compete with other marketed products and to recoup the costs of our research and development. 76 Additionally, net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. We cannot be sure that reimbursement will be available for any product candidate that we commercialize and, if reimbursement is available, the level of reimbursement. In addition, many pharmaceutical manufacturers must calculate and report certain price reporting metrics to the government, such as average sales price, or ASP, and best price. Penalties may apply in some cases when such metrics are not submitted accurately and timely. Further, these prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs. Outside the U.S., the commercialization of therapeutics is generally subject to extensive governmental price controls and other market regulations, and we believe the increasing emphasis on cost containment initiatives in Europe, Canada and other countries has and will continue to put pressure on the pricing and usage of therapeutics such as our product candidates. In many countries, particularly the countries of the European Union, or the EU, medical product prices are subject to varying price control mechanisms as part of national health systems. In these countries, pricing negotiations with governmental authorities can take considerable time after a product receives marketing approval. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. In general, product prices under such systems are substantially lower than in the U.S. Other countries allow companies to fix their own prices for products but monitor and control company profits. Additional foreign price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our product candidates. Accordingly, in markets outside the U.S., the reimbursement for our products may be reduced compared with the U.S. and may be insufficient to generate commercially reasonable revenue and profits. If we are unable to establish or sustain coverage and adequate reimbursement for any product candidates from third-party payors, the adoption of those products and sales revenue will be adversely affected, which, in turn, could adversely affect the ability to market or sell those product candidates, if approved. 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 we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future. 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. We must dedicate additional resources to comply with numerous laws and regulations in each jurisdiction in which we operate and plan to operate outside the United States, including those countries outside the United States in which we are conducting clinical trials as part of our EMERGENT and ARISE programs. 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. 77 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. Our operations in foreign jurisdictions, and those of our collaborators, may be impacted by economic, political and social conditions in such jurisdictions, as well as government policies, any of which could impact our ability to operate in such jurisdictions. Certain of the sites in our ongoing EMERGENT Phase 3 program are located in the Ukraine. Tensions between the Ukraine and Russia have escalated in recent months, culminating in Russia's recent invasion of the Ukraine. While our clinical trial sites in the Ukraine continue to actively recruit and treat patients, if political or civil conditions require it, our sites may need to delay or suspend clinical trial activities. Our clinical trial sites have contingency plans in place as part of their standard quality management practices for circumstances such as these and are prepared to initiate such plans when and if necessary. Despite that, these contingency plans, or the potential ineffectiveness of such contingency plans, could result in delays or suspensions, and any such delays or suspensions could cause material delays in our EMERGENT program. Additionally, through our license agreement with Zai Lab (Shanghai) Co., Ltd, or Zai, we plan to initiate clinical and regulatory activities in China. Accordingly, our business, results of operations, financial condition and prospects may be influenced to some degree by economic, political, legal and social conditions in China as well as China’s economic, political, legal and social conditions in relation to the rest of the world. 78 Risks Related to Our Dependence on Third Parties We have established a collaboration and may in the future seek to establish additional collaborations for the development and commercialization of our product candidates. If we are unable to enter into collaborations, 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. Additionally, there are certain jurisdictions where a collaborator may be able to realize the market potential of our product candidates better than us. For these or other reasons, 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. For example, in November 2021, we entered into a License Agreement, or the Zai License Agreement, with Zai, pursuant to which we granted to Zai the right to exclusively develop, manufacture and commercialize KarXT in Greater China, including mainland China, Hong Kong, Macau, and Taiwan. If we choose to enter into additional collaborations, we will 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. 79 If our existing or any future collaboration is not successful, we may not be able to capitalize on the market potential of our product candidates. The success of KarXT in Greater China depends on Zai's ability and efforts to successfully develop and commercialize KarXT in that territory. Additionally, we may enter into future collaborations for the development and commercialization of KarXT in other territories, or with respect to other product candidates we may develop. With respect to any such collaboration, 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. 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. Collaborations involving our product candidates pose a number of risks, including the following: • • • • • • • • • • 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; 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. While the Zai License Agreement contains provisions aimed to protect against many of these risks, including requirements that Zai diligently pursue the development and commercialization of KarXT in Greater China, and enabling us to reclaim the ability to develop and commercialize KarXT in China under certain circumstances, these provisions may prove insufficient. If our collaboration with Zai is not successful, our development and commercialization efforts in Greater China may be adversely affected. 80 Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner or at all. If any existing or future collaboration is not successful, our business, financial condition, results of operations, prospects, and development and commercialization efforts may be adversely affected. 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. 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. 81 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. In particular, we rely and expect to continue to rely on a small number of manufacturers to supply us with our requirements for the API and formulated drugs related to these programs. These programs could be adversely affected by a significant interruption in the supply of API and formulated drugs. For example, supply chain issues resulting from the COVID-19 pandemic have resulted in limited availability of certain components of our drug formulation and may impact our ability to procure enough materials to support our ongoing and planned clinical trials as well as potential commercial manufacturing. Although we believe that there are several potential alternative manufacturers who could manufacture KarXT or supply such components in the event such issues persist or become more serious, we may incur added costs and delays in identifying and qualifying any such replacement. In addition, we typically have ordered 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: • 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; • • • • limitations on supply availability resulting from capacity and scheduling constraints of third-parties or the impacts of the COVID-19 pandemic; 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. 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. 82 Our third-party manufacturers may be subject to damage or interruption from, among other things, fire, natural or man- made disaster, the ongoing COVID-19 pandemic, 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. 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. 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. 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. 83 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. 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. 84 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 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. 85 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. 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. 86 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: • • • • • • 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. 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. 87 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. Moreover, disputes may arise regarding intellectual property subject to a licensing agreement, including: • • • • • • 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. 88 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. 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: • • • • • • • 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. 89 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. 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. 90 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. 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. 91 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. 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. 92 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. 93 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 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. 94 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, 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. 95 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. 96 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 and 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, Troy Ignelzi, our Chief Financial Officer, and Charmaine Lykins, our Chief Commercial Officer. We have entered into employment agreements with Dr. Paul, Dr. Miller, Dr. Brannan, Mr. Ignelzi and Ms. Lykins, 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. 97 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: • 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; • manufacturing standards; • • • insider trading laws; 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 continue 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, 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. Due to our limited financial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations, retain key employees, or identify, recruit and train additional qualified personnel. Our inability to manage the expansion 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. 98 Risks Related to Our Common Stock An active trading market for our common stock may not be sustainable, 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: • • • • • • • • • • • • • • • • • • 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; • market conditions in the pharmaceutical and biotechnology sectors; • general economic, industry and market conditions; and 99 • the other factors described in this “Risk Factors” section. 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 have incurred and will continue to incur increased costs as a result of operating as a public company, and our management is required to devote substantial time to new compliance initiatives and corporate governance practices. As a public 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 devote and will need to continue to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased and will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and costly. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we are required to furnish a report by our management on our internal control over financial reporting and include with this annual report 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 have been and will continue to 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 neither we nor our independent registered public accounting firm will 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 or that we will not be able to comply with the requirements of Section 404 in a timely manner. 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. If this were to occur, we could also be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources. Irrespective of compliance with Section 404, any failure of our internal control over financial reporting could have a material adverse effect on our stated operating results and harm our reputation. If we are unable to implement these requirements effectively or efficiently, it could harm our operations, financial reporting, or financial results and could result in an adverse opinion on our internal control over financial reporting from our independent registered public accounting firm. 100 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 29,808,281 shares outstanding as of February 15, 2022, 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 56.9% of our common stock. If our 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 chose 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: • • • 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. 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: • • • • 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; 101 • • • • 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. 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, 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. Additionally, our independent registered public accounting firm is required to attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404. 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. 102 Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud. Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, 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 bylaws contain exclusive forum provisions, which may limit a stockholder’s ability to bring a claim in a judicial forum it finds favorable and may discourage lawsuits with respect to such claims. Our amended and restated bylaws, or 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 (1) any derivative action, (2) any claim of breach of fiduciary duty, (3) any claim against a current or former director, officer, employee or stockholder, and (4) any action against our company governed by the internal affairs doctrine, which we refer to collectively as the Delaware forum provision. The Delaware forum provision does not apply to any claims arising under the Securities Exchange Act of 1934 or the Securities Act of 1933, as amended, or the Securities Act. Our bylaws further provide that, unless we consent in writing to an alternative forum, the federal district courts of the United States of America shall be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act, which we refer to as the federal forum provision. In addition, our bylaws provide that any person or entity purchasing or otherwise acquiring any interest in shares of our common stock is deemed to have notice of and consented to the Delaware forum provision and the federal forum provision. We believe that these exclusive forum provisions benefit us by providing increased consistency in the application of Delaware law by chancellors particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. However, these provisions may impose additional litigation costs on stockholders who assert the provisions are not enforceable or valid and may impose more general additional litigation costs in pursuing any such claims, particularly if the stockholders do not reside in or near the State of Delaware. In addition, these forum selection clauses in our bylaws may limit our stockholders’ ability to bring a claim in a judicial forum that they find favorable for disputes with us or our directors, officers or employees, which may discourage such lawsuits against us and our directors, officers and employees even though an action, if successful, might benefit our stockholders. Alternatively, if the federal forum provision is found inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could have an adverse effect on our business, financial condition or results of operations. The Court of Chancery of the State of Delaware and the federal district courts of the United States of America may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments may be more or less favorable to us than our stockholders. 103 General Risks A pandemic, epidemic or outbreak of an infectious disease in the United States has impacted and may continue to impact our business and operations. In March 2020, SARS-CoV-2 (severe acute respiratory syndrome 2), or coronavirus, a novel strain of virus which causes coronavirus disease, or COVID-19, was declared a pandemic by the World Health Organization. The continued worldwide spread of COVID-19, and emergence of subsequent variants, has impacted the global economy, and has adversely impacted, and may continue to adversely impact, our business and operations, including the potential interruption of our clinical trial activities, regulatory reviews and our supply chain. For example, the COVID-19 outbreak delayed our Phase 1b clinical trial evaluating the safety and tolerability of KarXT in healthy elderly volunteers. Topline results from this trial were expected by the end of 2020. However, as a result of COVID-19’s impact on enrollment, we were not able to announce topline results from this trial until the second quarter of 2021. In addition, the spread of an infectious disease may impact our clinical trial sites and their operations. For example, as a result of the emergence of highly contagious variants of COVID-19, such as the omicron variant, many of our clinical trial sites have experienced limitations in staffing due to infection or exposure. We continue monitor the impact of such staffing limitations on the conduct and timelines of our ongoing and planned clinical trials. To date, our financial condition and operations have not been significantly impacted by the COVID-19 pandemic; however the spread of COVID-19 has caused us to modify our business practices, including implementing a work from home policy for all employees who are able to perform their duties remotely and restricting all nonessential travel. We expect to continue to take actions as may be required or recommended by government authorities, or as we determine are in the best interests of our employees and other business partners, in light of COVID-19. 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. We currently rely and expect to continue to rely on a small number of manufacturers to provide the APIs of KarXT and for the final drug product formulation of KarXT that is being used in our clinical trials. These programs could be adversely affected by ongoing supply chain issues caused by the ongoing COVID-19 pandemic. We continue to monitor the global outbreak and spread of COVID-19, and its subsequent emerging variants, and have taken steps to identify and mitigate the adverse impacts on, and risks to, our business posed by its spread and actions taken by governmental and health authorities to address this pandemic. The extent to which the coronavirus continues to impact our business beyond those impacts already sustained will depend on future developments, which are highly uncertain and cannot be predicted, and could have a material adverse effect on our business and operations. 104 Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire, retain or deploy key leadership and other personnel, or otherwise prevent new or modified products from being developed, approved, or commercialized in a timely manner or at all, which could negatively impact our business. The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, statutory, regulatory, and policy changes, the FDA’s ability to hire and retain key personnel and accept the payment of user fees, and other events that may otherwise affect the FDA’s ability to perform routine functions. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable. Disruptions at the FDA and other agencies may also slow the time necessary for biologics or modifications to approved biologics to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities. Since March 2020 when foreign and domestic inspections of facilities were largely placed on hold, the FDA has been working to resume routine surveillance, bioresearch monitoring and pre-approval inspections on a prioritized basis. Since April 2021, the FDA has conducted limited inspections and employed remote interactive evaluations, using risk management methods, to meet user fee commitments and goal dates. Ongoing travel restrictions and other uncertainties continue to impact oversight operations both domestic and abroad and it is unclear when standard operational levels will resume. The FDA is continuing to complete mission-critical work, prioritize other higher-tiered inspectional needs (e.g., for-cause inspections), and carry out surveillance inspections using risk-based approaches for evaluating public health. Should FDA determine that an inspection is necessary for approval and an inspection cannot be completed during the review cycle due to restrictions on travel, and the FDA does not determine a remote interactive evaluation to be adequate, the agency has stated that it generally intends to issue, depending on the circumstances, a complete response letter or defer action on the application until an inspection can be completed. During the COVID-19 public health emergency, a number of companies announced receipt of complete response letters due to the FDA's inability to complete required inspections for their applications. Regulatory authorities outside the U.S. may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic and may experience delays in their regulatory activities. If the FDA becomes unable to continue its current level of performance, we could experience delays and setbacks for our product candidates and for any approvals we may seek which could adversely affect our business. 105 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 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 may be 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. 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. 106 ITEM 2. PROPERTIES Our headquarters are located at 99 High Street, 26th Floor, Boston, Massachusetts, where we occupied approximately 25,445 square feet of leased office space as of December 31, 2021. This lease expires in December 2025. We also lease approximately 11,225 square feet of office space at 33 Arch Street, Suites 3110, 3130 and 3150, Boston Massachusetts. This lease expires in December 2023. As of December 31, 2021, approximately 8,801 square feet of this office space is subleased to third parties. Additionally, we occupy 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. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 107 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 Select 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 February 15, 2022, there were approximately 7 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 None. Issuer Purchases of Equity Securities by the Issuer and Affiliated Purchasers None. ITEM 6. RESERVED 108 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with our 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 a clinical-stage biopharmaceutical company driven to create and deliver transformative medicines for people living with psychiatric and neurological conditions. 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. 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. We have never generated revenue from product sales and have incurred significant net losses since inception. Our net losses were $143.8 million, $68.6 million and $44.0 million for the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, we had an accumulated deficit of $287.9 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 ongoing operations 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, 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. 109 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, 2021, we had cash, cash equivalents and available-for-sale investments of $494.0 million. We believe that our existing cash, cash equivalents and available-for-sale investments will be sufficient to meet our anticipated operating and capital expenditure requirements for at least twelve months following the potential submission of a New Drug Application, or NDA, with the U.S. Food and Drug Administration, or FDA, for KarXT for the treatment of acute psychosis in patients with schizophrenia. 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 from product sales. 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. 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. We may also generate revenue in the future from payments as a result of license or collaboration agreements for any of our product candidates or intellectual property, such as our License Agreement, or the Zai License Agreement, with Zai Lab (Shanghai) Co., Ltd., or Zai. Under the Zai License Agreement, we recognized revenue of $37.0 million in the year ended December 31, 2021. We cannot provide assurance as to the timing of future milestone or royalty payments under the Zai License Agreement, or that we will receive any of these payments at all. We generated no revenue from license or collaboration agreements in the years ended December 31, 2020 and 2019. 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. 110 Research and development costs directly related to our clinical development activities, such as fees paid to consultants, central laboratories, contractors, CMOs and CROs are tracked on an indication-by-indication basis. Other costs that are indirectly related to our clinical development activities, such as formulation and CMC, preclinical, discovery and unallocated expenses in the table below 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 and future product and development candidates. Unallocated expenses primarily relate to personnel or other consulting costs which are deployed across multiple projects under development. The following table summarizes our research and development expenses: Schizophrenia clinical trials Dementia-related psychosis clinical trials Pain clinical trial Formulation and CMC Preclinical Discovery Unallocated expenses Total research and development expense 2021 Year Ended December 31, 2020 2019 $ $ 62,167 $ 1,573 143 15,943 2,469 14,068 31,837 128,200 $ 11,803 $ 1,465 1,297 8,987 898 5,555 13,403 43,408 $ 13,455 381 619 1,871 1,908 1,123 5,179 24,536 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. 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; 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; continue to assess the potential impact of the COVID-19 pandemic on the ability to execute research and development activities; add equipment and physical infrastructure to support our research and development; and 111 • 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 may 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, commercial, 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, and costs incurred as we prepare for commercialization. Personnel costs consist of salaries, short-term incentive compensation, 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, and as we commercialize. We will also 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. Other Income, Net Impairment Loss. Impairment loss consists of impairment recognized on our right-of-use lease assets at our Arch Street facility, due to their carrying value exceeding their estimated fair value. Interest Income. Interest income consists of interest income from our cash equivalents and available-for-sale investments. Sublease Income. Sublease income consists of income recognized in connection with the sublease of office space at our Arch Street facility. Interest Income, Net. Interest income, net, consists of interest accrued, net of any interest forgiven, on the principal balance of convertible notes that were outstanding during 2019. In March 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 of the convertible notes upon their conversion into redeemable convertible preferred stock, and the forgiven interest was recorded as a reduction to interest expense in the year ended December 31, 2019. Accretion of Debt Discount. Upon issuance of our convertible notes, each note was recorded at cost, net of the derivative liability. 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. 112 Change in Fair Value of Derivative. Our convertible notes contained conversion options at a significant premium that were deemed to be embedded derivatives which 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 statement of operations. As part of the conversion of outstanding convertible notes into redeemable convertible preferred stock, all derivatives were settled in March and April 2019. 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, 2021, 2020 and 2019 as we believed, based upon the weight of available evidence, that it was more likely than not that all of our net operating loss carryforwards and tax credits will not be realized. At December 31, 2021, we had federal net operating loss carryforwards totaling $320.3 million, of which $9.8 million begin to expire in 2029 and $310.5 million can be carried forward indefinitely. At December 31, 2021, we had state net operating loss carryforwards totaling $245.1 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, 2021, we also had federal and state research and development tax credit carryforwards of $12.5 million and $1.6 million, respectively, which begin to expire in 2031. Through December 31, 2021, we had recorded a full valuation allowance against our net deferred tax assets at each balance sheet date. Results of Operations Comparison of the Years Ended December 31, 2021 and 2020 License revenue Operating expenses: Research and development General and administrative Total operating expenses Loss from operations Total other income, net Income tax provision Net loss attributable to common stockholders Research and Development Expenses Direct research and development expenses: Schizophrenia clinical trials Dementia-related psychosis clinical trials Pain clinical trial Formulation and CMC Preclinical Discovery Unallocated expenses: Personnel related (including stock-based compensation) Consultant fees and other expenses Total research and development expense 113 Year Ended December 31, 2020 2021 (in thousands) Change $ 36,964 $ — $ 36,964 128,200 52,617 180,817 (143,853 ) 54 (6 ) (143,805 ) $ 43,408 28,408 71,816 (71,816 ) 3,305 (43 ) (68,554 ) $ 84,792 24,209 109,001 (72,037 ) (3,251 ) 37 (75,251 ) Year Ended December 31, 2020 2021 (in thousands) Change 62,167 $ 1,573 143 15,943 2,469 14,068 29,524 2,313 128,200 $ 11,803 $ 1,465 1,297 8,987 898 5,555 11,134 2,269 43,408 $ 50,364 108 (1,154 ) 6,956 1,571 8,513 18,390 44 84,792 $ $ $ Expenses related to our schizophrenia clinical trials increased by $50.4 million, primarily due to expenses related to startup and ongoing execution of our EMERGENT and ARISE Phase 3 trials. The increase of $0.1 million in expenses related to our DRP clinical trial is primarily driven by enrollment, dosing and close-out activities related to our completed Phase 1b clinical trial in healthy elderly volunteers. The decrease of $1.2 million in expenses related to our pain clinical trial is primarily due to unrepeated costs for enrollment and dosing activities incurred in 2020 for our Phase 1b trial compared to close out costs for that trial incurred in 2021. Formulation and CMC expenses increased by $7.0 million due to an increase in manufacturing activities in 2021 to obtain sufficient supply to support current and future clinical trial activities as well as activities to support a potential future NDA filing. Preclinical expenses increased by $1.6 million due to the initiation of new studies in late 2020 and into 2021. The increase of $8.5 million in discovery costs is due to an increase in efforts for future product candidates, including ongoing collaborations with Charles River Labs and Psychogenics, Inc. The increase of $18.4 million in personnel related costs was primarily a result of an increase in headcount and an increase of $7.9 million related to stock-based compensation expense. The decrease of less than $0.1 million in consultant fees and other expenses was due to timing of consulting costs not specifically allocated to discovery, preclinical, clinical, formulation or CMC activities. General and Administrative Expenses Personnel-related (including stock-based compensation) Professional and consultant fees Other Total general and administrative expense Year Ended December 31, 2020 2021 (in thousands) 27,409 $ 12,674 12,534 52,617 $ 16,701 $ 5,162 6,545 28,408 $ Change 10,708 7,512 5,989 24,209 $ $ The increase of $10.7 million in personnel related costs was primarily a result of an increase in headcount and an increase of $8.5 million related to stock-based compensation expense. The increase of $7.5 million in professional and consultant fees was primarily due to an increase in recruiting fees, accounting fees, pre-commercial costs, legal costs and consulting fees related to our ongoing business activities. The increase of $6.0 million in other expenses was primarily due to $3.7 million in foreign tax withholdings on upfront payments received from Zai under the Zai License Agreement, increased lease costs due to our High Street Lease in Boston, Massachusetts, as well as other infrastructure and administrative related costs to support increased headcount. Other Income, Net Impairment loss on right of use assets Interest income Sublease income Total other income, net Year Ended December 31, 2020 2021 (in thousands) Change $ $ (702 ) $ 502 254 54 $ — $ 3,305 — 3,305 $ (702 ) (2,803 ) 254 (3,251 ) Impairment loss on right-of-use assets for the year ended December 31, 2021 represents non-cash impairment recognized on our right-of-use lease assets to the extent their carrying value exceeded their estimated fair value for our Arch Street facility leases in Boston, Massachusetts. See Note 12 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. Interest income is attributable to interest earned on our cash equivalents and available-for-sale investments. The decrease of $2.8 million in interest income is primarily due to lower market interest rates. 114 Sublease income is due to the sublease of a portion of our Arch Street office space in Boston, Massachusetts during 2021. Comparison of the Years Ended December 31, 2020 and 2019 License revenue Operating expenses: Research and development General and administrative Total operating expenses Loss from operations Total other income, net Income tax provision Net loss attributable to common stockholders Research and Development Expenses Direct research and development expenses: Schizophrenia clinical trials Dementia-related psychosis clinical trials Pain clinical trials Formulation and CMC Preclinical Discovery Unallocated expenses: Personnel related (including stock-based compensation) Consultant fees and other expenses Total research and development expense Year Ended December 31, 2019 2020 (in thousands) Change $ — $ — $ — 43,408 28,408 71,816 (71,816 ) 3,305 (43 ) (68,554 ) $ 24,536 20,869 45,405 (45,405 ) 1,448 — (43,957 ) $ 18,872 7,539 26,411 (26,411 ) 1,857 (43 ) (24,597 ) Year Ended December 31, 2019 2020 (in thousands) Change 11,803 $ 1,465 1,297 $ 8,987 898 5,555 11,134 2,269 43,408 $ 13,455 $ 381 619 $ 1,871 1,908 1,123 3,495 1,684 24,536 $ (1,652 ) 1,084 678 7,116 (1,010 ) 4,432 7,639 585 18,872 $ $ $ $ Expenses related to our schizophrenia clinical trials decreased by $1.7 million due to the conclusion of EMERGENT-1, which was partially offset by expenses related to startup activities for our planned EMERGENT Phase 3 clinical trials, including the initiation of EMERGENT-2 in December 2020. The decrease was further offset by a one-time $2 million milestone payment made to PureTech Health, which was expensed in December 2020, upon initiation of our EMERGENT-2 trial in accordance with the PureTech License Agreement (see Note 12 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K). The increase of $1.1 million and $0.7 million in expenses related to DRP and pain clinical trials, respectively, consist of enrollment and dosing activities for our Phase 1b trials incurred in 2020. Formulation and CMC expenses increased by $7.1 million due to an increase in manufacturing activities to obtain sufficient supply to support clinical trial activities, including our planned EMERGENT Phase 3 clinical trials. Preclinical expenses decreased by $1.0 million due to the conclusion of several toxicology studies in 2019. The increase of $4.4 million in expenses related to our discovery program was due to an increase in ongoing discovery efforts, including our ongoing collaborations with Charles River Labs and Psychogenics, Inc. The increase of $7.6 million in personnel-related costs was primarily a result of an increase in headcount. The increase of $0.6 million in consultant fees and other expenses consists of an increase in other consulting costs not specifically allocated to clinical, preclinical, formulation or CMC activities. 115 General and Administrative Expenses Personnel-related (including stock-based compensation) Professional and consultant fees Other Total general and administrative expense Year Ended December 31, 2019 2020 (in thousands) Change $ $ 16,701 $ 5,162 6,545 28,408 $ 15,750 $ 2,130 2,989 20,869 $ 951 3,032 3,556 7,539 The increase of $1.0 million in personnel-related costs was primarily a result of an increase in headcount, partially offset by the unrepeated acceleration of stock option awards which fully vested prior to the end of 2019 as a result of our Series B preferred stock financing and our initial public offering, or IPO. The increase of $3.0 million in professional and consultant fees was primarily due to an increase in recruiting fees, accounting fees, legal costs, and consulting fees related to our ongoing business activities. The increase of $3.6 million in other expenses was primarily due to insurance costs, the expansion of our facility in Boston, Massachusetts, and the entry into a new office lease in Carmel, Indiana. Other Income, Net Interest income Interest income, net Accretion of debt discount Change in fair value of derivative Total other income, net Year Ended December 31, 2019 2020 (in thousands) Change $ $ 3,305 $ — — — 3,305 $ 2,517 $ 11 (945 ) (135 ) 1,448 $ 788 (11 ) 945 135 1,857 The increase in interest income is attributable to interest earned on our cash equivalents and available-for-sale investments, the balance of which increased significantly subsequent to our IPO in July 2019 and our follow-on offering in November 2019. This increase in interest income was partially offset by lower interest rates throughout 2020. There was no interest income, net, accretion of debt discount, or change in fair value of derivative recorded during 2020 because there were no convertible notes outstanding during the period. Interest income, net, for the year ended December 31, 2019 represents the excess of interest forgiven over interest accrued on the Wellcome Trust Notes when all outstanding principal was converted into shares of Series B convertible preferred stock in March and April 2019. Accretion of debt discount for the year ended December 31, 2019 represents the full accretion of debt discount when all outstanding principal under the Wellcome Trust Notes was converted into shares of Series B convertible preferred stock in March and April 2019. The change in fair value of derivative for the year ended December 31, 2019 reflects the mark-to-market adjustment of the convertible note derivative liabilities prior to the conversion of the outstanding principal under the Wellcome Trust Notes in March and April 2019 into shares of our Series B convertible preferred stock. See Notes 5 and 11 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. 116 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, sales of our common stock and revenue from a license agreement. Through December 31, 2021, our operations have been financed by proceeds of $25.7 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, $234.2 million from the sale of our common stock in a follow-on public offering in November 2019, $270.0 million from the sale of our common stock in a follow-on public offering in March 2021 and $35.0 million from the Zai License Agreement in December 2021. As of December 31, 2021, we had $494.0 million in cash, cash equivalents and available-for-sale investments, and an accumulated deficit of $287.9 million. On July 2, 2020, we filed an automatically effective registration statement on Form S-3, or the Registration Statement, with the SEC which registers the offering, issuance and sale of an unspecified amount of common stock, preferred stock, debt securities, warrants and/or units of any combination thereof. We simultaneously entered into an equity distribution agreement with Goldman Sachs & Co. LLC, as sales agent, to provide for the issuance and sale by the Company of up to $150.0 million of common stock from time to time in “at-the-market” offerings under the Registration Statement and related prospectus filed with the Registration Statement, or the ATM Program. As of December 31, 2021, no sales had been made pursuant to the ATM Program. 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 prepaid expenses, 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 (decrease) in cash, cash equivalents and restricted cash Cash Flows from Operating Activities 2021 Year Ended December 31, 2020 (in thousands) 2019 $ (100,878 ) $ (22,688 ) 277,575 (69,856 ) $ (89,650 ) 3,659 (30,923 ) (174,335 ) 405,283 $ 154,009 $ (155,847 ) $ 200,025 Cash used in operating activities for the year ended December 31, 2021 was $100.9 million, consisting of a net loss of $143.8 million adjusted for noncash items, including stock-based compensation of $29.8 million, interest expense resulting from the amortization of premiums and accretion of discounts on our available-for-sale investments of $1.1 million, and impairment loss on right-of-use assets of $0.7 million. The change in our net operating assets and liabilities was primarily due to an increase in accrued expenses of $11.0 million, mainly driven by expenses incurred and timing of payments to CROs and CMOs in connection with and in support of our clinical trial activities, as well as an increase in payroll and related expenses due to increased headcount. 117 Cash used in operating activities for the year ended December 31, 2020 was $69.9 million, consisting of a net loss of $68.6 million adjusted for noncash items, including stock-based compensation of $13.5 million, interest expense resulting from the amortization of premiums and accretion of discounts on available-for-sale investments of $0.6 million, and changes in our net operating assets and liabilities, including an increase in accrued expenses of $2.8 million and an increase in prepaid and other current assets of $18.6 million, which was primarily due to timing of payments related to startup activities for our planned EMERGENT Phase 3 clinical trials, including the initiation of EMERGENT-2 in December 2020, as well as timing of payment of other research and development and general and administrative expenses. 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 adjusted for noncash items, including stock-based compensation expense of $12.6 million, interest income resulting from the amortization of premiums and accretion of discounts on our available-for-sale investments of $0.8 million, the accretion of debt discount related to the convertible notes of $0.9 million, and changes in our net operating assets and liabilities, including an increase in accrued expenses of $1.8 million as well as an increase in prepaid expenses and other current assets of $1.6 million, due primarily to timing of payment of various research and development and general and administrative expenses. Cash Flows from Investing Activities Cash used in investing activities for the year ended December 31, 2021 was $22.7 million, consisting primarily of $400.8 million for the purchases of investment securities and $3.1 million for the acquisition of property and equipment, partially offset by maturities and sales of investment securities of $372.2 million and $9.0 million, respectively. Cash used in investing activities for the year ended December 31, 2020 was $89.7 million, consisting primarily of $344.2 million for the purchases of investment securities, partially offset by maturities of investment securities of $255.0 million. Cash used in investing activities for the year ended December 31, 2019 was $174.3 million, consisting primarily of $231.7 million for the purchases of investment securities, partially offset by maturities and sales of investment securities of $50.0 million and $7.5 million, respectively. Cash Flows from Financing Activities Cash provided by financing activities for the year ended December 31, 2021 was $277.6 million and was attributable to $270.0 million in net proceeds received from the sale of our common stock in our follow-on public offering and $7.6 million attributable to proceeds received from the exercise of stock options. Cash provided by financing activities for the year ended December 31, 2020 was $3.7 million and was attributable to proceeds from the exercise of stock options of $4.1 million, offset by $0.4 million in payments of deferred offering costs associated with the filing of our Shelf and the ATM Program prospectus. 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. 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 our ongoing operations as a public company. 118 As of December 31, 2021, we had cash, cash equivalents and available-for-sale investments of $494.0 million. Based on our current plans, we believe that our existing cash, cash equivalents and available-for-sale investments will be sufficient to meet our anticipated operating and capital expenditure requirements for at least twelve months following the submission of an NDA for KarXT for the treatment of acute psychosis in patients with schizophrenia. 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 the receipt of regulatory approval, the revenue received, if any, 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; 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 and 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. 119 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 their rights as common stockholders. 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. Cash Requirements due to Contractual Obligations and Other Commitments In January 2020, we amended our current lease for 7,050 square feet of office space in Boston, Massachusetts, or the Arch Street Original Premises, to acquire approximately 4,175 additional square feet, or the Arch Street Expansion Premises, and to extend the original lease term through December 2023. Remaining lease payments from January 1, 2022 through the end of the lease term total $1.7 million for both the Arch Street Original Premises and the Arch Street Expansion Premises, of which we took possession of 2,424 square feet and 1,751 square feet in March 2020 and August 2020, respectively. In February 2020, we entered into an agreement to lease approximately 5,050 square feet of office space in Carmel, Indiana. The term of the lease commenced in June 2020 and expires in July 2023. Remaining lease payments from January 1, 2022 through the end of the lease term total $0.2 million. In March 2021, we entered into an agreement to sublease approximately 25,445 square feet of office space, or the High Street Premises, from a third party in Boston, Massachusetts as part of the relocation of our corporate headquarters. The term of the sublease extends from April 1, 2021 through December 31, 2025 and provides for escalating annualized base rent payments starting at $1.5 million and increasing to $1.6 million in the final year of the sublease. Remaining lease payments from January 1, 2022 through the end of the lease term total $6.3 million. Simultaneous with our entry into the High Street Premises sublease, in March 2021, we entered into an agreement to sublease the Arch Street Original Premises to a third party. The term of the sublease extends from July 1, 2021 through December 31, 2023. In April 2021, we entered into a second sublease agreement to sublease approximately 1,751 square feet of the Arch Street Expansion Premises to another third party from June 1, 2021 through December 31, 2023. 120 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 generally cancelable by us upon prior written notice. Payments due upon cancellation consist of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of cancellation, and may also include termination penalties. As of December 31, 2021, the timing, amount or likelihood of such payments are not known. We are also party to certain license and collaboration agreements with PureTech Health and Eli Lilly and Company. We may be obligated to make certain future payments which are contingent upon future events such as our achievement of specified regulatory and commercial milestones, or royalties on net product sales under these agreements. As of December 31, 2021, we were unable to estimate the timing or likelihood of achieving these milestones or generating future product sales. 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 SEC. 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. Revenue We recognize revenue in accordance with Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC 606"). To determine revenue recognition for arrangements within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, we assess the goods or services promised within each contract and assess whether each promised good or service is distinct for the purpose of identifying the performance obligations in the contract. This assessment involves subjective determinations and requires management to make judgments about the individual promised goods or services and whether they are separable from other aspects of the contractual relationship. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation in proportion to its stand-alone selling price, when (or as) the performance obligation is satisfied. We utilize key assumptions to determine a stand-alone selling price for performance obligations, which includes applicable market conditions and relevant entity specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. 121 If the consideration promised in a contract includes a variable amount, we estimate the amount of consideration to which we will be entitled in exchange for transferring the promised goods or services to a customer. We determine the amount of variable consideration by using the expected value method or the most likely amount method. We include the unconstrained amount of estimated variable consideration in the transaction price. The amount included in the transaction price is limited to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. At the end of each subsequent reporting period, we re-evaluate the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment. Research and Development Contract Costs and Accruals As part of the process of preparing our consolidated financial statements, we are required to estimate our prepaid and 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 prepaid expenses and other current assets and accrued expenses in the balance sheets and within research and development expense in the statements of operations. When evaluating the future utility of the prepaid expenses and adequacy of the accrued expenses, 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 prepaid and accrual estimates have not been materially different from the actual costs. 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. 122 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk related to changes in interest rates. We had cash, cash equivalents and available-for-sale investment securities of $494.0 million as of December 31, 2021, which consisted primarily of money market funds and investment securities, largely composed of U.S. Treasuries and investment grade, short to intermediate term fixed income securities. The primary objective of our investment activities is to preserve capital to fund our operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of investments in a variety of securities of high credit quality and short-term duration, according to our board-approved investment policy. Our investments are subject to interest rate risk and could fall in value if market interest rates increase. A hypothetical 10% relative change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements. 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, 2021, 2020 and 2019. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 123 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2021 and 2020 Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2021, 2020 and 2019 Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the years ended December 31, 2021, 2020 and 2019 Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 Notes to Consolidated Financial Statements 125 128 129 130 131 132 133 124 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors Karuna Therapeutics, Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of Karuna Therapeutics, Inc. and subsidiary (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 125 Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Evaluation of prepaid research and development contract costs As discussed in Note 2 to the consolidated financial statements, the Company incurs costs for 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 by analyzing progress of the research studies or clinical trials and manufacturing activities, including the phase or completion of events, invoices received and contracted costs. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs 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. As of December 31, 2021, prepaid research and development expenses totaled $18.1 million as discussed in Note 4 to the consolidated financial statements. We identified the evaluation of prepaid research and development contract costs as a critical audit matter. Specifically, the amount was based on certain assumptions and inputs, including the status of research and development activities and the associated percentage of completion, estimated costs per patient, the number and status of patients enrolled, as well as invoices received and paid. Subjective auditor judgment was required to evaluate these assumptions and inputs. 126 The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the research and development contract process. This included a control related to the assumptions and inputs described above. We selected certain research and development contracts and assessed the Company’s estimate of the cost of activities completed to date by: • • • • inquiring of management, including the internal project managers responsible for monitoring and tracking the status of clinical trials examining underlying documentation and third-party evidence from clinical research organizations, and comparing them to management’s assumptions and inputs obtaining and inspecting executed change orders and original contract terms, including the timeline and budget, and agreeing them to the information used in the Company’s estimation of research and development costs incurred to date examining certain invoices received after December 31, 2021 and evaluating whether services received prior to December 31, 2021 were included in the Company’s estimate of costs incurred as of December 31, 2021. /s/ KPMG LLP We have served as the Company’s auditor since 2018. Boston, Massachusetts February 24, 2022 127 KARUNA THERAPEUTICS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) Assets Current assets: Cash and cash equivalents Investment securities, available-for-sale Accounts receivable Prepaid expenses and other current assets Deferred offering costs Total current assets Restricted cash Right-of-use lease assets - operating, net Property and equipment, net Other non-current assets Total assets Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Accrued expenses Current portion of operating lease liability Total current liabilities Operating lease liability, net of current portion Other non-current liabilities Total liabilities Commitments and Contingencies (Note 12) Stockholders’ equity: Preferred stock, $0.0001 par value; 10,000,000 shares authorized and 0 shares outstanding at December 31, 2021 and 2020 Common stock, $0.0001 par value; 150,000,000 shares authorized at December 31, 2021 and 2020; 29,770,558 and 26,988,458 shares issued and outstanding at December 31, 2021 and 2020, respectively Additional paid-in capital Accumulated deficit Accumulated other comprehensive (loss) income Total stockholders’ equity Total liabilities and stockholders’ equity December 31, 2021 December 31, 2020 $ $ $ $ 206,953 $ 287,038 1,750 21,138 455 517,334 261 6,453 3,092 531 527,671 $ 1,939 $ 16,099 2,175 20,213 5,328 104 25,645 53,048 269,282 — 21,864 405 344,599 157 2,420 449 — 347,625 865 5,144 844 6,853 1,841 — 8,694 — — 3 790,391 (287,871 ) (497 ) 502,026 527,671 $ 3 482,955 (144,066 ) 39 338,931 347,625 The accompanying notes are an integral part of these consolidated financial statements 128 KARUNA THERAPEUTICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share data) License revenue Operating expenses: Research and development General and administrative Total operating expenses Loss from operations Other income, net: Impairment loss on right-of-use assets Interest income Sublease income Interest income, net (Note 5) Accretion of debt discount (Note 5) Change in fair value of derivative (Note 5) Total other income, net Net loss before income taxes Income tax provision Net loss attributable to common stockholders Net loss per share, basic and diluted (Note 9) Weighted average common shares outstanding used in computing net loss per share, basic and diluted 2021 Year Ended December 31, 2020 2019 $ 36,964 $ — $ 128,200 52,617 180,817 (143,853 ) (702 ) 502 254 — — — 54 (143,799 ) (6 ) $ $ (143,805 ) $ (4.94 ) $ 43,408 28,408 71,816 (71,816 ) — 3,305 — — — — 3,305 (68,511 ) (43 ) (68,554 ) $ (2.59 ) $ — 24,536 20,869 45,405 (45,405 ) — 2,517 — 11 (945 ) (135 ) 1,448 (43,957 ) — (43,957 ) (3.68 ) 29,138,915 26,446,006 11,958,152 The accompanying notes are an integral part of these consolidated financial statements 129 KARUNA THERAPEUTICS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) Net loss Other comprehensive (loss) income: Unrealized (losses) gains on available-for-sale investments Comprehensive loss $ $ 2021 (143,805 ) $ Year Ended December 31, 2020 2019 (68,554 ) $ (43,957 ) (536 ) (144,341 ) $ 34 (68,520 ) $ 5 (43,952 ) The accompanying notes are an integral part of these consolidated financial statements 130 KARUNA THERAPEUTICS, INC. CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (In thousands, except share data) 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 Secondary public offering costs Stock-based compensation expense Exercise of common options Other comprehensive income Net loss Balance, December 31, 2020 Issuance of common stock upon public offering, net of $17,250 in under- writing discounts and commissions and $233 in offering costs Stock-based compensation expense Exercise of common options Other comprehensive loss Net loss Balance, December 31, 2021 Series Seed, A and B Redeemable Convertible Preferred Stock Shares Value Common Stock Shares Value Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensi ve Income (Loss) Total Stockholders’ Equity (Deficit) 7,539,200 $ 41,965 12 $ — $ 1,633 $ (31,555 ) $ — $ (29,922 ) 5,422,845 81,927 — — — — — — — — 6,414,842 (12,962,045 ) (123,892 ) 16,833,790 1 2 93,043 123,890 — — — 93,044 — 123,892 — — — — — — — — $ — — — — — — $ — — — — — — $ — — — — — — — — — — — — — — 2,600,000 — 19,986 38,961 105,163 — — 26,012,754 $ — — 975,704 — — 26,988,458 $ — — — — — — — 3 $ — — — — — 3 $ 234,224 12,568 58 4 — — — 465,420 $ (34 ) 13,471 4,098 — — 482,955 $ — — — — — — (43,957 ) (75,512 ) $ — — — — (68,554 ) (144,066 ) $ — — — — — 5 — 5 $ — — — 34 — 39 $ 234,224 12,568 58 4 — 5 (43,957 ) 389,916 (34 ) 13,471 4,098 34 (68,554 ) 338,931 — — — — — — 2,395,834 — 386,266 — — 29,770,558 $ — — — — — 3 $ 270,017 29,811 7,608 — — 790,391 $ — — — — (143,805 ) (287,871 ) $ — — — (536 ) — (497 ) $ 270,017 29,811 7,608 (536 ) (143,805 ) 502,026 The accompanying notes are an integral part of these consolidated financial statements 131 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: 2021 Year Ended December 31, 2020 2019 $ (143,805 ) $ (68,554 ) $ (43,957 ) Stock-based compensation expense Impairment loss on right-of-use assets Amortization of premiums and accretion of discounts on investment securities Depreciation and amortization expense Loss on disposal of assets Accretion of debt discount (Note 5) Change in fair value of derivative liability (Note 5) Non-cash interest income, net (Note 5) Changes in operating assets and liabilities: Accrued interest on investment securities Accounts receivable Prepaid expenses and other current assets Right-of-use assets Other non-current assets Accounts payable Accrued expenses Operating lease liability Deferred lease obligation Other non-current liabilities Net cash used in operating activities Cash flows from investing activities Purchases of investment securities Maturities of investment securities Sales of investment securities Acquisition of property and equipment Net cash used in investing activities Cash flows from financing activities Proceeds from public offering, net of underwriting discounts and commissions Payment of offering costs 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 exercise of stock options Proceeds from issuance of convertible notes Proceeds from exercise of warrant Net cash provided by financing activities Net increase (decrease) 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 Lease liabilities arising from obtaining right-of-use assets Purchases of property and equipment included in accounts payable and accrued expenses Conversion of redeemable convertible preferred stock into common stock Conversion of convertible notes, accrued interest and discount upon conversion to preferred stock 29,811 702 1,063 506 — — — — 261 (1,750 ) 726 1,305 (531 ) 1,071 10,881 (1,222 ) — 104 (100,878 ) (400,829 ) 372,223 8,990 (3,072 ) (22,688 ) 270,250 (283 ) — — — — 13,471 — 642 145 20 — — — (191 ) — (18,555 ) 631 — 318 2,791 (574 ) — — (69,856 ) (344,213 ) 254,982 — (419 ) (89,650 ) — (405 ) — (34 ) — — — 7,608 — — 277,575 154,009 53,205 207,214 $ — 4,098 — — 3,659 (155,847 ) 209,052 53,205 $ 12,568 — (824 ) 58 — 945 135 (11 ) (436 ) — (1,600 ) — — 278 1,815 — 106 — (30,923 ) (231,718 ) 50,000 7,498 (115 ) (174,335 ) — — 234,624 (400 ) 95,453 (2,409 ) 74,825 4 3,128 58 405,283 200,025 9,027 209,052 6,040 $ 3,259 $ — 77 $ — $ — $ — $ — $ — $ — 123,892 7,102 $ $ $ $ $ The accompanying notes are an integral part of these consolidated financial statements 132 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of the Business Description 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 an innovative clinical-stage biopharmaceutical company driven to create and deliver transformative medicines for people living with psychiatric and neurological conditions. 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, the impact of the ongoing and evolving COVID-19 coronavirus pandemic, and the need to obtain adequate additional financing to fund the development of its product candidates. 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. 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 $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. 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 $234.2 million after deducting underwriting discounts and commissions of $15.0 million and offering expenses of $0.4 million. On July 2, 2020, the Company filed an automatically effective registration statement on Form S-3 (the “Registration Statement”) with the SEC which registers the offering, issuance and sale of an unspecified amount of common stock, preferred stock, debt securities, warrants and/or units of any combination thereof. The Company simultaneously entered into an equity distribution agreement with Goldman Sachs & Co. LLC, as sales agent, to provide for the issuance and sale by the Company of up to $150.0 million of common stock from time to time in “at-the-market” offerings under the Registration Statement and related prospectus filed with the Registration Statement (the “ATM Program”). As of December 31, 2021, no sales had been made pursuant to the ATM Program. 133 On March 4, 2021, the Company completed a follow-on public offering under the Registration Statement and a related prospectus supplement in which it issued and sold 2,395,834 shares of common stock, including full exercise of the underwriters’ over-allotment option to purchase an additional 312,500 shares of common stock, at a public offering price of $120 per share. The aggregate net proceeds to the Company from the offering, inclusive of proceeds from the over-allotment exercise, were $270.0 million after deducting underwriting discounts and commissions of $17.3 million and offering expenses of $0.2 million. The Company’s consolidated 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 $100.9 million for the year ended December 31, 2021 and had an accumulated deficit of $287.9 million as of December 31, 2021. The Company expects to continue to generate operating losses for the foreseeable future. The Company expects that its cash, cash equivalents and available-for-sale investments of $494.0 million as of December 31, 2021 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. 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 consolidated financial statements include the accounts of Karuna Therapeutics, Inc. and its wholly owned subsidiary, Karuna Securities Corporation, a Massachusetts corporation. All inter-company transactions and balances have been eliminated in consolidation. 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, revenue, 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. 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. Investment Securities The Company’s investment securities 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 (loss) income in stockholders’ equity. The cost of investment securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest income. Realized gains and losses are included as a component of other income, net based on the specific identification method. 134 When the fair value of an available-for-sale debt security falls below the amortized cost basis it is evaluated to determine if any of the decline in value is attributable to credit loss. Decreases in fair value attributable to credit loss are recorded directly to earnings with a corresponding allowance for credit losses, limited to the amount that the fair value is less than the amortized cost basis. If the credit quality subsequently improves the allowance is reversed up to a maximum of the previously recorded credit losses. When the Company intends to sell an impaired available-for-sale debt security, or if it is more likely than not that the Company will be required to sell the security prior to recovering the amortized cost basis, the entire fair value adjustment will immediately be recognized in earnings with no corresponding allowance for credit losses. 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 statement of operations. Deferred offering costs associated with the Company's ATM Program were $0.5 million and $0.4 million as of December 31, 2021 and 2020, respectively. 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. As of December 31, 2019, there were no deferred offering costs outstanding. Fair Value of Financial Instruments The Company’s financial instruments consist of cash equivalents, investment securities, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, convertible notes and derivatives embedded within the convertible notes. The carrying amount of accounts receivable, prepaid expenses and other current assets, 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, investment securities and derivative liabilities are carried at fair value, determined according to the fair value hierarchy described below (see Note 11). 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. 135 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. Property and Equipment Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the lease by use of the straight-line method. Maintenance and repair costs are expensed as incurred. When assets are retired or sold, the assets and accumulated depreciation are removed from the respective accounts and any gain or loss is recognized. Impairment of Long-Lived Assets The Company continually evaluates long-lived assets for potential impairment when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. Recoverability is measured by comparing the carrying values of the assets to the expected future net undiscounted cash flows that the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the book values of the assets exceed their fair value. 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 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 was 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, or for the years ended, December 31, 2021 and 2020. 136 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 holders of the majority of the underlying shares 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, were 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. There was no redeemable convertible preferred stock outstanding as of, or for the years ended, December 31, 2021 and 2020. Leases Effective January 1, 2020, the Company adopted ASU 2016-02, Leases (Topic 842) (“ASU 2016-02” or “ASC 842”), using the modified retrospective transition approach and utilizing the effective date as the date of initial application. As a result, prior periods are presented in accordance with the previous guidance in ASC 840, Leases (“ASC 840”). At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Operating leases are recognized on the balance sheet as right- of-use (“ROU”) lease assets, current portion of operating lease liability, and operating lease liability, net of current portion. The Company does not have financing leases. Operating lease liabilities and their corresponding ROU lease assets are initially recorded based on the present value of lease payments over the expected remaining lease term. Certain adjustments to the ROU lease asset may be required for items such as incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate to discount lease payments, which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. To estimate the Company's incremental borrowing rate, a credit rating applicable to the Company is estimated using a synthetic credit rating analysis since the Company does not currently have a rating agency-based credit rating. Prospectively, the Company will adjust the ROU lease assets for straight-line rent expense or any incentives received and remeasure the lease liability at the net present value using the same incremental borrowing rate that was in effect as of the lease commencement or transition date. The Company has elected not to recognize leases with an original term of one year or less on the balance sheet. The Company typically only includes an initial lease term in its assessment of a lease arrangement. Options to renew a lease are not included in the Company's assessment unless there is reasonable certainty that it will renew. Assumptions that the Company made at the commencement date are re-evaluated upon occurrence of certain events, including a lease modification. Lease modifications are accounted for as a separate contract or are treated as a change in accounting for the existing lease. A lease modification results in a separate contract when the modification grants the lessee an additional right of use not included in the original lease and when lease payments increase commensurate with the standalone price for the additional right of use. When a lease modification results in a separate contract, it is accounted for in the same manner as a new lease. Sublease income is recognized on a straight-line basis over the term of the sublease agreement and is recorded within other income, net, on the consolidated statements of operations. 137 Revenue The Company recognizes revenue in accordance with FASB ASC 606, Revenue from Contracts with Customers ("ASC 606"). This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options. The Company assesses if these options provide a material right to the customer and, if so, they are considered performance obligations. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. The Company assesses whether each promised good or service is distinct for the purpose of identifying the performance obligations in the contract. This assessment involves subjective determinations and requires management to make judgments about the individual promised goods or services and whether they are separable from the other aspects of the contractual relationship. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (that is, the good or service is capable of being distinct) and (ii) the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (that is, the promise to transfer the good or service is distinct within the context of the contract). In assessing whether a promised good or service is distinct in the context of a collaboration or licensing arrangement, the Company considers factors such as the research, manufacturing and commercialization capabilities of a collaboration partner and the availability of the associated expertise in the general marketplace (see discussion of license agreement in Note 8). The Company also considers the intended benefit of the contract in assessing whether a promised good or service is separately identifiable from other promises in the contract. If a promised good or service is not distinct, an entity is required to combine that good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct. The transaction price is then determined and allocated to the identified performance obligations in proportion to their stand-alone selling prices ("SSP") on a relative SSP basis. SSP is determined at contract inception and is not updated to reflect changes between contract inception and when the performance obligations are satisfied. Determining the SSP for performance obligations requires significant judgment. In developing the SSP for a performance obligation, the Company considers applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. 138 If the consideration promised in a contract includes a variable amount, the Company estimates the amount of consideration to which it will be entitled in exchange for transferring the promised goods or services to a customer. The Company determines the amount of variable consideration by using the expected value method or the most likely amount method. The Company includes the unconstrained amount of estimated variable consideration in the transaction price. The amount included in the transaction price is limited to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. At the end of each subsequent reporting period, the Company re-evaluates the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment. If an arrangement includes development and regulatory milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s control or the licensee’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received. For arrangements with licenses of intellectual property that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied. In determining the transaction price, the Company adjusts consideration for the effects of the time value of money if the timing of payments provides the Company with a significant benefit of financing. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied, either at a point in time or over time. If over time, recognition is based on the use of either an output or an input method, such that the method used best depicts the transfer of control to the customer. Amounts received from a customer prior to revenue recognition are recorded as deferred revenue. Amounts received from a customer that are expected to be recognized as revenue within the 12 months following the balance sheet date are classified as a current liability in the accompanying consolidated balance sheets. Research and Development Costs Research and development costs are expensed as incurred. Research and development costs include salaries and bonuses, stock-based 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. 139 Research and Development 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 discovery and preclinical studies, 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 expenses (or prepaid expenses, as appropriate) in the balance sheets and within research and development expense in the statements of operations. When evaluating the future utility of prepaid expenses and the adequacy of accrued expenses, 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 prepaid or accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates. The Company’s historical prepaid and 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 had 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. 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. 140 Net Loss Per Share 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. In July 2019, upon closing of the IPO, all outstanding shares of the Company’s redeemable convertible preferred stock automatically converted into 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. 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. 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, 2021, 2020 and 2019. Comprehensive (Loss) Income Comprehensive (loss) income 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 years ended December 31, 2021, 2020 and 2019, the Company’s only element of other comprehensive (loss) income was unrealized (losses) gains on available-for-sale investments. Recently Adopted Accounting Pronouncements In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which replaces the existing guidance in ASC 840, “Leases.” Topic 842 was subsequently amended by ASU 2018-11, Leases (Topic 842): Targeted Improvements, and ASU 2019- 01, Leases (Topic 842): Codification Improvements. The new leasing standard generally requires lessees to recognize operating and financing lease liabilities and corresponding ROU assets on the consolidated balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. The Company adopted the new standard effective January 1, 2020 and did not restate comparative periods. The Company elected the package of practical expedients permitted under the transition guidance and as such, the adoption of this ASU did not change the classification of any of the Company's existing leases. The Company elected to combine lease and non-lease components, elected not to record leases with an initial term of 12 months or less on the balance sheet and recognized the associated lease payments in the consolidated statements of operations on a straight-line basis over the lease term. As of January 1, 2020, the Company recognized $1.5 million as total lease liabilities and $1.2 million as total ROU lease assets on its consolidated balance sheet as a result of the adoption. 141 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 was effective for financial statements issued for annual and interim periods beginning after December 15, 2019 for all entities. The Company adopted the standard effective January 1, 2020. The adoption did not have a material impact on the Company’s consolidated financial statements. 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 was effective for financial statements issued for annual and interim periods beginning after December 15, 2020, with early adoption permitted. Effective January 1, 2020, the Company elected to early adopt the standard. The adoption did not have a material impact on the Company’s consolidated financial statements. 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. Under this ASU, the standard was effective for public business entities, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, the standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. As of January 1, 2021, the Company no longer qualified as a smaller reporting company for filing purposes, and therefore adopted ASU 2016-13 effective January 1, 2020. The adoption did not have a material impact on the Company’s consolidated financial statements. In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. The amendments in this update clarify that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606, Revenue from Contracts with Customers when the counter party is a customer in the context of a unit of account. This update also precludes companies from presenting transactions with collaborative partners that are outside the scope of Topic 606 together with revenue within the scope of Topic 606. For public business entities, ASU 2018-18 was effective for fiscal years beginning after December 31, 2019, and interim periods within those fiscal years. Effective January 1, 2020, the Company adopted the standard. The adoption did not have a material impact on the Company’s consolidated financial statements. In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. For public business entities, ASU 2018- 15 was effective for fiscal years beginning after December 31, 2019, and interim periods within those fiscal years. The Company adopted the standard effective January 1, 2020. The adoption did not have a material impact on the Company’s consolidated financial statements. Recently Issued Accounting Pronouncements New pronouncements issued but not effective until after December 31, 2021 are not expected to have a material impact on the Company’s consolidated financial statements. 142 Note 3. Property and Equipment, Net Property and equipment, net, consisted of the following (in thousands): Leasehold improvements Furniture and fixtures Office equipment Computer equipment Software Total property and equipment Less: accumulated depreciation Property and equipment, net December 31, 2021 2020 $ $ 1,351 $ 984 575 487 267 3,664 (572 ) 3,092 $ 154 85 29 229 154 651 (202 ) 449 Depreciation expense was $0.5 million for the year ended December 31, 2021, $0.1 million for the year ended December 31, 2020, and less than $0.1 million for the year ended December 31, 2019. Note 4. Prepaid Expenses and Other Current Assets and Accrued Expenses Prepaid expenses and other current assets consisted of the following (in thousands): Prepaid research and development expenses Prepaid insurance Other Total prepaid expenses and other current assets December 31, 2021 2020 $ $ 18,066 $ 2,364 708 21,138 $ 18,660 2,116 1,088 21,864 The Company also had other non-current assets of $0.5 million as of December 31, 2021, which consisted of a security deposit of $0.4 million, $0.1 million in prepaid expenses, and less than $0.1 million in deferred rent. 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, 2021 2020 $ $ 6,989 $ 8,316 543 251 16,099 $ 2,654 1,829 458 203 5,144 In July 2015, the Company entered into a Company Funding Agreement with The Wellcome Trust, Limited (“Wellcome Trust”), pursuant to which the Company was eligible to receive $3.8 million in gross proceeds from the issuance of a convertible note upon the achievement of specified milestones (the “2015 Convertible Note”). As of December 31, 2017, the Company had received the full amount of gross proceeds under the 2015 Convertible Note. 143 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,” and together with the 2015 Convertible Note, the “Wellcome Trust 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. The Wellcome Trust Notes 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. The principal due under the Wellcome Trust Notes was convertible 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 of each of the 2015 Convertible Note and 2018 Convertible Note, the Company concluded that the each contained a conversion option at a significant discount that was deemed to be an embedded derivative, which was required to be bifurcated and accounted for separately from the debt host. There were no debt issuance costs associated with the 2018 Convertible Note. The Company recognized the following changes in the debt related to the Wellcome Trust Notes during the year ended December 31, 2019 (in thousands): 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 Notes to redeemable convertible preferred stock Balance, December 31, 2019 Financial statement impacted 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 $ — There was no debt issued or outstanding under the Wellcome Trust Notes as of December 31, 2019, or during the years ended December 31, 2021 and 2020. Convertible Notes Since inception, and excluding the Wellcome Trust Notes, 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 14). There was no debt issued or outstanding under the Convertible Notes during the years ended December 31, 2021, 2020 and 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. 144 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 $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 into 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 $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 into 331,344 shares of Series B Preferred Stock. In April 2019, the Company received an additional $1.6 million pursuant to the 2018 Convertible Note which was subsequently converted into 137,743 shares of Series B Preferred Stock. Upon closing of the Company’s IPO on July 2, 2019, the then-outstanding shares of the Series Seed, Series A and Series B redeemable convertible preferred stock converted into common stock. As of, and for the years ended, December 31, 2021 and 2020, there were no shares of redeemable convertible preferred stock authorized, issued or outstanding. Note 7. Stockholders’ Equity 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. Through December 31, 2021, no preferred stock has been issued. Common Stock As of December 31, 2021, 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 are 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, 2021, no cash dividends have been declared or paid. As of December 31, 2021, there were 29,770,558 shares of common stock outstanding. 145 Note 8. Zai License Agreement Terms of Agreement On November 8, 2021, the Company and Zai Lab (Shanghai) Co., Ltd. ("Zai") entered into a license agreement (the "Zai License Agreement"), pursuant to which Karuna granted to Zai the right to exclusively develop, manufacture and commercialize KarXT in Greater China, including mainland China, Hong Kong, Macau, and Taiwan (the “Licensed Territory”). Zai will fund substantially all development, regulatory, and commercialization activities in the Licensed Territory. Under the terms of the Zai License Agreement, Karuna received a non-refundable $35 million upfront payment and payment of certain taxes on its behalf and is eligible to receive up to an additional $80 million in development and regulatory milestone payments. Karuna is also eligible to receive up to $72 million in sales milestone payments and low double-digit to high-teens tiered royalties based on annual net sales of KarXT in the Licensed Territory, subject to reduction under specified circumstances. Receipt of sales milestone payments and royalties are not contingent on any further participation by Karuna in the development of KarXT in the Licensed Territory. The Zai License Agreement will expire upon the latest of the following dates with respect to the last licensed product in any region in the Licensed Territory: (i) the date of expiration of the last valid claim covering such licensed product in such region, (ii) the date that is a specific period after the date of the first commercial sale of such licensed product in such region and (iii) the expiration date of any regulatory exclusivity for such licensed product in such region. Zai may terminate the Zai License Agreement for convenience, subject to the terms thereto, by providing written notice to Karuna, which termination will be effective following a prescribed notice period. In addition, Karuna may terminate the Zai License Agreement under specified circumstances if Zai or certain other parties challenge Karuna’s patent rights or if Zai or its affiliates fail to complete certain development activities with respect to the licensed product for a specified period of time, subject to specified exceptions. Either party may terminate the Zai License Agreement for the other party’s uncured material breach, with a customary notice and cure period, or insolvency. After termination or expiration, Karuna is entitled to retain a worldwide, exclusive, and perpetual license from Zai to exploit the licensed product (which license would be non-exclusive after expiration (but not termination)), subject to a reasonable royalty to be agreed by the parties if terminated for Karuna’s uncured material breach. Revenue Recognition The Company concluded that the distinct units of account within the agreement are reflective of a vendor-customer relationship and therefore within the scope of ASC 606. Under the provisions of ASC 606, the Company identified one performance obligation. The Company provided an exclusive license to intellectual property, bundled with the associated know-how and certain professional services that are not substantive. Under the terms of the Zai License Agreement, Zai has the sole right to manufacture, or have manufactured, KarXT for use in development and commercialization in the Licensed Territory. At the election of Zai, the Company may supply KarXT to Zai at the fully burdened manufacturing cost plus a specified margin, as defined within the agreement. This provision was determined to be an option to acquire additional goods or services at a price that approximates the stand-alone selling price for that good or service, and therefore does not represent a material right, or separate performance obligation, within the context of the Zai License Agreement. 146 The Company determined the transaction price was equal to $37.0 million, which includes the upfront fee of $35 million and payments to taxing authorities on Karuna’s behalf. In estimating the stand-alone selling price, the Company determined that there were no significant financing components, noncash consideration or amounts that may be refunded to the customer, and as such the total unconstrained consideration of $37.0 million was included in the total transaction price. License of Intellectual Property. The license to the Company's intellectual property, bundled with the associated know-how, represents a distinct performance obligation. The license and associated know-how was transferred to Zai in the fourth quarter of 2021 to satisfy this performance obligation. The Company allocated the full transaction price to the license of the Company's intellectual property, bundled with the associated know-how, and accordingly recognized revenue of $37.0 million as license revenue in its Consolidated Statement of Operations for the year ended December 31, 2021. Milestone Payments. The potential development and regulatory milestone payments, as well as sales milestone payments, are paid upon achievement of certain milestones as defined in the Zai License Agreement. The Company evaluated whether or not the milestones are considered probable of being reached and determined that their achievement is highly dependent on factors outside of the Company's control. These payments have been fully constrained until the Company concludes that achievement of the milestone is probable, and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods, and as such have been excluded from the transaction price. At the end of each subsequent reporting period, the Company will re-evaluate the probability of achievement of each milestone and any related constraint and, if necessary, adjust its estimate of the overall transaction price. Royalties. Any consideration related to royalties will be recognized if and when the related sales occur, as they were determined to relate predominantly to the license granted to Zai and, therefore, have also been excluded from the transaction price. The Company assessed the Zai License Agreement to determine whether a significant financing component exists and concluded that a significant financing component does not exist. The upfront payment received by the Company was subject to foreign tax withholdings of $3.7 million. The Company recorded this tax expense to general and administrative expense in the Consolidated Statement of Operations for the year ended December 31, 2021. There was no deferred revenue as of December 31, 2021 related to the Zai License Agreement. Note 9. 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 years ended December 31, 2021, 2020 and 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 2021 Year Ended December 31, 2020 $ $ (143,805 ) $ 29,138,915 (4.94 ) $ $ (68,554 ) 26,446,006 (2.59 ) 2019 (43,957 ) 11,958,152 (3.68 ) The Company’s potentially dilutive securities, which consist of stock options, 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. 147 Common Stock Equivalents As of December 31, 2021, 2020 and 2019, stock options outstanding to purchase common stock of 5,323,162, 4,612,790 and 4,614,544, respectively, have been excluded from the calculation of diluted net loss per share because including them would have had an anti-dilutive impact. Note 10. Stock-based Compensation Stock Options In September 2009, the Company’s board of directors approved the 2009 Stock Incentive Plan (the “2009 Plan”), which provided for the grant of incentive stock options to employees and non-statutory stock options to directors, consultants, and non- employees of the Company. 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, 2021, there were 2,400,198 options outstanding under the 2009 Plan. In May 2019, the Company’s 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, restricted stock units ("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 increases on January 1 of each calendar year, commencing on January 1, 2020, by 4% of the number of shares of common stock outstanding on the immediately preceding December 31 or such lesser amount determined by the Company’s board of directors or the compensation committee of the board of directors. As of December 31, 2021, there were 1,043,278 common shares available for issuance and 2,922,964 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. Awards typically vest in four years, but vesting conditions can vary based on the discretion of the Company’s board of directors. A summary of the Company’s stock option activity and related information is as follows: Outstanding as of December 31, 2020 Granted Exercised Forfeited Outstanding as of December 31, 2021 Options vested and expected to vest as of December 31, 2021 Options exercisable as of December 31, 2021 Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (in thousands) 28.63 126.08 19.70 78.89 50.04 50.04 20.36 8.3 $ 336,740 7.7 $ 431,456 7.7 $ 7.1 $ 431,456 365,081 Number of Shares 4,612,790 $ 1,173,675 (386,266 ) (77,037 ) 5,323,162 $ 5,323,162 $ 3,299,602 $ 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, 2021. 148 As of December 31, 2021, there was $96.7 million of unrecognized compensation cost, which is expected to be recognized over a weighted-average period of 3.00 years. The fair value of options granted 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 $ $ 2021 Year Ended December 31, 2020 55.78 - 84.03 $ 100.22 - 141.88 $ 5.50 - 7.00 56.57% - 60.21% 0.57% - 1.37% 0.00% 35.17 - 59.72 $ 62.14 - 106.46 $ 5.50 - 7.00 55.73% - 61.28% 0.35% - 1.49% 0.00% 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 RSUs. The average grant date fair value was $10.97 per share. As of December 31, 2021 and 2020, there was no unrecognized compensation expense related to unvested RSUs, and there were no restricted common stock units issued during the years ended December 31, 2021 and 2020. 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. No expense was recognized in the years ended December 31, 2021, 2020 and 2019, as the warrant was fully vested as of October 2018. There was no unrecognized compensation cost related to the warrants as of December 31, 2021, 2020 and 2019. In August 2018, PureTech Health partially exercised the warrant to purchase 12 shares of the Company’s common stock, resulting in a nominal amount of proceeds to the Company. In March 2019, PureTech Health exercised the remaining portion of the warrant to purchase 19,986 shares of the Company’s common stock, resulting in proceeds to the Company of $0.1 million. There were no outstanding warrants as of December 31, 2021 or 2020. Stock-based Compensation Expense Stock-based compensation expense is classified in the statements of operations for the years ended December 31, 2021, 2020 and 2019 as follows (in thousands): General and administrative Research and development Total stock-based compensation expense 2021 Year Ended December 31, 2020 2019 $ $ 18,175 $ 11,636 29,811 $ 9,704 $ 3,767 13,471 $ 11,988 580 12,568 149 Note 11. Fair Value of Financial Assets and Liabilities Cash Equivalents and Investment Securities The following table presents information about the Company’s assets as of December 31, 2021 and 2020 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): Cash equivalents: Money market fund Investment securities: US Treasuries Corporate debt securities Commercial paper Total Cash equivalents: Money market fund Investment securities: US Treasuries Corporate debt securities Commercial paper Total Level 1 Fair Value Measurement at December 31, 2021 Using Level 3 Level 2 Total $ 199,019 $ — $ — $ 199,019 100,043 — — 299,062 $ — 55,744 131,251 186,995 $ $ — — — — $ 100,043 55,744 131,251 486,057 Level 1 Fair Value Measurement at December 31, 2020 Using Level 3 Level 2 Total $ 50,141 $ — $ — $ 50,141 172,295 — — 222,436 $ — 36,817 60,170 96,987 $ $ — — — — $ 172,295 36,817 60,170 319,423 The fair values of the Company’s commercial paper and corporate debt securities are based on prices obtained from independent pricing sources. Securities with validated quotes from pricing services are reflected within Level 2, as they are primarily based on observable pricing for similar assets or other market observable inputs. Typical inputs used by these pricing services include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers or estimates of cash flow, prepayment spreads and default rates. As of December 31, 2021 and 2020, the Company does not hold any securities classified as Level 3, which are securities valued using unobservable inputs. The Company has not transferred any investment securities between the classification levels. 150 The estimated fair value and amortized cost of the Company’s available-for-sale investments, by contractual maturity and security type, are summarized as follows (in thousands): US Treasuries (due within one year) US Treasuries (due after one year and less than two years) Corporate debt securities (due within one year) Corporate debt securities (due after one year and less than two years) Commercial paper (due within one year) Total US Treasuries (due within one year) Corporate debt securities (due within one year) Commercial paper (due within one year) Total Amortized Cost Unrealized Gains Unrealized Losses Fair Value December 31, 2021 15,137 $ 85,277 45,510 10,338 131,273 287,535 $ — $ — — — 5 5 $ (12 ) $ (359 ) (57 ) (47 ) (27 ) (502 ) $ 15,125 84,918 45,453 10,291 131,251 287,038 Amortized Cost Unrealized Gains Unrealized Losses December 31, 2020 172,265 $ 36,823 60,155 269,243 $ 37 $ 3 16 56 $ (7 ) $ (9 ) (1 ) (17 ) $ Fair Value 172,295 36,817 60,170 269,282 $ $ $ $ The Company has classified all of its available-for-sale investment securities, including those with maturities beyond one year, as current assets on its consolidated balance sheets based on the highly liquid nature of the investment securities and because these investment securities are considered available for use in current operations. The Company is required to determine whether a decline in the fair value below the amortized cost basis of available-for- sale securities is due to credit-related factors. At each reporting date, the Company performs an evaluation of impairment to determine if any unrealized losses are the result of credit losses. Impairment is assessed at the individual security level. Factors considered in determining whether a loss resulted from a credit loss or other factors include the Company’s intent and ability to hold the investment until the recovery of its amortized cost basis, the extent to which the fair value is less than the amortized cost basis, the length of time and extent to which fair value has been less than the cost basis, the financial condition of the issuer, any historical failure of the issuer to make scheduled interest or principal payments, any changes to the rating of the security by a rating agency, any adverse legal or regulatory events affecting the issuer or issuer’s industry, and any significant deterioration in economic conditions. Unrealized losses on available-for-sale securities presented in the previous table have not been recognized in the consolidated statements of operations because the securities are high credit quality, investment grade securities that the Company does not intend to sell and will not be required to sell prior to their anticipated recovery, and the decline in fair value is attributable to factors other than credit losses. Based on its evaluation, the Company determined its year-to-date credit losses related to its available-for-sale securities were immaterial at December 31, 2021 and 2020. Derivative Liability The derivative liability associated with the Wellcome Trust Notes (see Note 5) 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 recognized the following changes in the fair value of derivative liabilities during the year ended December 31, 2019 (in thousands): 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 $ $ 389 750 135 (1,274 ) — 151 There was no derivative liability recorded as of December 31, 2021 or 2020. Note 12. Commitments and Contingencies Leases The Company entered into an agreement to lease approximately 7,050 square feet of office space in Boston, Massachusetts (“Arch Street Original Premises”) that began in December 2018 and had an original expiry in February 2023. In January 2020, the Company entered into an amended agreement (“Amended Arch Street Lease Agreement”) to gain access to approximately 4,175 square feet of additional office space (“Arch Street Expansion Premises”) beginning in March 2020, and to extend the maturity of the agreement for the Arch Street Original Premises to December 2023. The Amended Arch Street Lease Agreement provides for future minimum annual rental payments as defined within the agreement. Under the terms of the Amended Arch Street Lease Agreement, the Company is required to maintain a cash balance of $0.2 million to secure a letter of credit associated with this lease. The amount was classified as restricted cash in the consolidated balance sheets as of December 31, 2021 and 2020. The Amended Arch Street Lease Agreement also provides for $0.1 million in leasehold incentives which may be applied to base rent or improvements to the Arch Street Expansion Premises, subject to limitations. The Company determined the Amended Arch Street Lease Agreement represented a lease modification, and the Arch Street Original Premises and Arch Street Expansion Premises were identified as separate lease components. The extension of maturity with respect to the Arch Street Original Premises was treated as a modification not accounted for as a separate contract, in which the lease classification was reassessed and the lease liability was remeasured. The effect of the remeasurement, in the amount of $0.4 million, was recorded as an adjustment to the ROU lease asset as of February 1, 2020, the effective date of the modification. The addition of the Arch Street Expansion Premises was accounted for as a separate contract which granted the Company an additional right of use not included in the original lease, in which the lease payments increased commensurate with the standalone price for the additional right of use. As the leasehold incentives were not paid or payable at commencement, the Company will account for the incentives once the contingency is resolved. In February 2020, the Company entered into an agreement to lease approximately 5,050 square feet of office space, and furniture within the office space, in Carmel, Indiana (“Indiana Lease Agreement”), which began in June 2020 and expires in July 2023, with the option to renew for an additional three-year term. In addition, the agreement provides an option to purchase the office furniture at the expiration of the agreement. The office space and office furniture within the Indiana Lease Agreement were each determined to represent separate lease components. Consideration for the contract was allocated to each lease component based on their relative stand-alone selling price. The options to renew the lease for an additional three-year term as well as purchase the office furniture at the expiration of the agreement were excluded from the determination of lease liabilities arising from obtaining the ROU assets, as they were not considered probable of being exercised at commencement. In March 2021, the Company entered into an agreement (“High Street Lease”) to sublease from a third party approximately 25,445 square feet of office space in Boston, Massachusetts, beginning on April 1, 2021 and expiring December 31, 2025. The initial fixed rental rate is $60 per rentable square foot of the premises per annum and will increase at a rate of $1 per rentable square foot each year, with base rent first becoming due on July 1, 2021. Upon signing of the High Street Lease, the Company was also required to pay the first full monthly installment of base rent of $0.1 million and a security deposit of $0.4 million. The security deposit was recorded within other non-current assets on the consolidated balance sheet as of December 31, 2021. The first monthly installment was included as an adjustment to the ROU asset recognized upon commencement of the lease. The Company recognized an ROU asset and corresponding lease liability of $6.2 million and $6.0 million, respectively, on its consolidated balance sheet as of April 1, 2021, upon commencement of the High Street Lease. 152 For each of the lease agreements entered into or modified, the Company identified certain non-lease components. Lease and non-lease components were combined into a single lease component. In addition, all identified leases were assessed as operating leases. As the Company’s leases do not provide an implicit rate, the Company used its incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a term equal to the lease payments in a similar economic environment, in determining the present value of lease payments for each identified lease at the lease commencement date. Simultaneous with the High Street Lease, the Company entered into an agreement (“Arch Street Original Premises Sublease”) to sublease approximately 7,050 square feet of its former Arch Street Boston headquarters to a third party from July 1, 2021 through the remainder of its current lease term, which ends on December 31, 2023. The initial fixed rental rate is $59 per rentable square foot of the premises per annum, and will increase at a rate of 2% per year, with base rent first becoming due on October 1, 2021. Upon signing of the Arch Street Original Premises Sublease, the agreement required a security deposit of $0.1 million which has been recorded within other non-current liabilities on the consolidated balance sheet as of December 31, 2021. On April 30, 2021, the Company entered into an agreement (“First Expansion Premises Sublease”) to sublease approximately 1,751 square feet of the Arch Street Expansion Premises to another third party from June 1, 2021 through the remainder of its current lease term, which ends on December 31, 2023. The initial fixed rental rate is $61 per rentable square foot per annum and will increase at a rate of 2% per year, with base rent commencing on June 1, 2021. The components of lease cost were as follows (dollar amounts in thousands): Lease Cost Operating lease cost Short-term lease cost Sublease income Total lease cost 2021 Year Ended December 31, 2020 2019 $ $ 1,829 $ — (254 ) 1,575 $ 791 $ — — 791 $ 441 — — 441 The Company adopted ASC 842 effective January 1, 2020. Prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 840. Other Information Cash paid for amounts included in the measurement of lease liabilities Operating lease liabilities arising from obtaining right-of-use assets Weighted-average remaining lease term Weighted-average discount rate 153 Year Ended December 31, 2021 2020 $ $ 1,618 6,040 3.50 years $ $ 5.90 % 733 3,259 2.94 years 6.21 % The following is a maturity analysis of the annual undiscounted cash flows of the operating lease liabilities and a reconciliation to present value of lease liabilities as of December 31, 2021 (in thousands): Year ended: December 31, 2022 December 31, 2023 December 31, 2024 December 31, 2025 Total future minimum lease payments Less imputed interest Present value of lease liabilities $ $ The following summarizes the annual undiscounted cash flows to be received from subleases (in thousands): Year ended: December 31, 2022 December 31, 2023 Total future sublease payments to be received $ $ 2,547 2,520 1,597 1,622 8,286 (783 ) 7,503 528 539 1,067 Historically, all Company assets and liabilities belonged to a single corporate office asset group. The circumstances described above triggered a reassessment of asset grouping, such that the ROU assets associated with the Arch Street Original Premises and Arch Street Expansion Premises had their own separately identifiable cash flows and therefore their own separate asset grouping. Further, sublease income associated with the Arch Street office space is projected to be lower than lease payments owed by the Company for this space, and therefore impairment was indicated for this new asset group. The carrying value of these ROU assets immediately before impairment was $2.0 million, and the fair value of these operating lease ROU assets immediately subsequent to the impairment, calculated as the present value of the estimated future cash flows attributable to the assets, was $1.3 million. The Company recognized $0.7 million in impairment losses on ROU assets within other income, net, on the statement of operations for the year ended December 31, 2021. 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 and Company ("Eli Lilly"), pursuant to which Eli Lilly assigned to the Company 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 package 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 the Company under the Lilly License Agreement. 154 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, 2021, no milestones have been reached, and accordingly, no milestone payments have been made. 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 the Company 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 the Company receives 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. During the year ended December 31, 2021, the Company paid less than $0.1 million in sublicense income associated with the Zai License Agreement to PureTech Health. During the year ended December 31, 2020, the Company paid $2.0 million to PureTech Health, having reached the milestone of Phase 3 clinical trial commencement. The Company incurred no expenses related to the Patent License Agreement during the year ended December 31, 2019. The Company had no outstanding liabilities to PureTech Health related to the Patent License Agreement at December 31, 2021 and 2020. 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. 155 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, 2021. Note 13. Income Taxes During each of the years ended December 31, 2021 and 2020, the Company recorded income tax expense of less than $0.1 million. During the year ended December 31, 2019, there was no income tax benefit or expense. The Company did not recognize any significant deferred tax expense for the years ended December 31, 2021, 2020, or 2019 as the Company was subject to a full valuation allowance. 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 Effective Income tax rate 2021 Year Ended December 31, 2020 2019 21.0 % 5.3 % 3.6 % 0.0 % 0.0 % 0.0 % 5.2 % -35.1 % 0.0 % 21.0 % 10.3 % 21.3 % 0.0 % 0.0 % -0.1 % 3.2 % -55.7 % 0.0 % 21.0 % 6.7 % 0.0 % -0.1 % -0.4 % 0.3 % 4.9 % -32.4 % 0.0 % Significant components of the Company’s deferred tax assets and liabilities at December 31, 2021 and 2020 are as follows (in thousands): Deferred tax assets: Operating tax losses Tax Credit Carryforwards Accrued expenses Lease liability Share-based compensation Charitable contributions Deferred tax assets Valuation allowance Deferred tax liabilities: ROU assets Depreciation Deferred tax liabilities December 31, 2021 2020 $ 82,740 $ 47,349 13,695 1,653 1,910 11,699 10 111,707 5,613 631 702 5,923 — 60,218 (110,046 ) (59,563 ) (1,643 ) (18 ) (1,661 ) (633 ) (22 ) (655 ) — Net Deferred Tax Asset / (Liability) $ — $ 156 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. The Company was historically a subsidiary of PureTech Health. As of August 1, 2018, PureTech no longer held 80% of the outstanding shares of the Company. Therefore, from that date onward, the Company was required to file 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. As such, the Company has filed separate state income tax returns subsequent to this date. At December 31, 2021, on a separate return method, the Company has federal net operating loss carryforwards totaling $320.3 million, of which $9.8 million begin to expire in 2029 and the remaining $310.5 million can be carried forward indefinitely. In addition, the Company had state net operating loss carryforwards totaling $245.1 million which begin to expire in 2030. Lastly, the Company has federal research credits of $12.5 million and state research credits of $1.6 million which begin to expire in 2031. Because the Company had historically been a subsidiary of PureTech Health, $319.8 million and $225.0 million of the federal and state net operating loss carryforwards, respectively, can be used to offset income on the Company's future tax returns. In addition, $12.3 million and $1.6 million of the federal and state tax credit carryforwards, respectively, can be used to offset tax due on the Company's future tax returns. The Company's 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, 2021. The valuation allowance increased by $50.5 million during the year ended December 31, 2021, 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 completed a Section 382 study during the year ended December 31, 2020, and while certain tax attributes are subject to annual limitations, none are expected to be restricted in their future utilization if the Company earns sufficient future profits to utilize the tax attributes. Future transactions involving the issuance or transfer of the Company’s stock could result in additional ownership changes which may limit the amount of tax attributes available to offset future tax liabilities. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into law. Among other things, the CARES Act allows for a five-year carryback of Federal net operating losses generated in tax years beginning in 2018, 2019, or 2020 and removes the 80% taxable income limitation for net operating loss deductions for tax years beginning before January 1, 2021. The Company has evaluated the income tax ramifications of the CARES Act and has determined that there is no material impact to its overall income tax position. 157 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, 2021, the Company has not recorded any unrecognized tax benefits. 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, 2021, the Company has not accrued interest or penalties related to any uncertain tax positions. The Company is 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. Note 14. Related Party Transactions PureTech Health Management Consulting Services and Overhead Agreement The Company previously engaged 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 paid PureTech Health a monthly fee. In addition, PureTech Health periodically invoiced 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 in the year ended December 31, 2019. As of and for the years ended December 31, 2021 and 2020, the Company had no outstanding liabilities to PureTech Health and no general and administrative costs for management services were incurred. Note 15. 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 expense for the Company was $0.5 million for the year ended December 31, 2021, $0.2 million for the year ended December 31, 2020 and less than $0.1 million for the year ended December 31, 2019. Note 16. Subsequent Events On January 21, 2022, the Company entered into an agreement (“Second Expansion Premises Sublease”) to sublease approximately 2,422 square feet of its Expansion Premises to a third party from February 7, 2022 through the remainder of its current lease term, which ends on December 31, 2023. The fixed rental rate is $45 per rentable square foot per annum, with base rent commencing on April 7, 2022. 158 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, 2021. 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, 2021. Internal Control Over Financial Reporting Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive officer and principal financial officer, or persons performing similar functions, and effected by a company’s board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: • • • pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of a company’s assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that a company’s receipts and expenditures are being made only in accordance with authorizations of the company’s management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision of and with the participation of our principal executive officer and principal financial officer, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013 framework). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2021. 159 Our independent registered public accounting firm has issued an attestation report of our internal control over financial reporting, which is included in Item 8, “Consolidated Financial Statements and Supplementary Data” appearing elsewhere in this Annual Report on Form 10-K. 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, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable. 160 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 2022 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 2022 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 2022 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 2022 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Our independent public accounting firm is KPMG LLP, Boston, Massachusetts, PCAOB Auditor ID 185. 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 2022 Annual Meeting of Stockholders and is incorporated herein by reference. 161 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. 162 EXHIBIT INDEX 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 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 3.1 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on May 6, 2021, 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 (filed as Exhibit 4.3 to the Registrant’s Annual Report on Form 10-K, filed with the SEC on March 24, 2020, and incorporated by reference herein) 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) 163 10.13 10.14 10.15# 10.16# 10.17# 10.18# 10.19# 10.20# 10.21# 10.22 10.23*+ 10.24*# 21.1 23.1* 31.1* 31.2* 32.1** 101.INS Amendment to Office Lease, dated as of January 22, 2020, by and between the Registrant and T-C 33 Arch Street LLC (filed as Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K, filed with the SEC on March 24, 2020, and incorporated by reference herein) 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) Sublease, dated as of March 5, 2021, between the Registrant and Workable, Inc. (filed as Exhibit 99.1 to the Registrant's 8-K, filed with the SEC n March 10, 2021) License Agreement, dated as of November 8, 2021, between the Registrant and Zai Lab (Shanghai) Co., Ltd. Employment Agreement, dated as of November 29, 2021, between the Registrant and Charmaine Lykins List of Subsidiaries of the Registrant (filed as Exhibit 21.1 to the Registrant's Annual Report on Form 10-K filed on March 24, 2020) 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 Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Schema Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (embedded within the Inline XBRL document) 164 * 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. 165 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES Date: February 24, 2022 Date: February 24, 2022 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/ Christopher J. Coughlin Christopher J. Coughlin /s/ James Healy, M.D., Ph.D. James Healy, M.D., Ph.D. /s/ Jeffrey Jonas, M.D. Jeffrey Jonas, M.D. /s/ Laurie Olson Laurie Olson /s/ Atul Pande, M.D. Atul Pande, M.D. /s/ Denice Torres Denice Torres /s/ David E. Wheadon, M.D. David E. Wheadon, 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 Director 166 Date February 24, 2022 February 24, 2022 February 24, 2022 February 24, 2022 February 24, 2022 February 24, 2022 February 24, 2022 February 24, 2022 February 24, 2022 CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND REPLACED WITH “[***]”. SUCH IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THIS EXHIBIT BECAUSE IT IS (I) NOT MATERIAL AND (II) WOULD LIKELY CAUSE COMPETITIVE HARM TO THE COMPANY IF DISCLOSED. Exhibit 10.23 LICENSE AGREEMENT This License Agreement (this “Agreement”) is made as of November 8, 2021(the “Effective Date”), by and between Karuna Therapeutics, Inc., a corporation organized and existing under the laws of Delaware, located at 99 High Street, 26th Floor, Boston, Massachusetts, 02110, United States of America (“Karuna”), and Zai Lab (Shanghai) Co., Ltd, an exempted company organized and existing under the laws of P.R. of China, having a place of business at 4F, Bldg 1, Jinchuang Plaza, 4560 Jinke Rd, Shanghai, China, 201210 (“Zai”). Karuna and Zai are referred to in this Agreement individually as a “Party” and collectively as the “Parties.” RECITALS WHEREAS, Karuna is a biopharmaceutical company specializing in transformative medicines for the treatment of psychiatric and neurological conditions; WHEREAS, Zai is a pharmaceutical company having experience in the development and commercialization of pharmaceutical products in the Licensed Territory (as defined below); and WHEREAS, Karuna wishes to grant to Zai, and Zai wishes to be granted, an exclusive license to develop, manufacture and commercialize the Compound (as defined below) and Licensed Product (as defined below) in the Field (as defined below) in the Licensed Territory in accordance with the terms and conditions set forth below. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants contained herein, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows: AGREEMENT ARTICLE 1 DEFINITIONS Unless specifically set forth to the contrary herein, the following terms, whether used in the singular or plural, shall have the respective meanings set forth below: 1.1 “Adverse Event” means any unwanted or harmful medical occurrence in a patient or subject who is administered the Licensed Product, whether or not considered related to the Licensed Product, including any undesirable sign (including abnormal laboratory findings of clinical concern). 1 1.2 “Affiliate” means, with respect to a specified Person, any entity that directly or indirectly controls, is controlled by or is under common control with such Person, in each case, for so long as such control exists. As used in this Section 1.2, “control” (and, with correlative meanings, the terms “controlled by” and “under common control with”) means, in the case of a corporation, the ownership of more than fifty percent (50%) of the outstanding voting securities thereof or, in the case of any other type of entity, an interest that results in the ability to direct or cause the direction of the management and policies of such entity or the power to appoint more than fifty percent (50%) of the members of the governing body of the entity or, where ownership of more than fifty percent (50%) of such securities or interest is prohibited by law, ownership of the maximum amount legally permitted. 1.3 “Agreement” has the meaning set forth in the preamble. 1.4 “Alliance Manager” has the meaning set forth in Section 3.2. 1.5 “Anti-Corruption Laws” has the meaning set forth in Section 10.4(a)(i). 1.6 [***]. 1.7 “Applicable Laws” means all statutes, ordinances, regulations, rules or orders of any kind whatsoever of any Governmental Authority that may be in effect from time to time and applicable to the relevant activities contemplated by this Agreement. 1.8 “Authorized Regulatory Agent” means a local entity (a) authorized by Karuna or any of its Affiliates, where Karuna, its Affiliate or its Third Party contractor research organization is the license holder of imported drug product, to exclusively (even as to Karuna and its Affiliates, but in accordance with terms and conditions hereunder) manage the work associated with obtaining any Regulatory Approval or product registration in the Licensed Territory, and (b) which possesses and maintains valid licenses or permits in the Licensed Territory if such licenses or permits are required for such local entity to engage in the relevant activities in the Licensed Territory. 1.9 “Bankruptcy Code” has the meaning set forth in Section 12.7. 1.10 “Business Day” means a day other than Saturday, Sunday or any day on which banks located in the State of Massachusetts or Shanghai, the PRC are authorized or obligated to close. Whenever this Agreement refers to a number of days, such number shall refer to calendar days unless Business Days are specified. 1.11 “Calendar Quarter” means the respective periods of three (3) consecutive calendar months ending on March 31st, June 30th, September 30th and December 31st. 1.12 “Calendar Year” means each twelve (12) month period commencing on January 1st. 1.13 “cGMP” means all applicable current Good Manufacturing Practices including, as applicable, (a) the principles detailed in the U.S. Current Good Manufacturing Practices, 21 C.F.R. Parts 4, 210, 211, 601, 610 and 820, (b) European Directive 2003/94/EC and Eudralex 4, (c) the principles detailed in the ICH Q7 guidelines, and (d) the equivalent Applicable Laws in any relevant country or Region, each as may be amended and applicable from time to time. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 2 1.14 “Change of Control” means, with respect to a Party, that: (a) any Third Party acquires directly or indirectly the beneficial ownership of any voting security of such Party, or if the percentage ownership of such Third Party in the voting securities of such Party is increased through stock redemption, cancellation, or other recapitalization, and immediately after such acquisition or increase such Third Party is, directly or indirectly, the beneficial owner of voting securities representing more than fifty (50%) of the total voting power of all of the then outstanding voting securities of such Party, (b) a merger, consolidation, recapitalization, or reorganization of such Party is consummated which results in shareholders or equity holders of such Party immediately prior to such transaction, no longer owning at least fifty (50%) of the outstanding voting securities of the surviving entity (or its parent entity) immediately following such transaction, or (c) there is a sale or transfer to a Third Party of all or substantially all of such Party’s consolidated assets taken as a whole, through one or more related transactions. 1.15 “Claims” has the meaning set forth in Section 11.1. 1.16 “Clinical Trial” means any clinical testing of the Licensed Product in human subjects. 1.17 “CMOs” means Third Party contractor manufacture organizations. 1.18 “Commercialization” or “Commercialize” means all activities directed to marketing, distribution, promoting or selling of pharmaceutical products (including importing and exporting activities in connection therewith and securing pricing and reimbursement approvals, as necessary). 1.19 “Commercialization Plan” means the written plan for the Commercialization of the Licensed Product in the Licensed Territory, as updated in accordance with this Agreement. 1.20 “Commercially Reasonable Efforts” means with respect to a Party, the use of diligent, good faith efforts and resources, in an active and ongoing program, as normally used by such Party for a product discovered or identified internally or in-licensed from a Third Party that is important to such Party’s overall strategy or objectives, which product is at a similar stage in its development or product life and is of similar market potential and intellectual property protection; provided, however, that in no event shall such efforts and resources be less than [***]. 1.21 “Competing Product” means: [***]. 1.22 “Competing Product Notice” has the meaning set forth in Section 2.9(c). 1.23 “Compound” means Karuna’s proprietary small molecule muscarinic modulator known as KarXT, which is a combination of xanomeline tartrate and trospium chloride, as developed by or on behalf of Karuna or its Affiliates as of the Effective Date and further described on Schedule 1.23, and [***]. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 3 1.24 “Confidential Information” means all confidential information of the Disclosing Party or its Affiliates, regardless of its form or medium as provided or made available to the Receiving Party or its Affiliates in connection with this Agreement; provided that, Confidential Information shall not include any information that the Receiving Party can show by competent written evidence: (a) was already known to the Receiving Party at the time it was disclosed to the Receiving Party by the Disclosing Party without an obligation of confidentiality and not through a prior disclosure by the Disclosing Party, (b) was or becomes generally known to the public through no act or omission of the Receiving Party in violation of the terms of this Agreement, (c) was lawfully received by the Receiving Party from a Third Party without restriction on its disclosure and without, to the reasonable knowledge of the Receiving Party, a breach by such Third Party of an obligation of confidentiality to the Disclosing Party, or (d) was independently developed by the Receiving Party without use of or reference to the Confidential Information of the Disclosing Party (provided that such exception shall not apply to any Product Invention). All Product Inventions shall be the Confidential Information of Karuna, and Karuna shall be the Disclosing Party and Zai shall be the Receiving Party with respect thereto. All Zai Inventions shall be the Confidential Information of Zai, and Zai shall be the Disclosing Party and Karuna shall be the Receiving Party with respect thereto. The terms of this Agreement that are not publicly disclosed through a press release or by filings to financial regulatory authorities in accordance with the terms of this Agreement shall be the Confidential Information of both Parties. All confidential information disclosed by a Party pursuant to the Confidentiality Agreement shall be deemed to be such Party’s Confidential Information. 1.25 “Confidentiality Agreement” means that Confidential Disclosure Agreement, dated as of [***], by and between Karuna and Zai. 1.26 “Control” or “Controlled” means, with respect to any Know-How, Patents or other intellectual property rights, that a Party has the legal authority or right (whether by ownership, license or otherwise, after taking into account the provisions of this Agreement regarding ownership of Inventions, but without taking into account any license granted by one Party to the other Party pursuant to this Agreement) to grant a license, sublicense, access or right to use (as applicable) under such Know-How, Patents, or other intellectual property rights, on the terms and conditions set forth herein, in each case without (a) breaching the terms of any agreement with a Third Party or (b) incurring payments to a Third Party, except with respect to any Know-How and Patents in-licensed by Karuna pursuant to any Existing In- License Agreement or any New Karuna In-Licenses entered into in accordance with Section 2.12. 1.27 “CROs” has the meaning set forth in Section 2.4. 1.28 “CTA” has the meaning set forth in Section 1.64. 1.29 “Data” means research, pharmacology, toxicological, preclinical, Clinical Trial, technical, chemical, formulation, Manufacturing, analytical and quality control, safety, and scientific data, including raw data, original records, investigator reports, both preliminary and final, statistical analyses, expert opinions and reports, safety and other electronic databases. 1.30 “Develop” or “Development” or “Developing” means preclinical and clinical drug development activities and other development activities with respect to a product, including test method development and stability testing, toxicology, formulation, process development, qualification and validation, quality assurance, quality control, clinical or preclinical trials, statistical analysis and report writing, the preparation and submission of INDs marketing authorization approvals or similar application, regulatory affairs with respect to the foregoing, and all other activities necessary or useful or otherwise requested or required by a Regulatory Authority or as a condition or in support of obtaining or maintaining a Regulatory Approval. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 4 1.31 “Development Data” has the meaning set forth in Section 4.10(a). 1.32 “Development Milestone Event” has the meaning set forth in Section 8.2(a). 1.33 “Development Milestone Payment” has the meaning set forth in Section 8.2(a). 1.34 “Development Plan” has the meaning set forth in Section 4.1. 1.35 “Development Target” has the meaning set forth in Section 4.2(c). 1.36 “Development Target Deadline” has the meaning set forth in Section 4.2(c). 1.37 “Disclosing Party” has the meaning set forth in Section 9.1(a). 1.38 “Dispute” has the meaning set forth in Section 14.1. 1.39 “Effective Date” has the meaning set forth in the preamble in this Agreement. 1.40 “Exclusive Negotiation Period” has the meaning set forth in Section 2.9(c). 1.41 “Executive Officers” means, with respect to Karuna, [***] and, with respect to Zai, [***]. 1.42 “Existing In-License Agreement” means the agreement set forth on Schedule 1.42. 1.43 “Existing Patent Application” means [***]. 1.44 “Expiration Date” has the meaning set forth in Section 13.1(a). 1.45 “Exploit” or “Exploitation” means to Develop, Commercialize, register, Manufacture, have manufactured, use, have used, import, have imported, market, have marketed, distribute, have distributed, offer for sale, sell or have sold. 1.46 “FDA” means the U.S. Food and Drug Administration or its successor. 1.47 “Field” means all uses in humans. 1.48 “First Commercial Sale” means, with respect to any particular country or Region, the first sale of the Licensed Product in such country or Region by any of Zai, an Affiliate, or a Sublicensee, or a distributor of any of them, after all Regulatory Approvals have been granted in such country or Region for the Licensed Product to be marketed and sold legally as a pharmaceutical in such country or Region. 1.49 “Force Majeure Event” has the meaning set forth in Section 15.2. 1.50 “Fully Burdened Manufacturing Costs” means the cost of Manufacturing the Licensed Product. Fully Burdened Manufacturing Costs shall be a “standard cost” per unit (calculated annually), comprised of the following elements calculated in accordance with GAAP or IFRS, as applicable: [***]. 1.51 “GAAP” means the United States generally accepted accounting principles, consistently applied. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 5 1.52 “GCP” means all applicable Good Clinical Practice standards for the design, conduct, performance, monitoring, auditing, recording, analyses and reporting of Clinical Trials, including, as applicable (a) as set forth in the International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use Harmonized Tripartite Guideline for Good Clinical Practice (CPMP/ICH/135/95) and any other guidelines for good clinical practice for trials on medicinal products in the Licensed Territory, (b) the Declaration of Helsinki (2004) as last amended at the 52nd World Medical Association in October 2000 and any further amendments or clarifications thereto, (c) U.S. Code of Federal Regulations Title 21, Parts 50 (Protection of Human Subjects), 56 (Institutional Review Boards) and 312 (Investigational New Drug Application), as may be amended from time to time, and (d) the equivalent Applicable Laws in the Region in the Licensed Territory, each as may be amended and applicable from time to time and in each case, that provide for, among other things, assurance that the clinical data and reported results are credible and accurate and protect the rights, integrity, and confidentiality of trial subjects. 1.53 “Generic Launch Quarter” has the meaning set forth in Section 8.4(c)(ii). 1.54 “Global Development Plan” has the meaning set forth in Section 4.4(a). 1.55 “Global Study” means a clinical study designed to obtain Regulatory Approvals for the Licensed Product in multiple jurisdictions through the conduct of a Clinical Trial in multiple medical institutions, countries, Regions, territories and conducted as part of one (1) unified Clinical Trial or separately but concurrently in accordance with a common Clinical Trial protocol. 1.56 “GLP” means all applicable Good Laboratory Practice standards, including, as applicable, as set forth in the then current good laboratory practice standards promulgated or endorsed by the U.S. Food and Drug Administration as defined in 21 C.F.R. Part 58, or the equivalent Applicable Laws in the Region in the Licensed Territory, each as may be amended and applicable from time to time. 1.57 “Governmental Authority” means any court, commission, authority, department, ministry, official or other instrumentality of, or being vested with public authority under any law of, any country, Region, state or local authority or any political subdivision thereof, or any association of countries. 1.58 [***]. 1.59 [***]. 1.60 “GSP” means all applicable Good Supply Practice standards, including, as applicable, as set forth in the then current good supply practice standards promulgated or endorsed by the FDA as defined in Good Supply Practice for Pharmaceutical Licensed Products or the equivalent Applicable Laws in the Region in the Licensed Territory, each as may be amended and applicable from time to time. 1.61 “HGR Approval” means any and all necessary record filings with, and approvals, licenses, and/or permits issued by, the Human Genetics Resources Administration of the PRC or any other Governmental Authorities in the PRC required for Development activities (including Clinical Trials) and data transfer and sharing under this Agreement with respect to the Exploitation of Licensed Product in the Field in the PRC. 1.62 “ICC Rules” has the meaning set forth in Section 14.4(a). 1.63 “IFRS” means international financial reporting standards, consistently applied. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 6 1.64 “IND” means an investigational new drug application, or equivalent application such as a clinical trial applications filed with the applicable Regulatory Authority in a Region in the Licensed Territory (a “CTA”), which application is required to commence Clinical Trials in the Licensed Territory. 1.65 “Indemnifying Party” has the meaning set forth in Section 11.3. 1.66 “Indemnitee” has the meaning set forth in Section 11.3. 1.67 “Indication” means a separate and distinct disease or condition, or sign or symptom of a disease or medical condition in the Field. For clarity, different lines of treatment or the treatment of separate stages or forms or different population (e.g., adult vs pediatric) of the same disease or medical condition shall not constitute separate Indications. 1.68 “Initial MAH” has the meaning set forth in Section 5.1(e). 1.69 “Invention” means any and all inventions, discoveries and developments, whether or not patentable, which are created, conceived, developed or made in the course of performance of this Agreement, whether created, conceived, developed or made solely by, or on behalf of, Karuna, Zai, the Parties jointly or jointly with a Third Party, or any Affiliate of the same. 1.70 “Joint Global Study” has the meaning set forth in Section 4.4(b). 1.71 “JSC” has the meaning set forth in Section 3.1(a). 1.72 “Karuna” has the meaning set forth in the preamble of this Agreement. 1.73 “Karuna Indemnitee(s)” has the meaning set forth in Section 11.1. 1.74 “Karuna Product Marks” has the meaning set forth in Section 7.5. 1.75 “Karuna Sponsored Regulatory and Commercial Activities” has the meaning set forth in Section 5.1(e)(ii). 1.76 “Karuna Sponsored Study” has the meaning set forth in Section 5.1(d). 1.77 “Know-How” means any proprietary scientific or technical information, results and data of any type whatsoever, in any tangible or intangible form whatsoever, including databases, safety information, practices, methods, techniques, specifications, formulations, formulae, knowledge, know-how, skill, experience, test data including pharmacological, medicinal chemistry, biological, chemical, biochemical, toxicological and clinical test data, analytical and quality control data, stability data, studies and procedures, and manufacturing process and development information, results and data. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 7 1.78 “Licensed Know-How” means any and all Know-How Controlled by Karuna or its Affiliates as of the Effective Date or during the Term that is necessary for the Exploitation of the Compound or Licensed Product in the Field in the Licensed Territory, including all Product Inventions and all Development Data Controlled by Karuna and its Affiliates. Notwithstanding the foregoing, in the event a Change of Control of Karuna occurs after the Effective Date, Know-How Controlled by any Affiliate of Karuna that was not an Affiliate of Karuna immediately prior to such Change of Control transaction shall not be Licensed Know-How except to the extent such Know-How falls within the definition of Licensed Know-How in the immediately preceding sentence and (a) is also Controlled by Karuna or its Affiliate existing immediately prior to such transaction or (b) is generated or used by such Affiliate in the Exploitation of the Compound or Licensed Product after such transaction. Additionally, “Licensed Know-How” shall exclude (x) any Know-How relating to any other active ingredient or product in any combination regimen that includes the Licensed Product; or (y) any Know-How licensed to Karuna or its Affiliates pursuant to a Potential In-License entered into after the Effective Date unless such Potential In-License becomes a New Karuna In-License in accordance with Section 2.12. 1.79 “Licensed Patents” means the Patents in the Licensed Territory Controlled by Karuna or its Affiliates as of the Effective Date or during the Term that (a) claim or cover the Compound or the Licensed Product (including the composition of matter, method of use, formulation, manufacture, or method of packaging or labelling or use thereof), and (b) are necessary or reasonably useful for the Exploitation of the Compound or Licensed Product in the Field in the Licensed Territory, including all Patents that claim or cover Product Inventions. Schedule 1.79 contains a list of all Licensed Patents as of the Effective Date. Notwithstanding the foregoing, in the event a Change of Control of Karuna occurs after the Effective Date, Patents Controlled by any Affiliate of Karuna that was not an Affiliate of Karuna immediately prior to such Change of Control transaction shall not be Licensed Patents except to the extent any such Patent falls within the definition of Licensed Patents in the immediately preceding sentence and (i) is also Controlled by Karuna or its Affiliate existing immediately prior to such transaction or (ii) claims any Invention generated or used by such Affiliate in the Exploitation of the Licensed Product after such transaction. Additionally, “Licensed Patents” shall exclude (x) any Patent that claims or covers any other active ingredient or product in any combination regimen that includes the Licensed Product or (y) any Patents licensed to Karuna or its Affiliates pursuant to a Potential In-License entered into after the Effective Date unless such Potential In-License becomes a New Karuna In-License in accordance with Section 2.12. 1.80 “Licensed Product” means any product that contains the Compound in any forms, presentations, strengths, concentrations, delivery technology, dosages, formulation, package configuration and modalities. 1.81 “Licensed Technology” means the Licensed Know-How and Licensed Patents. 1.82 “Licensed Territory” means (a) Mainland China, (b) Macao Special Administration Region, (c) Taiwan and (d) subject to Section 2.5, Hong Kong Special Administration Region (each of (a)-(d), a “Region”). 1.83 “Local Study” means any Clinical Trial for the Licensed Product in the Field and which (a) Zai determines to conduct and is conducted by or on behalf of Zai in the Licensed Territory, and (b) does not include clinical sites in any country or jurisdiction outside the Licensed Territory. 1.84 “Losses” has the meaning set forth in Section 11.1. 1.85 “Mainland China” or “PRC” means the People’s Republic of China, excluding Macau, Hong Kong, and Taiwan. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 8 1.86 “Manufacture” or “Manufacturing” or “Manufactured” means all operations involved in production, synthesis, manufacturing, processing, filling and finishing, quality assurance and quality control testing (including in-process, release and stability testing, if applicable), storage, releasing, packaging, labeling, shipping and holding of product or any intermediate thereof, including process development, process qualification and validation, scale-up, commercial manufacturing and analytic development, product characterization, and stability testing. 1.87 “Manufacturing Technology” means any and all Licensed Know-How and other relevant information relating to the then- current process for the Manufacture of the Compound or Licensed Product. 1.88 “Manufacturing Technology Transfer” has the meaning set forth in Section 6.2. 1.89 “Milestone Events” means Development Milestone Events and Net Sales Milestone Events. 1.90 “Milestone Payments” means Development Milestone Payments and Net Sales Milestone Payments. 1.91 [***]. 1.92 “NDA” has the meaning set forth in Section 1.115. 1.93 “Net Sales” means the gross amount invoiced by Zai, its Affiliates, or Sublicensees for sales or other transfers of Licensed Product to unrelated Third Parties in the Licensed Territory, in bona-fide arm’s length transactions, in each case less the following deductions: [***] Such amounts shall be determined from the books and records of Zai, its Affiliates, or Sublicensees, maintained in accordance with generally accepted accounting principles (in accordance with GAAP or IFRS, as applicable) as consistently applied across its pharmaceutical products generally. Net Sales on Licensed Product provided as part of a non-cash exchange or other than through an arms-length transaction shall mean [***]. Notwithstanding the foregoing, Net Sales shall not include [***]. In no event shall any particular amount of deduction identified above be deducted more than once in calculating Net Sales (i.e., no “double counting” of deductions). The above deductions shall be the only deductions made in Net Sales and only to the extent such deductions are actually taken and documented as attributable to Licensed Product, and in all cases in a manner consistent with generally accepted accounting principles (in accordance with GAAP or IFRS, as applicable) consistently employed with respect to external reporting. 1.94 “Net Sales Milestone Event” has the meaning set forth in Section 8.3(a). 1.95 “Net Sales Milestone Payment” has the meaning set forth in Section 8.3(a). 1.96 “New Karuna In-License” has the meaning set forth in Section 2.12(c). 1.97 “NMPA” means the National Medical Licensed Product Administration in the PRC, including its subdivisions (including Center for Drug Evaluation), and local or provincial, and any successor agency(ies) or authority thereto having substantially the same function. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 9 1.98 “Party” or “Parties” has the meaning set forth in the preamble to this Agreement. 1.99 “Patent Prosecution” means the responsibility and authority for (a) preparing, filing and prosecuting applications (of all types) for any Patent (including any decision whether to file a further divisional application), (b) managing any interference, opposition, re- issue, reexamination, invalidation proceedings, revocation, nullification, or cancellation proceeding relating to the foregoing, (c) deciding to abandon Patent(s), (d) listing in regulatory publications (as applicable), (e) patent term extension, and (f) settling any interference, opposition, revocation, nullification or cancellation proceeding. 1.100 “Patents” means (a) all national, regional and international patents and patent applications, including any provisional patent application, (b) any patent application claiming priority from such patent application or provisional patent applications, including divisions, continuations, continuations-in-part, additions, (c) any patent that has issued or in the future issues from any of the foregoing patent applications, including any utility or design patent or certificate of invention, and (d) re-issues, renewals, extensions, substitutions, re- examinations or restorations, registrations and revalidations, and supplementary protection certificates and equivalents to any of the foregoing. 1.101 “Person” means any individual, sole proprietorship, corporation, joint venture, limited liability company, partnership, limited partnership, limited liability partnership, trust or any other private, public or governmental entity. 1.102 “Pharmacovigilance Agreement” has the meaning set forth in Section 5.8(a). 1.103 “Post-Marketing Study” means any study conducted by or for Zai in the Licensed Territory with respect to the Licensed Product after submission of a Regulatory Approval Application for the Licensed Product, whether initiated by a Party or at the request of an applicable Governmental Authority, to delineate additional information about a drug’s risks, benefits, and optimal use, including safety surveillance studies, pharmacoeconomic studies, pharmacoepidemiology studies, studies relating to different dosing or schedules of administration, studies of the use of the drug in other patient populations or other stages of the disease, or studies of the use of the drug over a longer period of time, but, in any case, excluding any study that is necessary to be completed in order to obtain Regulatory Approval. 1.104 “Potential In-License” has the meaning set forth in Section 2.12(a). 1.105 “Potential In-License Notice” has the meaning set forth in Section 2.12(a). 1.106 “Prime Rate” means for any day a per annum rate of interest equal to the “prime rate,” as published in the “Money Rates” column of The Wall Street Journal, from time to time, or if for any reason such rate is no longer available, a rate equivalent to the base rate on corporate loans posted by at least [***] of the ten largest U.S. banks. 1.107 “Product Infringement” has the meaning set forth in Section 12.4(a)(i). 1.108 “Product Invention” means all Inventions other than any Zai Invention. 1.109 “Product Marks” has the meaning set forth in Section 7.5. 1.110 “Public Official” has the meaning set forth in Section 10.4(d). 1.111 “Receiving Party” has the meaning set forth in Section 9.1(a). 10 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 1.112 “Records” has the meaning set forth in Section 4.9. 1.113 “Region” has the meaning set forth in Section 1.82. 1.114 “Regulatory Approval” means, with respect to the Licensed Product in a country, Region or jurisdiction, the approvals from the necessary Governmental Authority to import, market and sell the Licensed Product in such country, Region or jurisdiction (but excluding pricing approvals and reimbursement approvals). 1.115 “Regulatory Approval Application” means a New Drug Approval Application ( “NDA” as defined in the U.S. Federal Food, Drug and Cosmetic Act (21 U.S.C. §301 et seq.), as amended from time to time) in the U.S., or any corresponding application for approval to import, market or sell a product in any country, Region or jurisdiction in the Licensed Territory (but excluding any application for pricing and reimbursement approvals). 1.116 “Regulatory Authority” means any applicable Governmental Authority responsible for granting Regulatory Approvals for Licensed Product, including the NMPA, and any corresponding national or regional regulatory authorities. 1.117 “Regulatory Exclusivity” means with respect to the Licensed Product in a country, Region or jurisdiction, any exclusive marketing rights or data exclusivity rights under Applicable Laws or conferred by any Regulatory Authority in accordance with Applicable Laws with respect to the Licensed Product in such country, Region or jurisdiction. 1.118 “Regulatory Submissions” means any filing, application, or submission with any Regulatory Authority, including authorizations, approvals or clearances arising from the foregoing, including INDs, Regulatory Approvals and Regulatory Approval Applications, and all correspondence or communication with or from the relevant Regulatory Authority, as well as minutes of any material meetings, telephone conferences or discussions with the relevant Regulatory Authority, in each case, with respect to the Licensed Product. 1.119 “Remedial Action” has the meaning set forth in Section 5.10. 1.120 “Retained Rights” has the meaning set forth in Section 2.6. 1.121 “Royalty Payment” has the meaning set forth in Section 8.4(a). 1.122 “Royalty Term” has the meaning set forth in Section 8.4(b). 1.123 “Subcontractor” has the meaning set forth in Section 2.4. 1.124 “Sublicensee” has the meaning set forth in Section 2.3(a)(iii). For clarity, a Third Party who was granted a sublicense by a Sublicensee under the right granted by Karuna hereunder, in whole or in part, shall also be deemed a Sublicensee. 1.125 “Tax” or “Taxes” means any present or future taxes, levies, imposts, duties, charges, assessments or fees of any nature (including any interest thereon). For the avoidance of doubt, Taxes includes VAT. 1.126 “Term” has the meaning set forth in Section 13.1(a). 11 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 1.127 “Third Party” means an entity other than (a) Zai and its Affiliates or (b) Karuna and its Affiliates. 1.128 “Third Party Product” means any pharmaceutical product that (a) is sold or distributed in the Licensed Territory by a Third Party that is not an Affiliate or (sub)licensee (including a Sublicensee) of, or otherwise authorized by, Zai or its Affiliates under a marketing authorization granted by a Regulatory Authority in the Licensed Territory to such Third Party, and (b) contains [***]. 1.129 “U.S. Dollars” or “$” means United States dollars, the lawful currency of the United States. 1.130 “Upfront Payment” has the meaning set forth in Section 8.1. 1.131 “Valid Claim” means (a) a claim of an issued and unexpired Patent included within the Licensed Patents (but excluding any Licensed Patent that claims Product Invention solely invented by Zai and assigned by Zai to Karuna pursuant to Section 12.2) that has not been (i) permanently revoked or held unenforceable, unpatentable or invalid by a decision of a court or other governmental agency of competent jurisdiction, which decision is not appealable or is not appealed within the time allowed for appeal, (ii) abandoned, disclaimed or rendered unenforceable through disclaimer or otherwise, or (iii) abandoned, or (b) a claim of any filed patent application included within the Licensed Patents (but excluding any Licensed Patent that claims Product Invention solely invented by Zai and assigned by Zai to Karuna pursuant to Section 12.2) which has not been held finally revoked, unenforceable or invalid by a decision of a court or other governmental agency of competent jurisdiction and which (i) has not been admitted to be invalid or unenforceable through reissue or disclaimer or otherwise, (ii) has not been withdrawn or abandoned, or (iii) has not been lost through an interference proceeding, or (iv) has not been pending for more than [***] from its earliest priority date (after which time, such claim shall cease to be considered a Valid Claim until it subsequently issues and falls within the description in subclause (a)). 1.132 “VAT” means value-added taxes or other similar taxes. 1.133 “Withholding VAT Taxes” has the meaning set forth in Section 8.8(b). 1.134 “Zai” has the meaning set forth in the preamble of this Agreement. 1.135 “Zai Implemented Patents” has the meaning set forth in Section 12.3(b). 1.136 “Zai Indemnitee(s)” has the meaning set forth in Section 11.2. 1.137 “Zai Inventions” means all Inventions created, conceived, developed or made solely by or on behalf of Zai or its Affiliates under this Agreement other than those that relate specifically to [***]. For clarity, Zai Inventions do not include any Inventions that [***]. 1.138 “Zai Invention Patents” means any Patents that claim or cover Zai Inventions. 1.139 “Zai IP” means all Zai Know-How and Zai Patents. 1.140 “Zai Know-How” all Know-How that is Controlled by Zai or its Affiliates as of the Effective Date or during the Term and is actually used by Zai or any of its Affiliates in its Exploitation of the Compound or Licensed Product in the Licensed Territory or in connection with the performance of Zai’s activities under this Agreement, including all Zai Inventions, but excluding any Know-How relating to any other active ingredient or product in any combination regimen that includes the Licensed Product. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 12 1.141 “Zai Patents” means any Patents that are Controlled by Zai or its Affiliates as of the Effective Date or during the Term and claim or cover Zai Know-How, including Zai Invention Patents. ARTICLE 2 LICENSES 2.1 License Grant and Right of Reference to Zai. Subject to the terms and conditions of this Agreement, Karuna hereby grants to Zai an exclusive (subject to Section 2.6), royalty-bearing license, with the right to grant sublicenses through multiple tiers (solely in accordance with Section 2.3), under the Licensed Technology, to Exploit the Compound and Licensed Product in the Field in the Licensed Territory. (a) (b) Subject to the terms and conditions of this Agreement, Karuna hereby grants to Zai the right of reference to all Regulatory Submissions related to the Licensed Product in the Field submitted by or on behalf of Karuna or its Affiliates or (sub)licensees (and all data contained or referenced therein), with the right to grant further rights of reference to Sublicensees to the extent permitted pursuant to Section 2.3. Subject to the terms and conditions of this Agreement (including Section 4.4(b)), Zai and its Affiliates (and any Sublicensee to whom it may grant a further right of reference) may use such right of reference to Karuna’s Regulatory Submissions in the Field solely for the purpose of seeking, obtaining and maintaining the Regulatory Approval of the Licensed Product in the Field in the Licensed Territory. Karuna shall provide to Zai, as necessary, a cross-reference letter or similar communication to the applicable Regulatory Authority to effectuate the right of reference as contemplated under this Section 2.1(b). 2.2 License Grant and Right of Reference to Karuna. Subject to the terms and conditions of this Agreement, Zai hereby grants to Karuna an exclusive, fully paid-up and royalty free, and sublicenseable license under Zai IP to (i) exercise its Retained Rights and (ii) perform Karuna’s obligations under this Agreement, provided that, in each case ((i)-(ii)), such license shall be non-exclusive in the Licensed Territory. (a) (b) Subject to the terms and conditions of this Agreement, Zai hereby grants to Karuna the right of reference to all Regulatory Submissions related to the Licensed Product in the Field submitted by or on behalf of Zai or its Affiliates or Sublicensees (and all data contained or referenced therein), with the right to grant further rights of reference to Karuna’s Affiliates and (sub)licensees with respect to Licensed Product. Subject to the terms and conditions of this Agreement, Karuna and its Affiliates (and any licensee to whom it may grant a further right of reference) may use the right of reference to Zai’s Regulatory Submissions in the Field solely for the purpose of seeking, obtaining and maintaining the Regulatory Approval of the Licensed Product outside the Licensed Territory. Zai shall provide to Karuna, as necessary, a cross-reference letter or similar communication to the applicable Regulatory Authority to effectuate the right of reference as contemplated under this Section 2.2(b). 2.3 Right to Sublicense. under the license and rights granted in Section 2.1 to: (a) General. Subject to the remainder of this Section 2.3, Zai shall have the right to grant sublicenses i. ii. consent, and its Affiliates without Karuna’s consent, any Third Party Subcontractors engaged under Section 2.4, without Karuna’s [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 13 any Third Party (other than those described in subclause (ii)) as proposed in writing by Zai, upon Karuna’s prior written consent, not to be unreasonably withheld, conditioned, or delayed (each such permitted Third Party sublicensee in (ii) and (iii), a “Sublicensee”). iii. (b) Zai shall ensure that each sublicense agreement between Zai and its Affiliate or Sublicensee is consistent with the terms of this Agreement, and specifically contains terms and conditions that: (i) require each such Affiliate or Sublicensee to protect and keep confidential any Confidential Information of the Parties, including in accordance with ARTICLE 9; (ii) provide Karuna with the right to audit (either by itself or through Zai or Zai’s designee) the books and records of each such Sublicensee in accordance with this Agreement (including pursuant to Sections 4.7, 5.9, 7.7, 8.6(b), 8.6(c), and 10.4(a)(iv)); (iii) do not impose any payment obligations or liability on Karuna; (iv) contain appropriate intellectual property assignment and license provisions to give effect of the IP ownership and license provisions in this Agreement. Zai shall, (A) with respect to any sublicense agreement with a Sublicensee other than those described in Section 2.3(a)(ii), prior to entering into any sublicense agreement, provide Karuna a copy of the draft sublicense agreement that is substantially final, [***], in order for Karuna to confirm compliance with the foregoing requirements and approve such sublicense agreement; and (B) within [***] after execution of each sublicense agreement, provide a copy of the complete executed agreement with each Affiliate or Sublicensee to Karuna, [***], provided that, Zai shall be permitted to redact commercially sensitive terms of any such agreement which terms are not necessary for Karuna to confirm Zai’s compliance with its obligations hereunder. (c) Restrictions. Zai shall not grant a sublicense to any Affiliate or Third Party that has been debarred or disqualified by any Governmental Authority or is subject to any proceedings, sanctions or fines under any Anti-Corruption Law. Zai shall remain primarily responsible for all of its obligations under this Agreement that have been delegated or sublicensed to any Affiliate or Sublicensee, and Karuna shall have the right to proceed directly against Zai without any obligation to first proceed against such Affiliate or Sublicensee. Karuna may require that Zai enforce any provisions of any sublicense agreement between Zai (or its Affiliate) and a Sublicensee against the applicable Sublicensee. Without limiting the foregoing, Zai shall be liable for (i) its Affiliate’s Sublicensee’s conduct under this Agreement, and (ii) its Affiliates’ or Sublicensees’ breach of this Agreement which shall be deemed a breach of this Agreement as if Zai had itself conducted the action or inaction that contributed to the breach of this Agreement. 2.4 Subcontracting. Subject to the terms and conditions of this Agreement, Zai may engage Third Party contract research organizations (“CROs”), contract manufacturing organization, logistic service providers, sales contract sales, marketing providers or similar independent contractors (each, a “Subcontractor”) solely for purposes of, as applicable, conducting Development activities in accordance with the Development Plan, Manufacturing or Commercialization activities for the Licensed Product in the Field in the Licensed Territory, in each case, for or on behalf of Zai under this Agreement without Karuna’s prior written consent, provided that (a) any Subcontractor shall be bound by a written agreement that is consistent with the terms and conditions of this Agreement and shall include confidentiality and non-use of confidential information, and intellectual property assignment and license provisions, in each case, that are consistent with the applicable provisions of this Agreement, (b) Zai shall promptly notify Karuna identity of any such Subcontractor, including any audits Zai performs on such Subcontractor and provide Zai with a copy of any audit responses or audit reports [***]. Notwithstanding the foregoing, Zai shall remain primarily responsible for all of its obligations under this Agreement that have been delegated to or performed by a Subcontractor, and Karuna shall have the right to proceed directly against Zai without any obligation to first proceed against such Subcontractor. Karuna may require that Zai enforce any provisions of any agreement between Zai (or its Affiliate) and a Subcontractor against the applicable Subcontractor. Without limiting the foregoing, Zai shall be liable for (i) its Subcontractors’ conduct under this Agreement, and (ii) its Subcontractors’ breach of this Agreement which shall be deemed a breach of this Agreement as if Zai had itself conducted the action or inaction that contributed to the breach of this Agreement. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 14 2.5 Hong Kong License. The Parties agree that the licenses and rights granted to Zai under Section 2.1 shall be extended to Hong Kong on the additional terms and conditions set forth on Schedule 2.5. Unless specifically stated otherwise on Schedule 2.5, all terms and conditions of this Agreement shall apply with respect to the Parties’ rights and obligations in connection with Exploitation of the Compound and Licensed Product in Hong Kong (mutatis mutandis). 2.6 Karuna Retained Rights. Notwithstanding anything to the contrary in this Agreement, Karuna hereby expressly retains, on behalf of itself (and its Affiliates, other (sub)licensees, and designees) (a) all rights under the Licensed Technology to fulfill, either itself, its Affiliates or through subcontractors, Karuna’s obligations under this Agreement, (b) the exclusive rights to Exploit the Compound and Licensed Product outside the Licensed Territory or outside the Field anywhere in the world (but without the right to Commercialize the Compound or the Licensed Product in the Licensed Territory during the Term, except with respect to any right or obligation of Karuna as the Initial MAH in accordance with the terms of this Agreement or otherwise required by Applicable Laws), (c) subject to and in accordance with Section 4.4, the non-exclusive rights under the Licensed Technology to conduct the Global Studies, (d) the non-exclusive rights to Manufacture or have Manufactured the Compound or Licensed Product in the Licensed Territory, solely to support (i) the Exploitation of the Compound and Licensed Product outside of the Licensed Territory, and (ii) the Exploitation of the Licensed Product in the Licensed Territory (including through the conduct of Global Studies by Karuna pursuant to Section 4.4), and (e) the right to exercise its rights and perform obligations as the CTA holder for the Karuna Sponsored Studies and the Initial MAH, as set forth in this Agreement or otherwise required by Applicable Laws (collectively (a)-(e)), the “Retained Rights”). Zai acknowledges and agrees that the Retained Rights include the right for Karuna to grant licenses under clauses (a) through (e) of the Retained Rights to its Affiliates and Third Parties. 2.7 No Other Rights. Except for the licenses and rights expressly granted under this Agreement, no right, title, or interest of any nature whatsoever is granted whether by implication, estoppel, reliance, or otherwise, by a Party to the other Party. All rights with respect to Know-How, Patents or other intellectual property rights that are not specifically granted herein are reserved to the owner thereof. Further, the licenses and other rights granted to Zai herein are subject to the rights retained by the counterparty to each Existing In-License Agreement and New Karuna In-License, as applicable. 2.8 Covenant Not to Exceed the Scope of the License. Each Party shall not, and shall not permit any of its Affiliates or sublicensees to, practice any Patent or Know-How licensed to it by the other Party outside the scope of the licenses granted to it under this Agreement. 2.9 Exclusivity. (a) Subject to the remainder of this Section 2.9, unless otherwise agreed by the Parties in writing: During the period commencing on the Effective Date and ending on [***], neither Party shall, for itself, or with, through or for its Affiliates or any Third Party (including the grant of any license, option or other right to any Third Party), directly or indirectly, seek Regulatory Approval of, or Commercialize any [***] anywhere in the Licensed Territory, other than the Compound or Licensed Product as expressly permitted under this Agreement. i. During the Term, Zai shall not, for itself, or with, through or for its Affiliates or any Third Party (including the grant of any license, option or other right to any Third Party), directly or indirectly, engage in or conduct any clinical Development, seek Regulatory Approval of, or Commercialize any [***] anywhere in the Licensed Territory, other than the Compound or Licensed Product as expressly permitted under this Agreement. ii. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 15 Notwithstanding Section 2.9(a), in the event that a Third Party becomes an Affiliate of a Party after the Effective Date through merger, acquisition, consolidation or other similar transaction, and such Third Party, as of the closing date of such transaction, is engaged in the Exploitation of [***] in the Licensed Territory in a manner that is not permitted under Section 2.9(a), then: (b) if such transaction results in a Change of Control of such Party, then such new Affiliate shall have the right to continue the Exploitation of [***] in the Licensed Territory and such continuation shall not constitute a breach of such Party’s exclusivity obligations set forth above; provided that such Party and its new Affiliate, for the duration of the applicable exclusivity obligation, [***]; and i. ii. if such transaction does not result in a Change of Control of such Party, then such Party and its new Affiliate shall have [***] from the closing date of such transaction to wind down or divest (including exclusively out- license with no further active Exploitation) such [***], and its new Affiliate’s Exploitation of such [***] during such [***] period shall not deemed a breach of such Party’s exclusivity obligations set forth above; provided that, during such [***], such Party and its new Affiliate [***]. (c) During the Term, if Karuna or any of its Affiliates directly or indirectly, engages in or conducts clinical Development of [***] and desires to, either by itself, or through its Affiliates or any Third Party (including the grant of any license, option or other right to any Third Party), engage in any Commercialization of [***] anywhere in the Licensed Territory, it shall promptly notify Zai in writing of such intention, together with a reasonably detailed summary of any material Development results of [***] (the “Competing Product Notice”). Zai may, within [***] following receipt of the Competing Product Notice, provide a written notice to Karuna and elect to exclusively negotiate with Karuna a license for the Exploitation of [***] in the Licensed Territory. Thereafter, the Parties shall negotiate in good faith for a period of [***] (the “Exclusive Negotiation Period”). If Zai fails to provide such notice, or, despite exercising good faith efforts, the Parties cannot reach an agreement with respect to such license for [***] in the Licensed Territory within the Exclusive Negotiation Period, then Karuna shall, have the right, either by itself or with, through or for its Affiliates or any Third Party, to Exploit [***] in the Licensed Territory, without any obligation to Zai, provided that, (i) if despite good faith negotiations, the Parties cannot agree with respect to such license for [***], Karuna agrees not to [***]; and (ii) if Karuna does not enter an agreement with any Third Party with respect to the grant of such rights [***], then Zai’s first right of negotiation under this Section 2.9(c) with respect to [***] shall again become effective and applicable; (d) The obligations of Karuna set forth in Section 2.9(c) (x) shall terminate if Karuna undergoes a Change of Control after the Effective Date; except that, upon Change of Control of Karuna during the Term, such obligations set forth in Section 2.9(c) shall continue to apply to [***] prior to such Change of Control by Karuna or any of its Affiliates existing prior to such Change of Control; and (y) shall not apply if a Third Party becomes an Affiliate of Karuna after the Effective Date through merger, acquisition, consolidation or other similar transaction, and such transaction does not result in a Change of Control of Karuna, with respect to [***] Exploited by such new Affiliate or any of its Affiliates with a Third Party as of the closing date of such transaction. 16 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 2.10 Access to Licensed Know-How. Within [***] following the Effective Date, Karuna shall provide Zai access to all Licensed Know-How as of the Effective Date, which access shall occur in a manner and following a reasonable schedule mutually agreed by the Parties. During the Term, Karuna shall provide or make available to Zai additional Licensed Know-How, to the extent that such Licensed Know-How comes to Karuna’s attention (or is reasonably requested by Zai) and has not previously been provided or made available to Zai, to the extent necessary or reasonably useful for Zai to exercise its rights or perform its obligations under this Agreement. In connection with transfer of the Licensed Know-How, Karuna shall also provide Zai with reasonable technical assistance in order for Zai to use and apply the Licensed Know-How in the Exploitation of the Compound and Licensed Product, including reasonable access to its technical personnel involved in the Exploitation of the Compound and Licensed Product. Zai shall reimburse Karuna for the cost incurred by Karuna to provide such technical assistance, [***]. 2.11 Existing In-License Agreements. All licenses and other rights granted to Zai under this Agreement (including any sublicense rights) are subject to the rights and obligations of Karuna under the Existing In-License Agreements. Zai acknowledges and agrees that it will comply with all of the obligations under the Existing In-License Agreements to the extent applicable to Zai as a sublicensee thereunder that are set forth on Schedule 2.11 (the “Existing In-License Agreement Terms”), which shall be incorporated in this Agreement by reference. Karuna shall be solely responsible for the payment of any royalty, milestone and other payments due to Third Parties under any Existing In-License Agreement on account of Zai’s, its Affiliates’ and Sublicensees’ Exploitation of the Compound and Licensed Product in the Field in the Licensed Territory in accordance with this Agreement and the Existing In-License Agreement Terms. 2.12 New Karuna In-Licenses. (a) If, during the Term, Karuna enters into any agreement with a Third Party pursuant to which it obtains a licensable or sublicensable (in accordance with the terms of this Agreement) right or license from such Third Party to any Patents or Know- How that would, but for the provisions of this Section 2.12 constitute Licensed Technology (such agreement, a “Potential In-License”), then Karuna shall promptly notify Zai thereof in writing, including by providing a summary description of: (i) such Patents or Know-How under such Potential In-License; (ii) all payments that Karuna would be obligated to pay to such Third Party in connection with the grant, maintenance, or exercise of a license or sublicense to or by Zai under such Patents or Know-How; and (iii) all obligations with which Zai would be required to comply as a licensee or sublicensee under such Potential In-License (such notice, a “Potential In-License Notice”). (b) If, within [***] after the receipt of a Potential In-License Notice, Zai provides Karuna with written notice indicating interest in obtaining a license or sublicense under such Patents or Know-How, then Karuna shall promptly provide Zai with a copy of such Potential In-License, which copy may be redacted to exclude terms not relevant to the rights or obligations that Zai would receive or assume if it were to exercise its rights under this Section 2.12 to include such Patents or Know-How as Licensed Technology. 17 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED (c) If, within [***] after receipt of such copy referenced in Section 2.12(b), Zai provides Karuna with written notice in which: (i) Zai consents to including the applicable Patents or Know-How in the Licensed Technology; and (ii) Zai agrees to (A) make all payments when due under such Potential In-License to the extent arising out of the grant, maintenance, or exercise of a license or sublicense to or by Zai under such Patents or Know-How and (B) comply with all obligations under such Potential In-License as required to comply as a licensee or sublicensee under such Potential In-License, then (x) such Potential In-License shall be deemed a “New Karuna In-License” thereafter, (y) any such Patents or Know-How, to the extent otherwise falling within the definition of Licensed Technology, shall be added to Licensed Technology and licensed or sublicensed to Zai under this Agreement, and (z) Zai shall be obligated to make any payments referenced in the foregoing sub-clause (ii)(A). If Zai does not provide such notices required by this Section 2.12, such Patents and Know-How will be excluded from the Licensed Technology pursuant to this Agreement and such Potential In-License will not become a New Karuna In-License. ARTICLE 3 GOVERNANCE 3.1 Joint Steering Committee. (a) Formation. Within [***] after the Effective Date, the Parties shall establish a joint steering committee (the “JSC”) to cooperate, coordinate, integrate and monitor the Development and Commercialization of the Compound and Licensed Product in the Field in the Licensed Territory under this Agreement. Each Party shall appoint [***] (or such other equal number of representatives as agreed by the Parties in writing) to the JSC, each of whom shall be an officer or employee of the applicable Party having sufficient seniority within such Party to make decisions arising within the scope of the JSC’s responsibilities. Each Party may replace its JSC representatives upon written notice to the other Party. Upon the JSC’s establishment, a representative from Zai shall act as the chairperson of the JSC. Once a year, the role of chairperson shall rotate between the Parties. The chairperson shall not have any greater authority than any other representative of the JSC. (b) Role. The JSC shall [***]. (c) Limitation of Authority. The JSC shall only have the powers expressly assigned to it in this ARTICLE 3 and elsewhere in this Agreement and shall not have the authority to: (i) modify or amend the terms and conditions of this Agreement; (ii) waive either Party’s compliance with the terms and conditions of this Agreement; (iii) determine any such issue in a manner that would conflict with the express terms and conditions of this Agreement; (iv) make any decisions related to, or determine, approve or oversee the initiation, suspension, cessation, conduct, strategy, implementation of or other matters related to, any Global Study; or (v) impose any other obligations on either Party without the prior written consent of such Party. (d) Meetings. The JSC shall hold meetings at such times as it elects to do so, but in no event shall such meetings be held less frequently than [***]. Each Party may call additional ad hoc JSC meetings as the needs arise with reasonable advance notice to the other Party. Meetings of the JSC may be held in person, or by audio or video teleconference, unless otherwise agreed by the Parties. In-person JSC meetings shall be held at locations mutually agreed by the Parties. Each Party shall be responsible for such Party’s expenses of participating in the JSC meetings. No action taken at any JSC meeting shall be effective unless at least [***] of each Party are participating in such JSC meeting. The Alliance Manager appointed by Zai as set forth in Section 3.2 herein shall prepare the minutes for all JSC meetings, which such minutes shall be approved by the JSC at the subsequent meeting. 18 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED (e) Non-Member Attendance. Each Party may from time to time invite a reasonable number of participants relevant to items on the issued agenda, in addition to its representatives, to attend the JSC meetings in a non‑voting capacity; provided that if either Party intends to have any Third Party (including any consultant) attend such a meeting, such Party shall provide prior written notice to the other Party, and such Party shall also ensure that such Third Party is bound by confidentiality and non-use obligations consistent with the terms of this Agreement. (f) Decision-Making. [***]. If after reasonable discussion and good faith consideration of each Party’s view on a particular matter before the JSC, the JSC cannot reach a decision as to such matter within [***] after such matter was brought to the JSC for resolution, such matter shall be referred by a notice sent pursuant to Section 15.5 by the JSC to the Executive Officers of both Parties for resolution. If the Executive Officers cannot resolve such matter within [***] after such matter has been referred to them, then such matter shall be resolved as follows: i. Except as otherwise provided in Section 3.1(f)(iii), Zai shall have final decision making authority over such matter to the extent such matter primarily relates to [***]. Notwithstanding the foregoing, if Karuna reasonably believes that any decision made by Zai pursuant to this Section 3.1(f)(i) would be reasonably expected to [***], Karuna shall have the final decision-making authority over such matter. Notwithstanding the foregoing, Zai shall have the final decision-making authority regarding [***]. [***], provided that Karuna shall not use its final decision-making authority in a manner that would [***]. ii. Karuna shall have the final decision-making authority over all matters relating to Parties’ mutual agreement, with neither Party having the final decision-making authority with respect thereto: [***]. iii. Notwithstanding anything to the contrary, the following matters shall require the (g) Exchange of Information. The Parties shall cooperate to exchange information through the JSC and otherwise as reasonably requested by the other Party with respect to Development, Manufacture, Commercialization and medical affairs activities conducted by each Party and their Affiliates, in the case of Zai its Sublicensees, and in the case of Karuna, its (sub)licensees of rights to the Compound or Licensed Product outside the Licensed Territory. Such exchange shall include summaries of information relating to material Development activities of each Party, including all Clinical Trials of the Licensed Product, IND and Regulatory Approval Application filings for all Indications for the Licensed Product. For Clinical Trials of the Licensed Product that may be used to support Regulatory Approval for the Licensed Product in the other Party’s territory (including Global Studies), such exchange shall also include all data, results and analyses as reasonably requested by a Party, and the other Party shall have the right to use such data and results for the purpose of obtaining and maintaining Regulatory Approval for the Licensed Product in its territory, subject to Section 4.4(d). [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 19 3.2 Alliance Managers. Within [***] following the Effective Date, each Party shall appoint (and notify the other Party of the identity of) a representative having the appropriate qualifications (including a general understanding of pharmaceutical Development and Commercialization issues) to act as its alliance manager with respect to this Agreement (the “Alliance Manager”). The Alliance Managers shall serve as the primary contact points between the Parties regarding the activities in the Licensed Territory contemplated under this Agreement. The Alliance Managers shall (a) facilitate the flow of information; (b) otherwise promote communication, coordination and collaboration between the Parties by providing single point communication for seeking consensus both internally within each Party’s respective organization, including facilitating review of external corporate communications, and raising cross-Party or cross-functional disputes in a timely manner; and (c) manage the JSC meetings by (i) calling meetings of the JSC; (ii) preparing and issuing minutes of each such meeting within [***] thereafter; and (iii) preparing and circulating an agenda for the upcoming meeting, in each case at the direction of and in consultation with the then-current chairperson, provided that the Alliance Manager of each Party shall not have the authority to vote on behalf of such Party with respect to any matters within the authority of the JSC. Each Party may replace its Alliance Manager by written notice to the other Party. ARTICLE 4 DEVELOPMENT 4.1 Development Plan. The Parties shall undertake the Development of the Licensed Product in a collaborative and efficient manner in accordance with this ARTICLE 4. The Development and Manufacturing of the Compound and Licensed Product relating to the Licensed Territory under this Agreement shall be governed by a written development plan (the “Development Plan”), as revised from time to time in accordance with this Section 4.1. The Development Plan shall include [***]. The Development Plan shall contain in reasonable detail the major Development activities and the projected timelines for conducting such activities, including activities designed to achieve Regulatory Approvals for the Licensed Product in the Licensed Territory. An initial Development Plan is attached hereto as Schedule 4.1. From time to time, and subject to Zai’s diligence obligations set forth in Section 4.2(c) (as may be modified by Section 4.2(d)), Zai may propose certain necessary updates or amendments to the Development Plan in consultation with Karuna and submit such proposed updated or amended plan to the JSC for review, discussion and approval. In accordance with Section 3.1(b), the JSC shall review, discuss and approve any updates or amendments to the Development Plan. For clarity, the Parties acknowledge and agree that Zai will not undertake any activities relating to [***]. 4.2 Responsibilities; Diligence. (a) General. During the Term, subject to the JSC’s oversight, and rights of Karuna as the CTA holder for the Karuna Sponsored Studies and the Initial MAH, as set forth in this Agreement or otherwise required by Applicable Laws, Zai shall have the primary responsibility for the Development of the Licensed Product in the Field in the Licensed Territory, in accordance with the Development Plan, at Zai’s sole cost and expense subject to Section 4.4(b). Zai shall perform such obligations under the Development Plan in a professional and scientific manner, and in compliance with the requirements of Applicable Laws, GCP and cGMP. Changes in the scope or direction of the Development work under this Agreement that would be a material deviation from the Development Plan must be approved by the JSC as set forth in Section 3.1(b); provided that any change with respect to Joint Global Studies shall be consistent with the Joint Global Studies as set forth in the Global Development Plan. Diligence. During the Term, Zai, by itself or through its Affiliates and Sublicensees, shall use Commercially Reasonable Efforts to Develop the Licensed Product in the Field in each Region in the Licensed Territory in accordance with the Development Plan. (b) 20 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED Development Targets. Without limiting the foregoing, Zai shall achieve the following Development milestones with respect to the Development of the Licensed Product in the PRC (each, a “Development Target” and the associated deadline, “Development Target Deadline”). (c) i. [***]. (d) Extension for Delay. Upon the JSC’s approval (not to be unreasonably withheld, conditioned or delayed), the Development Target Deadline for each Development Target above may be extended by the duration of any delays that are encountered during the course of Development and caused by [***]. Notwithstanding the foregoing, if Zai fails to meet any Development Target Deadline that is due, the JSC shall be deemed to have approved an extension to the extent Zai has presented reasonable written documentary evidence demonstrating that, at the time such Development Target Deadline is due: [***]. this Agreement as provided in Section 13.3, [***] subject to Zai’s right to dispute the applicability of. (e) Failure to Meet Development Target Deadlines. and [***] Karuna shall have the right to terminate 4.3 Local Study. (a) Subject to rights of Karuna as the CTA holder of the Karuna Sponsored Studies and Initial MAH, as set forth in this Agreement or otherwise required by Applicable Laws, Zai shall be solely responsible for performing any Local Study at its sole cost (including handling relevant Regulatory Submissions for any Local Studies in the Licensed Territory at its own cost, as applicable, in accordance with ARTICLE 5), as set forth in the Development Plan; provided that [***]. Each Local Study conducted in the Licensed Territory shall be conducted in accordance with the Development Plan, including the study protocol set forth therein and approved by any relevant Regulatory Authority, and Applicable Laws in the Licensed Territory. (b) (c) 4.4 Global Study. Without limiting the foregoing, for each Karuna Sponsored Study, [***]. [***]. (a) General. Karuna may initiate, suspend, or cease a Global Study for the Licensed Product for any Indication. As between the Parties, Karuna shall be responsible for any Global Study of the Licensed Product, subject to this Section 4.4, with respect to participation by Zai in Joint Global Studies. Karuna shall present to the JSC a global development plan for any Global Study that includes clinical sites for Clinical Trials for the Licensed Product in the Licensed Territory (the “Global Development Plan”). The JSC shall discuss such Global Development Plan for Zai’s potential participation in such Global Study in the Licensed Territory. 21 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED (b) Zai may participate in a Global Study presented by Karuna in a Global Development Plan based upon mutual agreement of the Parties (such agreed Global Study, a “Joint Global Study”). Unless otherwise agreed between the Parties, Zai shall be responsible for all activities associated with conducting each Joint Global Study in the Licensed Territory set forth in the applicable Global Development Plan, and any additional or modified activities for such Joint Global Study in the Licensed Territory so agreed between the Parties shall be included in an amendment to the Global Development Plan. Zai shall recruit, enroll, treat, and provide follow-up in a timely manner with respect to an agreed number or percentage of the total number of patients to be treated under the protocol set forth in the Regulatory Submission to the FDA and NMPA for the Joint Global Study and in accordance with the Global Development Plan (as may be amended pursuant to the preceding sentence), provided that if the percentage of the total number of patients enrolled in the Licensed Territory exceeds [***] of the total number of patients enrolled in a Joint Global Study, Karuna will be responsible for the costs of such patients enrolled in the Licensed Territory above such [***]. Zai, itself or with or through any other of its Affiliates or Sublicensees, shall, in accordance with Section 5.1, be the Authorized Regulatory Agent of each Joint Global Study in the Licensed Territory. For any Joint Global Study, Zai shall be responsible for [***], and Karuna shall be responsible for [***]. (c) (d) If Zai elects not to participate in any Global Study presented by Karuna by notifying Karuna in writing of such election not to participate (or by failing to notify Karuna in writing of its election to participate) within [***] after the date of Karuna’s presentation of such Global Study to the JSC, Karuna may conduct such Global Study in the Licensed Territory [***] but in conducting such Global Study, the Parties shall coordinate the Parties’ Development activities for the Licensed Product in the Licensed Territory, provided that Zai shall not have access, or any right of reference to, any data (except for safety data) generated from such Global Study, and any Know-How (except for safety data) or Patents resulting from such Global Study shall be excluded from Licensed Technology unless Zai notifies Karuna in writing of Zai’s intent to have access and right of reference to such data, and to include any such Know-How or Patents in Licensed Technology, in which case, Zai shall pay to Karuna [***]. 4.5 Post-Marketing Studies. If the Regulatory Authority requires that a Post-Marketing Study for the Licensed Product be conducted in the Licensed Territory, or if the Parties mutually agree that a Post-Marketing Study for the Licensed Product in the Licensed Territory is necessary (such agreement not to be unreasonably withheld, conditioned, or delayed), Zai shall be responsible for conducting such Post-Marketing Study for the Licensed Product in the Licensed Territory, including [***]. 4.6 Development Reports. The status, progress and results of Zai’s Development activities under this Agreement shall be discussed at meetings of the JSC. At least [***] before each regularly scheduled JSC meeting, Zai shall provide the JSC with a written report in English summarizing its Licensed Product Development activities and the results thereof, covering subject matter at a level of detail reasonably requested by Karuna and sufficient to enable Karuna to determine such Zai’s compliance with its obligations pursuant to Section 4.1 to Section 4.4. In addition, Zai shall make available to Karuna such additional information about its Development activities with Licensed Product as may be reasonably requested by Karuna from time to time. All updates and reports provided by Zai pursuant to this Section 4.6 shall be the Confidential Information of Zai. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 22 4.7 Clinical Trials Compliance and Registration. Each Party shall conduct all Clinical Trials of the Licensed Product in the Licensed Territory in compliance with all Applicable Laws, including GCP and regulations promulgated by the NMPA. Zai shall be responsible for registering in the appropriate clinical trial registry and posting the results of all studies for the Licensed Product conducted under an IND filed by or on behalf of Zai for the Licensed Product in the Licensed Territory as required by Applicable Law. Zai further agrees to allow Karuna to post the clinical trial results of Zai’s Clinical Trials for the Licensed Product as required by Applicable Law. 4.8 Conduct of Audits. Upon [***] prior written notification by Karuna but no more frequent than [***] (except in the event that Karuna has reasonable cause), and based on an audit scope agreed upon by the Parties, Karuna or its representatives may conduct an audit of Zai, its Affiliates, or any Sublicensees or Subcontractors, and all Clinical Trial sites engaged by Zai or its Affiliates, Sublicensees or Subcontractors to perform Zai’s obligations under any Development Plan, in each case, to ensure that the applicable Clinical Trials are conducted in compliance with the Development Plan, GCP, and Applicable Laws; provided that in the event any such audit of Zai’s Subcontractors or Clinical Trial sites engaged by Zai or its Affiliates or Sublicensees, in each case, requires Zai’s assistance, Zai shall provide Karuna or its representatives with such assistance [***], to the extent reasonable, including providing personnel of Zai to be present for such audit and producing any documents or authorizations allowing Karuna or its representatives to conduct such audit, to the extent reasonable. No later than [***] after the completion of such audit, Karuna shall provide Zai with a written summary of Karuna’s findings of any deficiencies or other areas of remediation that Karuna identifies during any such audit. Zai shall use Commercially Reasonable Efforts to respond or remediate any such deficiencies within [***] following Karuna’s receipt of such report. Without limiting the foregoing, Zai shall have the right to be present at any such audit conducted by Karuna pursuant to this Section 4.8 of any Sublicensees, Subcontractors, or Clinical Trial sites. 4.9 Records. In conformity with Applicable Law, standard pharmaceutical industry practices and the terms and conditions of this Agreement, each Party shall prepare and maintain, or shall cause to be prepared and maintained, complete and accurate written records, accounts, notes, reports and data (including Development Data) with respect to activities conducted concerning the Licensed Product (“Records”) in the Licensed Territory; provided, that in no instance shall such Records be maintained for less than the latest of (a) [***] following the end of the Calendar Year to which the records pertain, (b) requirements under Applicable Law or (c) such Party’s standard operating practice. Upon a Party’s written request and to the extent required by Applicable Law or applicable Regulatory Authorities in the Licensed Territory, the other Party shall make available to the requesting Party electronic copies (unless otherwise required by Applicable Law) of the aforesaid required Records to the requesting Party throughout the Term and thereafter as long as such other Party Controls such Records, which shall be at minimum for the time period set forth above. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 23 4.10 Ownership, Disclosure and Use of Development Data. (a) Except as otherwise provided by Section 12.1 with respect to Inventions, during the Term, any and all Data and other results generated by a Party, its Affiliate or its respective licensees, sublicensees, collaboration partners, contractors, subcontractors (including Subcontractors) concerning the Licensed Product, including relevant laboratory notebook information, screening data, regulatory data (including all data and results created for or provided to any Regulatory Authority) and data from all pre-clinical studies (including toxicology studies) and Clinical Trials of the Licensed Product (including all data and results created for or provided to any Investigator Review Board or principal investigator of any pre-clinical study or Clinical Trial) (collectively, the “Development Data”), shall, as between Zai and Karuna, (i) be owned solely and exclusively by Karuna if [***], (ii) be jointly owned by Karuna and Zai if [***]. Each Party shall require that all of its Affiliates, Sublicensees and subcontractors (including Subcontractors) assign any of such Affiliates’, Sublicensees’ and subcontractors’(including Subcontractors’) right, title and interest in and to such Development Data to such Party in order to comply with this provision. (b) All material Development Data in Control of Karuna or its Affiliates and existing as of the Effective Date that is necessary for the Development and Commercialization of the Licensed Product in the Licensed Territory shall be made available to Zai (or its designee) as promptly as practicable, in any event within [***] after the Effective Date. Any additional material Development Data generated by or on behalf of a Party or its Affiliates and in its Control after the Effective Date and during the Term of this Agreement that is necessary for the Development and Commercialization of the Licensed Product in the Licensed Territory shall be made available to the other Party (or its designee) within [***] after such Party or its Affiliate distributes copies or summaries of such Development Data internally. (c) During the Term, each Party shall promptly provide to the JSC (in the case of Zai, together with the Development reports submitted to the JSC pursuant to Section 4.6), or to the other Party upon the other Party’s request, any Development Data generated pursuant to the Development Plan by or on behalf of such Party, its Affiliates, licensees or Sublicensees, to the extent not previously provided to the JSC or the other Party. (d) Each Party and its Affiliates may only use and disclose the Development Data during the Term for the purposes of exercising its rights and performing its obligations with respect to the Licensed Product in its territory (and with respect to Karuna, for purposes of exercising the Retained Rights) pursuant to this Agreement, including Development and regulatory activities with respect to the Licensed Product under this Agreement or its or their ongoing compliance with record retention requirements with respect to the Licensed Product by any Regulatory Authority in its territory; provided, for clarity, that neither Party nor its Affiliates will have any right to use or disclose any Development Data of the other Party as a comparator with, or in comparison to, any other compound or product without such other Party’s prior written consent. 24 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED ARTICLE 5 REGULATORY 5.1 Zai’s Responsibilities. (a) The regulatory strategy for the Licensed Territory will be consistent with the overall objectives of obtaining and maintaining Regulatory Approval of the Licensed Product in the Licensed Territory in accordance with the Development Plan. During the Term, subject to the oversight of the JSC, Zai shall, at its sole cost and expense, (i) be responsible for all regulatory activities leading up to and including the obtaining of the Regulatory Approval for the Licensed Product from the Regulatory Authority on a Region- by-Region basis in the Field in the Licensed Territory, at its sole cost and expense, except as set forth in the Global Development Plan and Development Plan; and (ii) to the extent permitted by Applicable Law, hold and maintain all Regulatory Approvals, Regulatory Submissions and all pricing and reimbursement approvals, in each case, for the Licensed Product in the Field in the Licensed Territory, in the name of Zai or its Affiliates, provided that, if Applicable Laws in a Region in the Licensed Territory do not allow Zai (or an Affiliate of Zai) to hold Regulatory Approvals or Regulatory Submissions for the Licensed Product in the Field in the Licensed Territory, then during the Term, Karuna will, at Zai’s costs, (A) hold such Regulatory Approval, Regulatory Submissions and pricing and reimbursement approvals for the Licensed Product in the Field in such Region solely for Zai’s benefit, (B) appoint Zai (or an Affiliate of Zai) as sole Authorized Regulatory Agent to handle all regulatory activities for the Licensed Product in the Field in such Region, and (C) shall promptly transfer such Regulatory Approval, Regulatory Submissions and pricing and reimbursement approvals to Zai or its designee when allowed by Applicable Laws. (b) Zai shall use Commercially Reasonable Efforts to obtain and maintain, in its own name (or in the name of its Affiliates, but subject to Section 5.1(a)(ii)), Regulatory Approvals, Regulatory Submissions and pricing and reimbursement approvals (if applicable) for Licensed Product in the Field in each Region in the Licensed Territory in accordance with the Development Plan and Zai shall be [***]. During any period when Karuna holds any Regulatory Approval, Regulatory Submissions or pricing and reimbursement approvals for the Licensed Product in the Field in a Region for Zai’s benefit pursuant to Section 5.1(a)(ii), (i) Karuna shall not be obligated to [***]; (ii) Karuna shall not assume any liability [***]; (iii) should Karuna or its Affiliates incur any costs or expenses related to holding or transferring any such Regulatory Approval, Regulatory Submissions or pricing and reimbursement approvals, Zai shall [***]; and (iv) Zai shall [***]. (c) Zai shall keep Karuna promptly informed (and in any event within [***] for any significant matter) of regulatory developments related to the Licensed Product in each Region in the Licensed Territory and shall promptly notify Karuna in writing of any decision by any Regulatory Authority in such Region in the Licensed Territory regarding the Licensed Product. Zai shall share with Karuna copies of correspondences or a summary of phone calls received from and sent to any Regulatory Authority in each Region in the Licensed Territory relating to the Licensed Product promptly after (and in any event within [***] for any significant matter) Zai or its Affiliate distributes such copies or summaries internally. (d) (e) [***]. [***]. 25 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 5.2 Review of Regulatory Submissions. Zai shall provide to Karuna for review and comment drafts of all material Regulatory Submissions (including application for HGR Approvals) in Field in the Licensed Territory for the Licensed Product no later than [***] prior to the planned submission, provided that, [***]. Zai shall incorporate any comments received from Karuna on such Regulatory Submissions where required under any Applicable Laws and shall use good faith efforts to incorporate any other comments received from Karuna on such Regulatory Submissions; provided that in the event of any disagreement regarding incorporation of comments made by Karuna with respect to the contents of any substantive proposals or Regulatory Submission for the Licensed Product in the Licensed Territory or any written correspondence with any Regulatory Authority for the Licensed Product in the Licensed Territory, the Parties shall discuss, through the JSC, such disagreements in good faith. In addition, Zai shall notify Karuna of any material Regulatory Submissions for the Licensed Product and any other material documents, comments or other correspondences related thereto submitted to or received from any Regulatory Authority in the Licensed Territory and shall provide Karuna with copies thereof as soon as reasonably practicable, but in all events within [***] after submission or receipt thereof [***]. 5.3 Notice of Meetings. Zai shall provide Karuna with notice of any material meeting or discussion with any Regulatory Authority in the Licensed Territory related to the Licensed Product no later than [***] after receiving notice thereof. Zai shall lead any such meeting or discussion and Karuna or its designee shall have the right, but not the obligation, to attend and participate in any such meeting or discussion unless prohibited or restricted by Applicable Laws or Regulatory Authority. At Zai’s request, Karuna shall reasonably cooperate with Zai in preparing for any such meeting or discussion. If Karuna elects not to attend such meeting or discussion, then Zai shall provide to Karuna a written summary thereof in English promptly following the issuance or approval of the corresponding official minutes by the applicable Regulatory Authority. 5.4 Notice of Regulatory Action. If any Regulatory Authority takes or gives notice of its intent to take any regulatory action with respect to any activity of Zai, its Affiliates, Sublicensees or Subcontractors, in each case, relating to the Licensed Product, then Zai shall notify Karuna of such contact, inspection, or notice or action within [***] after receipt of such notice (or, if action is taken without notice, within [***] of Zai becoming aware of such action). Karuna shall have the right to review and comment on any responses to any Regulatory Authority that pertain to the Licensed Product in the Licensed Territory. 5.5 Karuna’s Responsibilities. Subject to Section 4.4(d), Karuna shall reasonably cooperate with Zai in obtaining any Regulatory Approvals for the Licensed Product in the Licensed Territory by providing, to the extent reasonably requested by Zai, access to Regulatory Approvals, Regulatory Submissions, Development Data, and other information and documentation for the Licensed Product outside of the Licensed Territory if such information is required by Applicable Laws in the Licensed Territory or requested by a Regulatory Authority in the Licensed Territory in furtherance of such Regulatory Approvals for the Licensed Product in the Licensed Territory. In addition, upon Zai’s reasonable request, Karuna shall, and shall cause its Affiliates and sublicensees to provide to Zai copies of such records of Development, Manufacturing, and Commercialization activities to the extent required to obtain Regulatory Approval of the Licensed Product in the Licensed Territory. [***]. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 26 5.6 No Harmful Actions. If Karuna believes that Zai is taking or intends to take any action with respect to the Licensed Product that could have a material adverse impact upon the regulatory status of the Licensed Product outside the Licensed Territory, Karuna shall have the right to bring the matter to the attention of the JSC and the Parties shall discuss in good faith to resolve such concern. Without limiting the foregoing, unless the Parties otherwise agree: (a) Zai shall not communicate with any Regulatory Authority having jurisdiction outside the Licensed Territory, unless so ordered by such Regulatory Authority, in which case Zai shall immediately notify Karuna of such order; and (b) Zai shall not submit any Regulatory Submissions or seek Regulatory Approvals for the Licensed Product outside the Licensed Territory. 5.7 Regulatory Authority Communications Received by a Party. Each Party shall keep the other Party informed in a timely manner, and compliant with the reporting requirements of the applicable Regulatory Authorities, of any action by, or notification or other information which it receives (directly or indirectly) from any Regulatory Authority (inside or outside of the Licensed Territory as applicable) which: (a) raises any material concerns regarding the safety or efficacy of the Licensed Product; (b) indicates or suggests a potential material liability of either Party to Third Parties in connection with the Licensed Product in the Field in the Licensed Territory; (c) is reasonably likely to lead to a recall or market withdrawal of the Licensed Product; (d) relates to expedited and periodic reports of Adverse Events with respect to the Licensed Product and which may have a material impact on obtaining or maintaining Marketing Approval or the continued commercialization of the Licensed Product in the Licensed Territory, as then conducted; or (e) relates to any dissatisfaction regarding the Licensed Product in the Licensed Territory of such a nature and magnitude that it is required under the Applicable Law to be collected, maintained and reported to a Regulatory Authority, including reports of actual or suspected product tampering, contamination, mislabeling or inclusion of improper ingredients. Each Party shall provide the other Party in a timely manner with a copy of all correspondence received from a Regulatory Authority specifically regarding the matters referred to above. Karuna shall reasonably cooperate with and assist Zai in complying with regulatory obligations and communications, including by providing to Zai, in a timely manner upon request, such information and documentation in Karuna’s possession or Control as may be necessary for Zai to prepare a response to an inquiry from any Regulatory Authority regarding the Licensed Product in the Licensed Territory. To the extent there are any inconsistencies or conflicts between this Section 5.7 and the Pharmacovigilance Agreement, the Pharmacovigilance Agreement shall control, unless otherwise agreed to in writing by the Parties. 5.8 Adverse Events Reporting. (a) Promptly following the Effective Date, but in no event later than [***] thereafter, Zai and Karuna shall develop and agree to the worldwide safety and pharmacovigilance procedures for the Parties with respect to the Licensed Product, such as safety data sharing and exchange, Adverse Events reporting and prescription events monitoring in a written agreement (the “Pharmacovigilance Agreement”). Such agreement shall describe the coordination of collection, investigation, reporting, and exchange of information concerning Adverse Events or any other safety problem of any significance, and product quality and product complaints involving Adverse Events, sufficient to permit each Party, its Affiliates, licensees or sublicensees to comply with its legal obligations. The Pharmacovigilance Agreement shall be promptly updated if required by changes in Applicable Law. Each Party hereby agrees to comply with its respective obligations under the Pharmacovigilance Agreement and to cause its Affiliates, licensees and sublicensees to comply with such obligations. To the extent there is any disagreement between this Section 5.8, Section 5.9, or any related definitions and the Pharmacovigilance Agreement, the Pharmacovigilance Agreement shall control with respect to safety matters and this Agreement shall control with respect to all other matters. 27 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED (b) Zai shall be responsible for complying with all Applicable Laws governing Adverse Events in the Licensed Territory for all Clinical Trials performed by or on behalf of Zai, its Affiliates, Subcontractors and Sublicensees, including the Local Studies and Joint Global Studies, and Karuna shall be responsible for complying with all Applicable Laws covering Adverse Events (i) in the Licensed Territory for all Clinical Trials performed by or on behalf of Karuna, its Affiliates, Subcontractors and licensees for the Global Studies that Zai does not participate in, and (ii) outside the Licensed Territory for all Clinical Trials. (c) Karuna shall hold and control the global safety database for all Licensed Product and for the exchange by the Parties in English of any information which a Party becomes aware of concerning any Adverse Event experienced by a subject or patient being administered the Licensed Product, including any such information received by either Party from any Third Party (subject to receipt of any required consents from such Third Party). It is understood that each Party and its Affiliates, licensees and sublicensees shall have the right to disclose such information if such disclosure is reasonably necessary to comply with Applicable Laws or requirements of any applicable Regulatory Authority. 5.9 Safety and Regulatory Audits. Upon reasonable notification, Karuna shall be entitled to conduct an audit of safety and regulatory systems, procedures and practices of Zai, its Affiliates, and Sublicensees (including Clinical Trial sites), in each case, relating to the Development of the Licensed Product in the Field in the Licensed Territory, including on-site evaluations. Karuna may conduct such audit no more than [***] (unless an additional audit is warranted for cause) upon [***] prior written notice to Zai. With respect to any inspection of Zai or its Affiliates or Sublicensees (including Clinical Trial sites) by any Governmental Authority relating to the Licensed Product, Zai shall notify Karuna of such inspection (a) no later than [***] after Zai receives notice of such inspection or (b) within [***] after the completion of any such inspection of which Zai did not receive prior notice. Zai shall promptly provide Karuna with all information related to any such inspection. Zai shall also permit Governmental Authorities outside of the Licensed Territory to conduct inspections of Zai or its Affiliates or Sublicensees (including Clinical Trial sites) relating to the Licensed Product, and shall ensure that all such Affiliates or Sublicensees permit such inspections. [***]. Following any such regulatory inspection related to the Licensed Product, Zai shall provide Karuna with (i) an unredacted copy of any finding, notice, or report provided by any Governmental Authority related to such inspection (to the extent related to the Licensed Product) within [***] of Zai receiving the same, and (ii) [***]. Zai shall provide Karuna with a copy of any proposed response to such communications and shall consider in good faith Karuna’s reasonable comments with respect to such proposed response. Further details including notification, timing, response and scope of such audits shall be included in the Pharmacovigilance Agreement. 5.10 Remedial Actions. Each Party shall notify the other immediately, and promptly confirm such notice in writing, if it obtains information indicating that the Licensed Product may be subject to any recall, corrective action or other regulatory action by any Governmental Authority or Regulatory Authority (as to Karuna’s notification obligation, only to the extent it would reasonably be expected to affect the Licensed Territory) (a “Remedial Action”). The Parties shall assist each other in gathering and evaluating such information as is necessary to determine the necessity of conducting a Remedial Action with respect to the Licensed Territory. Zai shall have sole discretion with respect to any matters relating to any Remedial Action in the Field in the Licensed Territory (including decision to commence such Remedial Action), provided that, unless required by Regulatory Authorities or Applicable Law, Zai shall not commence such Remedial Action in the Field in the Licensed Territory without prior notice to Karuna, provided further that, Karuna shall have sole discretion with respect to any matters relating to any Remedial Action in the Licensed Territory to the extent related to any Global Study. The reasonable cost and expenses of any Remedial Action in the Licensed Territory shall be borne [***]. Zai shall, and shall ensure that its Affiliates and Sublicensees shall, maintain adequate records to permit the Parties to trace the distribution and use of the Licensed Product in the Licensed Territory. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 28 ARTICLE 6 MANUFACTURING 6.1 Supply. During the Term, subject to the terms and conditions of this Agreement (including Karuna’s Retained Rights and Karuna’s obligations under Section 6.3), Zai shall have the sole right (and shall solely control, at its discretion) itself or with or through its Affiliates, Sublicensees, or other Third Parties, to Manufacture or have Manufactured the Compound and Licensed Product for use in Development (including Clinical Trials) in the Licensed Territory and for Commercialization in the Field in the Licensed Territory. Zai shall ensure that all Licensed Products Manufactured by or on behalf of Zai, its Affiliates, Sublicensees or Subcontractors shall comply with this Agreement, the specifications for the Licensed Product, other quality standards as mutually agreed by the Parties for the Licensed Product, and Applicable Laws in the applicable Region in the Licensed Territory (including applicable cGMP). 6.2 Manufacturing Technology Transfer. At Zai’s request, the Parties shall (a) cooperate in good faith through the JSC to identify the Manufacturing Technology, and (b) Karuna shall use Commercially Reasonable Efforts to (i) transfer all Know-How within the Manufacturing Technology to Zai or its permitted designee (which designee may be an Affiliate or a Third Party manufacturer, and subject to Section 2.4), and (ii) provide reasonable assistance to Zai or such permitted designee, [***], in order to enable Zai and its designees to obtain the regulatory or governmental approvals necessary to authorize Zai and its designees to Manufacture the Compound or Licensed Product for clinical and commercial supply in the Licensed Territory (clauses (i) and (ii) together, the “Manufacturing Technology Transfer”). The Parties shall conduct the Manufacturing Technology Transfer in accordance with a mutually agreed transfer plan, including the timelines set forth therein, and Zai shall be fully responsible, at its own costs, for obtaining all licenses, permits and other certifications required by the applicable Regulatory Authorities in order to complete such Manufacturing Technology Transfer. 6.3 Supply by Karuna. Zai shall make a written request to Karuna to commence the Manufacturing Technology Transfer before [***]. Promptly after such request by Zai, and subject to Zai exercising Commercially Reasonable Efforts to conduct and complete the Manufacturing Technology Transfer set forth in Section 6.2, Karuna shall (either by itself or through an Affiliate or CMO) Manufacture and supply the Compound and Licensed Product to Zai for Development and Commercialization use in the Field in the Licensed Territory, until Zai is approved by applicable Regulatory Authorities to manufacture the Compound and Licensed Product (by itself or through an Affiliate or CMO) to support its Development and Commercialization of the Product in the Territory after the completion of the Manufacturing Technology Transfer set forth in Section 6.2. Karuna shall supply the Compound and Licensed Product to Zai at the Fully Burdened Manufacturing Cost plus [***] for Development use or, as the case may be, [***] for Commercialization use. Subject to further agreement by the Parties with respect to compliance with applicable cGMP and additional standards required by Regulatory Authorities or Applicable Laws in any particular Region in the Licensed Territory, all Compound and Licensed Product supplied by Karuna shall comply with applicable specifications, shall be manufactured in compliance with all Applicable Laws (including cGMP) of the country where such Compound and Licensed Product are manufactured, and shall be accompanied by a certificate of analysis and certificate of conformity as required under Applicable Laws. The Parties shall negotiate in good faith and agree on other detailed terms for such supply, including forecast, ordering, delivery, inspection, acceptance and other customary terms, which shall be set forth in one or more separate supply agreement and quality agreement. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 29 ARTICLE 7 COMMERCIALIZATION 7.1 General; Commercialization. During the Term, and subject to the rights of Karuna as the Initial MAH, as set forth in this Agreement or otherwise required by Applicable Laws, Zai shall be solely responsible to Commercialize and obtain pricing and reimbursement approvals for the Licensed Product in the Field in the Licensed Territory in accordance with the Commercialization Plan, at its sole cost and expense. Without limiting the foregoing, for each Region in the Licensed Territory in which the Licensed Product receives Regulatory Approval, Zai shall use Commercially Reasonable Efforts to Commercialize the Licensed Product in the Field in such Region. 7.2 Commercialization Plan. The Commercialization Plan shall contain in reasonable detail the significant Commercialization activities and the projected timelines for achieving such activities. Zai shall provide an initial Commercialization Plan to the JSC for review and discussion [***] of the first Regulatory Approval Application for the Licensed Product in the Licensed Territory, which shall include general information regarding marketing plans and budget estimates. Thereafter, Zai may propose updates or amendments to the Commercialization Plan to reflect necessary or material changes in such plans, including those in response to changes in the marketplace, relative success of the Licensed Product, and other relevant factors influencing such plan and activities, and submit such proposed updated or amended Commercialization Plan to the JSC. In preparing the initial Commercialization Plan and any updates or amendments thereto, Zai shall provide Karuna with an opportunity to comment and Zai shall consider any Karuna’s comments in good faith in finalizing the initial Commercialization Plan and any updates or amendments thereto. 7.3 Commercialization Reports. Zai shall update the JSC at each regularly scheduled JSC meeting regarding Commercialization activities conducted by Zai, its Affiliates and Sublicensees, in each case, with respect to the Licensed Product in Field the Licensed Territory. Each such update shall be in a form to be agreed by the JSC and shall summarize Zai’s, its Affiliates’ and Sublicensees’ significant Commercialization activities with respect to the Licensed Product in the Field in the Licensed Territory, covering subject matter at a level of detail reasonably required by Karuna and sufficient to enable Karuna to determine Zai’s compliance with its diligence obligations pursuant to this Agreement. In addition, Zai shall make available to Karuna such additional information about its Commercialization activities as may be reasonably requested by Karuna from time to time. All updates and reports generated pursuant to this Section 7.3 shall be the Confidential Information of Zai. 7.4 Pricing. Zai shall advise the JSC of its proposed pricing for the Licensed Product in each Region in the Licensed Territory prior to the anticipated filing of Regulatory Approval Application in such Region for the Licensed Product. Zai shall consider in good faith any comments provided by Karuna with respect to pricing of the Licensed Product sold in each Region. Zai shall keep Karuna informed on the status of any application for pricing and reimbursement approval for the Licensed Product in each Region in the Field and in the Licensed Territory, including any discussion with Regulatory Authority with respect thereto. Notwithstanding anything to the contrary in this Agreement (including Section 3.1(f)), Zai shall have the final decision-making authority on [***]. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 30 7.5 Product Trademarks. As soon as reasonably practicable following the Effective Date, but no later than [***] prior to the filing of any Regulatory Approval Application for the Licensed Product in each Region in the Licensed Territory, the Parties shall discuss in good faith a branding strategy for Commercialization of the Licensed Product in the Licensed Territory, including selection of any trademarks, logos and trademarks for use in connection with Commercialization of the Licensed Product in each Region in the Licensed Territory, which strategy shall be consistent with and subject to Karuna’s global branding strategy for the Licensed Product. Zai may use (pursuant to this Section 7.5) the trademarks Controlled by Karuna in the Licensed Territory as Karuna may provide to Zai in writing from time to time (the “Karuna Product Marks”) and may use the English mark thereof with Chinese phonetic translation below. Karuna hereby grants to Zai, during the Term and subject to the terms and conditions of this Agreement, a royalty-free, exclusive license under Karuna’s rights to use such Karuna Product Marks in connection with the Commercialization of the Licensed Product in the Field in the Licensed Territory in compliance with Applicable Laws and this Agreement. Zai shall comply with Karuna’s brand usage guidelines provided to Zai in its use of the Karuna Product Marks. Zai may also (in addition to or in lieu of the Karuna Product Marks) brand the Licensed Product in the Field in the Licensed Territory using its (and its Affiliates’ and Sublicensees’) own corporate name or logo, and other trademarks, logos, and trade names specific for the Licensed Product that differ from the Karuna Product Marks and do not contain the name of Karuna; provided, however, that (a) such trademarks, logos and trade names shall not be confusingly similar to any of the trademarks Controlled by Karuna or any of its Affiliates, (b) prior to such use, Zai shall submit such trademarks, logos and trade names for Karuna’s prior written approval (not to be unreasonably withheld, delayed or conditioned), and (c) such trademarks, logos and trademarks shall be deemed owned by Zai (the “Product Marks”). Zai shall own all rights in the Product Marks in the Licensed Territory and shall register and maintain the Product Marks in the Licensed Territory that it determines reasonably necessary. 7.6 No Diversion. To the extent permitted by Applicable Law, each Party hereby covenants and agrees that, with respect to Commercialization of the Licensed Product in the Field, (a) it shall not, and shall cause its Affiliates and contractually obligate its sublicensees not to, directly or indirectly, including via the Internet or mail order, engage in marketing to any Third Party or to any address or Internet Protocol address or the like, in the other Party’s territory for the purposes of Commercializing the Licensed Product in the other Party’s territory, (b) neither Party shall engage, nor permit its Affiliates, sublicensees to engage, in any advertising or promotional activities relating to the Licensed Product for use directed primarily to customers or other buyers or users of such product located in any country, Region or jurisdiction in the other Party’s territory, or solicit orders from any prospective purchaser located in any country, Region or jurisdiction in the other Party’s territory, and (c) if it receives any order or inquiry with respect to the Licensed Product from customers or any Third Party outside its territory, it shall direct such order or inquiry to the other Party. For clarity, Karuna’s territory means anywhere in the world other than the Licensed Territory. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 31 7.7 Transfer of Compound; Audits. Zai shall not, and shall ensure that its Affiliates and Sublicensees do not, directly or indirectly, sell, resell, donate, assign, hypothecate, export, distribute, transfer or divert the Compound or Licensed Product to an entity other than Zai, or an entity approved by Zai, in each case outside the Licensed Territory or otherwise in a manner that would cause the sale of such Compound or Licensed Product in the chain of distribution (from Zai or its Affiliates or Sublicensees to the end user) to be excluded (except as an exception provided in the Net Sales definition) in the calculation of Net Sales, provided that for each unit of the Compound or Licensed Product, the inclusion of such sales in the calculation of Net Sales shall occur only once. Subject to Applicable Laws, upon Karuna’s reasonable request and [***], but no more often than once in every [***], Zai (either directly or indirectly through its sublicenses or designees) shall allow Karuna to perform an audit, site visit or similar inspection of any site or facility where Development or Commercialization activities for the Licensed Product are being conducted to ensure (i) compliance with applicable cGMP, GCP, GLP, and GSP standards, and (ii) compliance with this Section 7.7. 7.8 Medical Affairs. Zai shall be solely responsible, at its sole cost and expense, for conducting medical affairs activities with respect to the Licensed Product in the Field in the Licensed Territory, including communications with key opinion leaders, medical education, symposia, advisory boards (to the extent related to medical affairs or clinical guidance), publications, congress presentations and posters, published manuscripts, activities performed in connection with patient registries and post-approval trials, and other medical programs and communications, including educational grants, research grants (including conducting investigator-initiated studies), and charitable donations to the extent related to medical affairs and not to other activities that do not involve the promotion, marketing, sale, or other Commercialization of the Licensed Product, all of which shall be conducted in accordance with Applicable Law. Zai shall update the JSC at each regularly scheduled JSC meeting regarding Zai’s medical affairs activities. All updates and reports generated pursuant to this Section 7.8 shall be the Confidential Information of Zai. ARTICLE 8 PAYMENTS AND MILESTONES 8.1 Upfront Payment. Zai shall pay to Karuna an one-time, irrevocable, non-refundable, non-creditable amount of thirty-five million U.S. Dollars ($35,000,000) (the “Upfront Payment”) within [***] after the Effective Date. 8.2 Development Milestones Payments to Karuna. (a) Subject to the remainder of this Section 8.2, within [***] after the Licensed Product first achieves each of the Milestone Events set forth below (each such event, a “Development Milestone Event”), the Party that achieves such Milestone Event shall notify the other Party. Zai shall pay to Karuna the corresponding one-time, irrevocable, non-refundable, non-creditable Development Milestone Payments (each such payment, a “Development Milestone Payment”) within [***] after the receipt of an invoice for such payment issued pursuant to Section 8.5(c) after the receipt of such notice. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 32 1) [***] 2) [***] 3) [***] 4) [***] 5) [***] 6) [***] 7) [***] Development Milestone Event Development Milestone Payment $[***] $[***] $[***] $[***] $[***] $[***] $[***] $[***] Total: For the avoidance of doubt, (i) each Development Milestone Payment shall be payable on the first occurrence of the corresponding Development Milestone Event for the Licensed Product, and (ii) none of the Development Milestone Payments shall be payable more than once. (b) (c) (d) (e) (f) (g) [***]. [***]. [***]. [***]. [***]. 8.3 Sales Milestones. (a) Zai shall pay to Karuna the following one-time, irrevocable, non-refundable, non-creditable Milestone Payments (each such payment, a “Net Sales Milestone Payment”) for the achievement of the corresponding Net Sales Milestone Events set forth below (each such event, a “Net Sales Milestone Event”) within [***] after the receipt of an invoice for such payment issued pursuant to Section 8.5(c) after the end of the Calendar Year in which the Net Sales Milestone Event is achieved. Net Sales Milestone Event First time annual Net Sales of the Licensed Product in the Licensed Territory (other than Hong Kong) exceed: 1) $[***] 2) $[***] 3) $[***] Total: Net Sales Milestone Payment $[***] $[***] $[***] $[***] (b) For the avoidance of doubt each Net Sales Milestone Payment shall be payable on the first occurrence of the corresponding Net Sales Milestone Event, and if annual Net Sales in a given Calendar Year exceed more than one (1) applicable threshold, then all corresponding Net Sales Milestone Payments shall be payable. Licensed Products sold after the expiration of the Royalty Term shall not be included in the calculation of annual Net Sales to determine whether any Net Sales threshold has been achieved. 33 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 8.4 Royalties. (a) Royalty Payment. During the Royalty Term, Zai shall pay to Karuna tiered royalties as calculated by multiplying the applicable royalty rate set forth in the table below by the corresponding amount of incremental, aggregated Net Sales of all Licensed Products in the Licensed Territory (other than Hong Kong) in a Calendar Year (a “Royalty Payment”). Each Royalty Payment shall be non-creditable, irrevocable, and non-refundable. The tiered royalty rates on Net Sales shall be as set forth below: For that portion of annual aggregated Net Sales of all Licensed Products in the Licensed Territory (other than Hong Kong) in a Calendar Year Royalty Rate 1) [***] 2) [***] 3) [***] 4) [***] [***]% [***]% [***]% [***]% (b) Royalty Term. The Royalty Payments payable under this Section 8.4 shall be payable on the Licensed Product-by-Licensed Product and Region-by-Region basis from the First Commercial Sale of the applicable Licensed Product in such Region until the latest of: (i) the date the last-to-expire Valid Claim in such Region expires; (ii) the close of business of the day that is exactly twelve (12) years after the date of the First Commercial Sale of the Licensed Product in such Region; and (iii) the expiration date of any Regulatory Exclusivity for the Licensed Product in such Region (the “Royalty Term”). Licensed Products sold after the expiration of the Royalty Term shall not be included in the calculation of annual Net Sales to determine the applicable royalty tiers. (c) Royalty Reductions. During the Royalty Term, on the Licensed Product-by-Licensed Product and Region- by-Region basis, subject to Section 8.4(c)(vi), the royalty rate applicable to Net Sales of the Licensed Product in such Region shall be reduced by [***] after the expiration of the last-to-expire Valid Claim in such Region. i. ii. During the Royalty Term, on the Licensed Product-by-Licensed Product and Region- by-Region basis, subject to Section 8.4(c)(vi), if at any time during a Calendar Quarter following receipt of all necessary Regulatory Approvals from the applicable Regulatory Authorities in such Region to market and sell such Third Party Product as a pharmaceutical product for one or more Indications for the corresponding Licensed Product in such Region (the “Generic Launch Quarter”), the applicable royalty rate for Net Sales, in such Region for such Licensed Product shall be reduced as follows: (A) if for any Calendar Quarter after the Generic Launch Quarter the comparable unit sales of the Third Party Product(s) in such Region is greater than [***] but equal to or less than [***] of the comparable unit sales of such Licensed Product, then the royalty payments owed by the Zai for such Licensed Product in such Region for such Calendar Quarter shall be reduced by [***], and (B) if for any Calendar Quarter after the Generic Launch Quarter the comparable unit sales of the Third Party Product(s) in such Region is greater than [***] of the comparable unit sales of such Licensed Product, then the royalty payments owed by Zai for such Licensed Product in such Region for the remainder of the Royalty Term shall be reduced by [***]. iii. iv. [***]. [***]. 34 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED v. If Zai reasonably determines in good faith after advice of counsel that it is [***] and enters into such a license, subject to Section 8.4(c)(vi), on the Licensed Product-by-Licensed Product and Region-by-Region basis, Zai shall have the right to deduct, from the Royalty Payment that would otherwise have been due pursuant to this Section 8.4, an amount equal to [***] of the royalties paid by Zai to such Third Party pursuant to such license on account of the sale of the Licensed Product in such Region the Licensed Territory; provided that (A) prior to entering into such license, Zai shall [***]; and (B) in the event [***]. Within [***] following the execution of any such Third Party license, Zai shall provide Karuna with a true and complete copy of such Third Party license. Notwithstanding the foregoing, in no event shall the operation of Section 8.4(c)(i) through 8.4(c)(v), individually or in combination, reduce the royalties payable by Zai to Karuna with respect to the Net Sales of the Licensed Product in any Region in the Licensed Territory in any Calendar Quarter to an amount less than [***] of the amount that would otherwise have been due pursuant to Section 8.4(a) with respect to such Net Sales. vi. due pursuant to this Section 8.4, and continuing for so long as royalties are due hereunder: (d) Royalty Reports. Following the First Commercial Sale of the Licensed Product for which royalties are royalty report (in a template agreed to by the Parties) showing, on a Region-by-Region basis: i. Zai shall, within [***] after the end of each Calendar Quarter, provide Karuna with a (1) (2) (3) (4) (5) (6) (7) [***]; [***]; [***]; [***]; [***]; [***]; [***]. (e) Royalty Payment. Concurrently with each royalty report provided by Zai under Section 8.4(d) above, Zai shall pay to Karuna applicable royalties for each Calendar Quarter within [***] after the end of such Calendar Quarter. If no royalty is due for any Calendar Quarter following commencement of the reporting obligation, Zai shall so report. 8.5 Payment. Mode of Payment. All payments to be made under this Agreement shall be made in U.S. Dollars and shall be paid by electronic transfer in immediately available funds to such bank account in the United States as is designated in writing by Karuna. All payments shall be free and clear of any transfer fees or charges. (a) (b) Currency Exchange Rate. All payments under this Agreement shall be payable in U.S. Dollars. The rate of exchange to be used in computing the amount of currency equivalent in U.S. Dollars for calculating Net Sales in a Calendar Quarter (for purposes of both the royalty calculation and whether a Net Sales milestone has been achieved) shall be made at the average exchange rate as published by the Wall Street Journal for such Calendar Quarter, or such other source as the Parties may agree in writing. 35 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED Payment Timeline. Except as otherwise provided herein, all payments to be made by one Party to the other Party under this Agreement require a corresponding invoice and shall be due within [***] (or such other time period set forth herein) following such Party’s receipt of an invoice from the other Party. (c) 8.6 Audits. Zai shall keep, and shall require its Affiliates and Sublicensees to keep (all in accordance with the GAAP or IFRS), for a period not less than [***] from the end of the Calendar Year to which they pertain, complete and accurate records in sufficient detail to properly reflect Net Sales and to enable any Milestone Payment payable hereunder to be determined. (a) (b) Upon the written request of Karuna, Zai shall permit, and shall cause its Affiliates and Sublicensees to permit, an independent certified public accounting firm of nationally recognized standing selected by Karuna and reasonably acceptable to Zai, at Karuna’s expense, to have access during normal business hours to such records of Zai or its Affiliates as may be reasonably necessary to verify the accuracy of the payments hereunder for any Calendar Year ending not more than [***]. These rights with respect to any Calendar Year shall [***] the end of any such Calendar Year and shall be limited to once each Calendar Year (provided that the foregoing frequency limit shall not apply if Karuna has reasonable cause). The accounting firm shall provide Karuna and Zai with a written report [***]. If such accounting firm concludes that an underpayment was made, then Zai shall pay the amount due within [***] after receipt of such accounting firm’s written report so concluding. If such accounting firm concludes that an overpayment was made, then such overpayment shall be credited against any future payment due to Karuna hereunder (if there is no future payment due, then Karuna shall promptly refund such overpayment to Zai). Karuna shall bear the full cost of such audit unless such audit discloses that the additional payment payable by Zai for the audited period is more than [***] of the amount otherwise paid for that audited period, in which case Zai shall pay the reasonable fees and expenses charged by the accounting firm. (c) Zai shall include in each relevant sublicense granted by it a provision requiring any Sublicensee to maintain records of sales of Licensed Product made pursuant to such sublicense, and to grant access to such records by an accounting firm to the same extent and under the same obligations as required of Zai under this Agreement. Karuna shall advise Zai in advance of each audit of any such Sublicensee with respect to the Net Sales of the Licensed Product either by Karuna or its designated auditor under the terms of such Sublicensee agreement. The accounting firm shall provide Karuna and Zai with a copy of the audit report at the same time. Karuna shall pay the full costs charged by the accounting firm, unless the audit discloses that the additional payments payable to Karuna for the audited period is more than [***] from the amounts otherwise paid for that audited period, in which case Zai shall pay the reasonable fees and expenses charged by the accounting firm. 8.7 Interest. Each Party shall pay interest on any amounts overdue under this Agreement [***] from the day payment was initially due; provided, however, that in no case shall such interest rate exceed the highest rate permitted by Applicable Laws. The payment of such interest shall not foreclose a Party from exercising any other rights it may have because any payment is overdue. 8.8 Taxes. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 36 (a) Each Party shall be entitled to deduct and withhold from any amounts payable under this Agreement such taxes as are required to be deducted or withheld therefrom under any provision of Applicable Law (other VAT and Withholding VAT Taxes described in 9.8(c)). The Party that is required to make such withholding shall: (i) timely remit the taxes to the proper taxing authority; and (ii) send evidence of the obligation, together with proof of tax payment, to the other Party on a timely basis following such tax payment. Each Party shall reasonably cooperate with the other Party in claiming refunds or exemptions from such deductions or withholdings under any relevant agreement or treaty which is in effect to ensure that any amounts required to be withheld pursuant to this Section 8.8 are reduced in amount to the fullest extent permitted by Applicable Law. In addition, the Parties shall cooperate in accordance with Applicable Law to minimize indirect taxes (such as VAT, sales tax, consumption tax, and other similar taxes) in connection with this Agreement. In the event of any such any withholding is required to be withheld and deducted from payments by Zai (or its Affiliate paying on behalf of Zai) pursuant to this Agreement under Applicable Laws, notwithstanding anything to the contrary herein, [***]. (b) [***]. If Zai is required to deduct or withhold any VAT on any payments payable by Zai under this Agreement (the “Withholding VAT Taxes”), Zai will (i) pay such Withholding VAT Tax on behalf of Karuna to the appropriate Governmental Authority, (ii) furnish Karuna with proof of payment of such Withholding VAT Tax within [***] following such payment, and (iii) [***]. Zai will promptly provide to Karuna applicable receipts evidencing payment of such Withholding VAT Taxes and other documentation reasonably requested by Karuna. Upon Zai’s request, Karuna shall provide reasonable assistance to Zai for Zai to recover any such Withholding VAT Taxes. For clarity, [***]. 8.9 Blocked Currency. If by Applicable Laws in a Region in the Licensed Territory, conversion into Dollars or transfer of funds of a convertible currency to the United States becomes materially restricted, forbidden or substantially delayed, then Zai shall promptly notify Karuna and, thereafter, amounts accrued in such country or region under this ARTICLE 8 shall be paid to Karuna (or its designee) in such country or Region in local currency by deposit to an escrow account in a local bank designated by Karuna and to the credit of Karuna, unless the Parties otherwise agree. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 37 ARTICLE 9 CONFIDENTIALITY; PUBLICATION 9.1 Nondisclosure Obligation. (a) For the Term and [***] thereafter, the Party receiving (the “Receiving Party”) the Confidential Information of the other Party (the “Disclosing Party”) shall keep confidential and not publish, make available or otherwise disclose any Confidential Information to any Third Party, without the express prior written consent of the Disclosing Party; provided, however, the Receiving Party may disclose certain Confidential Information to those of its Affiliates, officers, directors, employees, agents, consultants or independent contractors, existing and potential licensees, sublicensees, upstream licensors, and bona-fide purchasers of such Receiving Party who need to know such Confidential Information in connection with exercising rights or performing obligations as contemplated by this Agreement or any other written agreement between the Parties and are bound by confidentiality and non-use obligations with respect to such Confidential Information consistent with those set forth herein; the Receiving Party shall remain responsible for the compliance by its Affiliates, officers, directors, employees, agents, consultants or independent contractors (including licensees and sublicensees) with such confidentiality and non-use obligations. Either Party may disclose the terms and existence of this Agreement to any bona fide existing or potential investors, lenders and acquirers and the accountants and advisors of any of the foregoing who are bound by a written agreement (or in the case of attorneys or other professional advisors, formal ethical duties) requiring such recipients to treat, hold and maintain the terms of this Agreement as confidential information in a manner that is consistent with the terms and conditions of this Agreement. The Receiving Party shall exercise at a minimum the same degree of care it would exercise to protect its own Confidential Information (and in no event less than a reasonable standard of care) to keep confidential the Confidential Information. The Receiving Party shall use the Confidential Information solely in connection with exercising rights or performing obligations as contemplated by this Agreement or any other written agreement between the Parties. (b) It shall not be considered a breach of this Agreement if the Receiving Party discloses Confidential Information or either Party discloses the terms and conditions of this Agreement in order to comply with a lawfully issued court or governmental order or with a requirement of Applicable Laws or the rules of any internationally recognized stock exchange; provided that: (i) the Receiving Party gives prompt written notice of such disclosure requirement to the Disclosing Party and cooperates with the Disclosing Party’s efforts to oppose such disclosure or obtain a protective order for such Confidential Information, and (ii) if such disclosure requirement is not quashed or a protective order is not obtained, the Receiving Party shall only disclose those portions of the Confidential Information that it is legally required to disclose and shall make a reasonable effort to obtain confidential treatment for the disclosed Confidential Information. To the extent there is any conflict between this ARTICLE 9 and any other agreement related to Confidential Information entered into between the Parties, including the Confidentiality Agreement, the terms of this ARTICLE 9 shall control to the extent of such conflict. 38 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED (c) Scientific Publication. The JSC shall discuss the publication strategy for the publication of scientific papers, abstracts, meeting presentations and other disclosure of the results of the Clinical Trials carried out under this Agreement, taking into consideration the Parties’ interest in publishing the results of the Licensed Product Development work in order to obtain recognition within the scientific community and to advance the state of scientific knowledge, and the need to protect Confidential Information, intellectual property rights and other business interests of the Parties; provided that Zai’s publication outside the Licensed Territory (including in any form or media that may be distributed outside the Territory) shall require Karuna’s prior written consent, not to be unreasonably withheld. Zai shall provide Karuna with the opportunity to review and comment on any proposed publication [***] that pertains to the Licensed Product at least [***] prior to its intended submission for publication, which shall be limited to data, results and the like with respect to patients or subjects located in the Licensed Territory. Karuna shall provide Zai with its comments, if any, within [***] after the receipt of such proposed publication. Zai shall consider in good faith the comments provided by Karuna and shall comply with Karuna’s request to: (a) remove any and all Confidential Information of Karuna from such proposed publication; and (b) if Karuna determines that such publication would entail the disclosure of patentable Inventions upon which patent applications should be filed prior to such publication, delay the submission for a period as may be reasonably necessary for the drafting and filing of a patent application covering such Inventions; provided that such additional period shall not exceed [***] from the proposed date of the intended submission for publication. Zai agrees to acknowledge the contribution of Karuna and its employees in all publications as scientifically appropriate. 9.2 Publication and Listing of Clinical Trials. With respect to the listing of Clinical Trials or the publication of Clinical Trial results for the Licensed Product and to the extent applicable to a Party’s activities conducted under this Agreement, each Party shall comply with (a) the Pharmaceutical Research and Manufacturers of America (PhRMA) Guidelines on the listing of Clinical Trials and the Publication of Clinical Trial results, and (b) any Applicable Law or applicable court order, stipulations, consent agreements, and settlements entered into by such Party. The Parties agree that any such listings or publications made pursuant to this Section 9.2 shall be considered a publication for purposes of this Agreement and shall be subject to Section 9.1. 9.3 Publicity; Use of Names. (a) Subject to permitted disclosures under Section 9.1, each of the Parties agrees not to disclose to any Third Party the terms and conditions of this Agreement without the prior approval of the other Party, except to (i) advisors (including consultants, financial advisors, attorneys and accountants), (ii) bona fide potential and existing investors, acquirers, merger partners or other financial or commercial partners on a need to know basis for the sole purpose of evaluating an actual or potential investment, acquisition or other business relationship, in each case under circumstances that reasonably protect the confidentiality thereof, or (iii) to the extent required by Applicable Laws, including securities laws and regulations. Notwithstanding the foregoing, the Parties agree to issue the initial press release(s) to announce the execution of this Agreement as contained in Schedule 9.3(a); thereafter, Karuna and Zai may each disclose to Third Parties the information contained in such press release(s) or in any other press releases or disclosures made in accordance with this Section 9.3, without the need for further approval by the other. 39 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED (b) The Parties acknowledge the importance of supporting each other’s efforts to publicly disclose results and significant developments regarding the Licensed Product for use in the Field in the Licensed Territory and other activities in connection with this Agreement, beyond what may be strictly required by Applicable Laws and the rules of a recognized stock exchange, and each Party may make such disclosures from time to time with respect to the Licensed Product in each case with the prior written approval of the other Party, which approval shall not be unreasonably withheld, conditioned or delayed. Such disclosures may include achievement of significant events in the Development (including regulatory process) or Commercialization of the Licensed Product for use in the Field in the Licensed Territory. Unless otherwise requested by the applicable Party, Zai shall indicate that Karuna is the licensor of the Licensed Product and Licensed Technology in each public disclosure issued by Zai regarding the Licensed Product. When Zai elects to make any public disclosure under this Section 9.3(b) or Karuna elects to make any public disclosure regarding results and significant developments regarding the Licensed Product for use in the Field in the Licensed Territory under this Section 9.3(b), the disclosing Party shall give the other Party at least [***]prior to its intended disclosure to review and comment on such statement, it being understood that (i) if the other Party does not notify such Party in writing within [***] or such shorter period if required by Applicable Laws of any reasonable objections, as contemplated in this Section 9.3(b), such disclosure shall be deemed approved, and (ii) if the other Party does notify such Party in writing within the time period set forth in clause (i) above, and reasonably determines that such public disclosure would entail the public disclosure of the other Party’s Confidential Information or of patentable Inventions upon which patent applications should be filed prior to such public disclosure, such public disclosure shall be delayed for such period as may be reasonably necessary for deleting any such Confidential Information of the other Party, or the drafting and filing of a patent application covering such Inventions; provided that such additional period shall not exceed [***] from the proposed date of the public disclosure, and, in any event, the other Party shall work diligently and reasonably to agree on the text of any proposed disclosure in an expeditious manner. The principles to be observed in such disclosures shall be accuracy, compliance with Applicable Laws and regulatory guidance documents, and reasonable sensitivity to potential negative reactions of applicable Regulatory Authorities. (c) The Parties acknowledge the need to keep investors and others informed regarding such Party’s business under this Agreement, including as required by Applicable Laws or the rules of a recognized stock exchange. To the extent a Party is publicly listed or becomes publicly listed, and subject to Section 9.3(b) as applicable, such Party may issue press releases or make disclosures to the SEC or other applicable agency as it determines, based on advice of counsel, as reasonably necessary to comply with Applicable Laws; provided that each Party shall provide the other Party with reasonable advance notice of such legally required disclosures. The Parties shall consult with each other on the provisions of this Agreement to be redacted in any filings made by a Party with the SEC or as otherwise required by Applicable Laws; provided that each Party shall have the right to make any such filing as it reasonably determines necessary under Applicable Laws. (d) The Parties agree and acknowledge that, upon reasonable request by Zai and subject to mutual agreement by the Parties, Zai may record or file this Agreement (or a summary or translation of this Agreement as is necessary to effect such recordation or filing) with any patent and trademark office or similar authority in the Licensed Territory, if Zai reasonably determines that such recordation or filing is beneficial or required to give effect to or protect its rights under this Agreement. Upon Zai’s reasonable request, Karuna shall provide such cooperation and reasonable assistance in connection with such recordation or filing. 9.4 Prior Confidentiality Agreement. As of the Effective Date, the terms of this ARTICLE 9 shall supersede any prior non- disclosure, secrecy or confidentiality provisions in any agreement between the Parties (or their Affiliates) relating to the subject of this Agreement, including such provisions in the Confidentiality Agreement. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 40 ARTICLE 10 REPRESENTATIONS, WARRANTIES, AND COVENANTS 10.1 Representations and Warranties of Each Party. Each Party represents and warrants to the other Party as of the Effective Date that: (a) it is a company or corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction in which it is incorporated, and has full corporate power and authority and the legal right to own and operate its property and assets and to carry on its business as it is now being conducted and as contemplated in this Agreement, including the right to grant the licenses granted by it hereunder; (b) (i) it has the corporate power and authority and the legal right to enter into this Agreement and perform its obligations hereunder; (ii) it has taken all necessary corporate action on its part required to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder; and (iii) this Agreement has been duly executed and delivered on behalf of such Party, and constitutes a legal, valid, and binding obligation of such Party that is enforceable against it in accordance with its terms, subject to the general principles of equity and subject to bankruptcy, insolvency, moratorium, judicial principles affecting the availability of specific performance and other similar laws affecting the enforcement of creditors’ rights generally; Party under this Agreement or performing its obligations under this Agreement, including any Existing In-License Agreement; and (c) it is not a party to any agreement that would prevent it from granting the rights granted to the other required to be obtained by such Party in connection with execution of this Agreement have been obtained. (d) all consents, approvals and authorization from all Governmental Authorities or other Third Parties 10.2 Additional Representations, Warranties and Covenants of Karuna. Karuna represents, warrants and covenants to Zai that as the Effective Date with respect to itself and its Affiliates: Karuna and its Affiliates are the sole owners or exclusive licensees of the Licensed Patents and material Licensed Know-How, and Karuna has the right under the Licensed Technology to grant the licenses to Zai as purported to be granted pursuant to this Agreement; (a) (b) Schedule 1.79 sets forth a complete and accurate list all Licensed Patents as of the Effective Date; neither Karuna nor any of its Affiliates is a party to any license or similar agreement under which it has granted or agreed to grant a license to any Third Party to any Licensed Technology that would conflict with the rights or licenses granted to Zai under this Agreement; (c) Licensed Technology which is inconsistent with the terms and conditions of this Agreement; (d) neither Karuna nor any of its Affiliates will grant any license, sublicense or other rights in or to the (e) Karuna and its Affiliates and their employees, consultants and contractors involved in the Development of the Compound and Licensed Product are not, and have not been, debarred or disqualified by any Regulatory Authority as of the Effective Date, and have complied in all material respects with all Applicable Laws in connection with the Development of the Compound and Licensed Product; 41 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED no claim or action has been brought against Karuna or, to Karuna’s knowledge, threatened in writing to Karuna, by any Third Party alleging that (i) the Licensed Patents are invalid or unenforceable, or (ii) the Exploitation of the Compound or Licensed Product infringes the Patents or misappropriates the Know-How of any Third Party; (f) (g) to its knowledge, the Exploitation of the Compound and Licensed Product does not infringe or misappropriate any Patent or Know-How of any Third Party; (h) it is not aware of any infringement or misappropriation of any Licensed Technology by any Third Party; except for the Existing In-License Agreements listed on Schedule 1.42, there is no material in-license agreement between Karuna or its Affiliates with any Third Party pursuant to which Karuna or its Affiliates has obtained Control to any Licensed Technology; (i) (j) it has provided Zai with true and complete copy of each Existing In-License Agreement, and each Existing In-License Agreement is in full force and effect; no notice of default or termination has been received or given under any Existing In-License Agreement and, to its knowledge, there is no act or omission by Karuna or its Affiliates that would provide a right to terminate any Existing In-License Agreement; (k) it will not knowingly breach any Existing In-License Agreement (and New Karuna In-License, if any); it will not terminate, modify or amend the Existing In-License Agreement (and New Karuna In-License, if any), or exercise, waive, release, or assign any rights thereunder, in any manner that would limit, restrict or otherwise materially adversely affect the rights of Zai hereunder without obtaining Zai’s prior written consent; (l) in the event of any notice of breach of any Existing In-License Agreement (and New Karuna In- License, if any) by Karuna or its Affiliate, Karuna will as promptly as practicable notify Zai in writing, and will use Commercially Reasonable Efforts to cure such breach, or, if Karuna reasonably determines that it has not committed such breach, use Commercially Reasonable Efforts to resolve such dispute; (m) in the event of any notice of breach of any Existing In-License Agreement (and New Karuna In- License, if any) by the applicable counter party in a manner that will or is likely to materially adversely affect Zai’s rights or obligations under this Agreement, Karuna will as promptly as practicable notify Zai in writing, and will use Commercially Reasonable Efforts to enforce such Existing In-License Agreement (and New Karuna In-License, if any) or resolve such dispute; and (n) all information provided by Karuna to Zai for due diligence purposes in relation to this Agreement is complete and accurate in all material respects. Without limiting the foregoing, it has disclosed or made available to Zai for review all material non-clinical and clinical data for the Compound and Licensed Product, and all other material information (including relevant correspondence with Regulatory Authorities) relating to the Compound and Licensed Product, in each case that would be material for Zai to assess the safety and efficacy of the Compound and Licensed Product. 10.3 Additional Representations, Warranties and Covenants of Zai. Zai represents, warrants and covenants to Karuna that as of the Effective Date with respect to itself and its Affiliates: (a) there are no legal claims, judgments or settlements against or owed by Zai or its Affiliates (nor any of their respective directors, officers, employees, Affiliates, nor any Person authorized to act on behalf of Zai or its Affiliates), or pending or, to Zai’s or its Affiliates’ actual knowledge, threatened, legal claims or litigation, in each case, relating to antitrust, anti-competition, anti-bribery or corruption violations, including under any Anti-Corruption Laws; and 42 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED (b) (c) Zai and its Affiliates are not, and have not been, debarred or disqualified by any Regulatory Authority; Zai has sufficient financial wherewithal (at the time when such financial resources are required) to (i) perform all of its obligations pursuant to this Agreement, and (ii) meet all of its obligations that come due in the ordinary course of business; (d) Zai shall, in the course of performing its obligations or exercising its rights under this Agreement, and shall cause its Affiliates, Sublicensees and Subcontractors to, in all material aspects comply with the Development Plan, all agreements referenced herein, all Applicable Laws, including as applicable, cGMP, GCP, GLP, and GSP standards, and shall not employ or engage any party who has been debarred by any Regulatory Authority, or, to its knowledge, is the subject of debarment proceedings by a Regulatory Authority; (e) Zai shall perform, and shall cause its Affiliate and Sublicensees and their respective Subcontractors to perform, all necessary or required record filings with and obtain all necessary or required licenses, approvals and permits from, all applicable Governmental Authorities in the Licensed Territory (including the HGR Approvals) for the conduct of Development activities and sharing of any data or information under this Agreement, and shall provide Karuna with copies of such record filings, licenses, approvals, and permits, [***]. 10.4 Compliance with Anti-Corruption Laws. that: (a) Notwithstanding anything to the contrary in this Agreement, each Party hereby covenants to each other it shall not, in the performance of this Agreement, perform any actions that are prohibited by local and other anti-corruption laws (collectively “Anti-Corruption Laws”, including the provisions of the U.S. Foreign Corrupt Practices Act, the U.K. Anti-Bribery Law, and the PRC Anti-Unfair Competition Law and the PRC Criminal Law, in each case, as amended) that may be applicable to either or both Parties to this Agreement; i. it shall not, in the performance of this Agreement, directly or indirectly, make any payment, or offer or transfer anything of value, or agree or promise to make any payment or offer or transfer anything of value, to a government official or government employee, to any political party or any candidate for political office or to any other Third Party with the purpose of influencing decisions related to either Party or its business in a manner that would violate Anti-Corruption Laws; ii. it shall, on request by the other Party, conduct reasonable investigation to verify that there has not been any violation of Anti-Corruption Laws by such Party or persons employed by or subcontractors (including, in the case of Zai, any Sublicensees or Subcontractors) used by such Party in the performance of this Agreement; iii. iv. it shall maintain records (financial and otherwise) and supporting documentation related to the subject matter of this Agreement in order to document or verify compliance with the provisions of this Section 10.4, and upon request of the other Party, upon reasonable advance notice, shall provide a Third Party auditor mutually acceptable to the Parties with access to such records for purposes of verifying compliance with the provisions of this Section 10.4. Acceptance of a proposed Third Party auditor may not be unreasonably withheld or delayed by either Party. It is expressly agreed that the costs related to the Third Party auditor shall be fully paid by the Party requesting the audit (unless such audit identifies any violation of the obligations under this Section 10.4, in which case the audited Party shall bear all the costs), and that any auditing activities may not unduly interfere with the normal business operations of Party subject to such auditing activities. The audited Party may require the Third Party auditor to enter into a reasonable confidentiality agreement in connection with such an audit. 43 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED To its knowledge as of the Effective Date and during the Term, neither Zai nor any of its subsidiaries nor any of their Affiliates, directors, officers, employees, distributors, agents, representatives, sales intermediaries or other Third Parties acting on behalf of Zai or any of its subsidiaries or any of their Affiliates: (b) including the U.S. Foreign Corrupt Practices Act (15 U.S.C. § 78 dd-1 et seq.); or i. has taken or shall take any action in violation of any applicable anticorruption law, has corruptly, offered, paid, given, promised to pay or give, or authorized or shall corruptly, offer, pay give, promise to pay or give or authorize, the payment or gift of anything of value, directly or indirectly, to any Public Official (as defined in Section 10.4(d) below), for the purposes of: ii. her official capacity; violation of his lawful duty; iii. iv. v. has influenced or shall influence any act or decision of any Public Official in his or has induced or shall induce such Public Official to do or omit to do any act in has secured or shall secure any improper advantage; or has induced or shall induce such Public Official to use his or her influence with a government, governmental entity, or commercial enterprise owned or controlled by any government (including state-owned or controlled veterinary or medical facilities) in obtaining or retaining any business whatsoever. vi. As of the Effective Date, none of the officers, directors, employees of Zai or of any of its Affiliates or agents acting on behalf of Zai or any of its Affiliates, in each case that are employed or reside outside the United States, are themselves Public Officials. (c) (d) For purposes of this Section 10.4, “Public Official” means (i) any officer, employee or representative of any regional, federal, state, provincial, county or municipal government or government department, agency or other division; (ii) any officer, employee or representative of any commercial enterprise that is owned or controlled by a government, including any state-owned or controlled veterinary or medical facility; (iii) any officer, employee or representative of any public international organization, such as the International Monetary Fund, the United Nations or the World Bank or similar organizations in each Region in the Licensed Territory; and (iv) any person acting in an official capacity for any government or government entity, enterprise or organization identified above. 10.5 NO OTHER REPRESENTATIONS OR WARRANTIES. EXCEPT AS EXPRESSLY STATED IN THIS AGREEMENT, NO REPRESENTATIONS OR WARRANTIES WHATSOEVER, WHETHER EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT, OR NON-MISAPPROPRIATION OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS, ARE MADE OR GIVEN BY OR ON BEHALF OF A PARTY. ALL SUCH REPRESENTATIONS AND WARRANTIES, WHETHER ARISING BY OPERATION OF LAW OR OTHERWISE, ARE HEREBY EXPRESSLY EXCLUDED. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 44 ARTICLE 11 INDEMNIFICATION 11.1 By Zai. Zai shall indemnify and hold harmless Karuna, its Affiliates, and their directors, officers, employees and agents (individually and collectively, the “Karuna Indemnitee(s)”) from and against all losses, liabilities, damages and expenses (including reasonable attorneys’ fees and costs) (individually and collectively, “Losses”) incurred by them in connection with any claims, demands, actions or other proceedings by any Third Party (individually and collectively, “Claims”) arising after the Effective Date to the extent arising from (a) the Exploitation of the Licensed Product in the Licensed Territory, including promotion of the Licensed Product and any actions (or omissions) in the performance of its regulatory activities, in each case by Zai or any of its Affiliates, Sublicensees, or Subcontractors, (b) the gross negligence, illegal conduct or willful misconduct of Zai or any of its Affiliates or Sublicensees, (c) Zai’s breach of any of its representations, warranties or covenants made in or pursuant to this Agreement or any covenants or obligations set forth in or entered into pursuant to this Agreement, or (d) Karuna holding any Regulatory Approval, Regulatory Submission or pricing and reimbursement approval for the Licensed Product for Zai’s benefit in accordance with Section 5.1, in each case of clauses (a) through (d) above except to the extent such Losses arise from, are based on, or result from any activity or occurrence for which Karuna is obligated to indemnify the Zai Indemnitees under Section 11.2. 11.2 By Karuna. Karuna shall indemnify and hold harmless Zai, its Affiliates, and their directors, officers, employees and agents (individually and collectively, the “Zai Indemnitee(s)”) from and against all Losses incurred by them in connection with any Claims to the extent arising from (a) Exploitation of the Compound and Licensed Product outside the Licensed Territory, including the promotion of the Licensed Product and any actions (or omissions) in the performance of its regulatory activities, in each case by Karuna or any of its Affiliates or licensees (other than Zai or its Affiliates or Sublicensees), or in the Licensed Territory with respect to Global Studies or any Manufacturing activities in the Licensed Territory of the Licensed Product for use outside of the Licensed Territory pursuant to Karuna’s Retained Rights, in each such case by Karuna or any of its Affiliates or licensees (other than Zai or its Affiliates, Sublicensees or Subcontractors); (b) the gross negligence, illegal conduct or willful misconduct of Karuna or any of its Affiliates or licensees (other than Zai), or (c) Karuna’s breach of any of its representations, warranties or covenants made in or pursuant to this Agreement or any covenants or obligations set forth in or entered into pursuant to this Agreement; in each case of clauses (a) through (c) above, except to the extent Losses arise from, are based on, or result from any activity or occurrence for which Zai is obligated to indemnify the Karuna Indemnitees under Section 11.1. 11.3 Defined Indemnification Terms. Either of the Zai Indemnitee or the Karuna Indemnitee shall be an “Indemnitee” for the purpose of this ARTICLE 11, and the Party that is obligated to indemnify the Indemnitee under Section 11.1 or Section 11.2 shall be the “Indemnifying Party.” 11.4 Defense. If any such Claims are made, the Indemnitee shall be defended at the Indemnifying Party’s sole expense by counsel selected by the Indemnifying Party and reasonably acceptable to the Indemnitee; provided that the Indemnitee may, at its own expense, also be represented by counsel of its own choosing. The Indemnifying Party shall have the sole right to control the defense of any such Claim, subject to the terms of this ARTICLE 11. 11.5 Settlement. The Indemnifying Party may settle any such Claim or otherwise consent to an adverse judgment (a) with prior written notice to the Indemnitee but without the consent of the Indemnitee where the only liability to the Indemnitee is the payment of money and the Indemnifying Party makes such payment, without admission of any wrongdoing or fault of the Indemnitee, or (b) in all other cases, only with the prior written consent of the Indemnitee, such consent not to be unreasonably withheld or delayed. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 45 11.6 Notice. The Indemnitee shall notify the Indemnifying Party promptly of any Claim with respect to which it seeks indemnification under Sections 11.1 or 11.2 and shall reasonably cooperate with all reasonable requests of the Indemnifying Party with respect thereto. 11.7 Permission by Indemnifying Party. The Indemnitee may not settle any such Claim or otherwise consent to an adverse judgment in any such Claim or make any admission as to liability or fault without the express written permission of the Indemnifying Party. 11.8 Insurance. Each Party shall procure and maintain insurance, including product liability insurance, with respect to its activities hereunder and which is consistent with normal business practices of prudent companies similarly situated at all times. Each Party shall provide the other Party with evidence of such insurance upon request and shall provide the other Party with written notice at least [***] prior to such Party’s decision or receipt of notice from the insurance company, as applicable, with respect to the cancellation, non-renewal or material decrease in the coverage level of such insurance. It is understood that such insurance shall not be construed to create a limit of either Party’s liability. Zai shall impose substantially identical obligations on its Affiliates (to the extent not named insureds under Zai’s coverages) and Sublicensees. 11.9 LIMITATION OF LIABILITY. SUBJECT TO AND WITHOUT LIMITING (A) THE INDEMNIFICATION OBLIGATIONS OF EACH PARTY WITH RESPECT TO THIRD PARTY CLAIMS UNDER SECTIONS 11.1 OR 11.2, (B) LIABILITY AS A RESULT OF A BREACH OF ARTICLE 9 OR (C) LIABILITY FOR BREACH OF COVENANTS UNDER SECTION 2.9, NEITHER PARTY OR ANY OF ITS AFFILIATES SHALL BE LIABLE TO THE OTHER PARTY UNDER ANY CONTRACT, WARRANTY, NEGLIGENCE, TORT, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR ANY SPECIAL, INDIRECT, INCIDENTAL, PUNITIVE, MULTIPLIED OR CONSEQUENTIAL DAMAGES OR FOR LOST PROFITS (EVEN IF DEEMED DIRECT DAMAGES) ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT. 11.10 No Third Party Beneficiary Rights. The provisions of this Agreement are for the sole benefit of the Parties and their successors and permitted assigns, and they shall not be construed as conferring any rights to any Third Party (including any Third Party beneficiary rights). ARTICLE 12 INTELLECTUAL PROPERTY 12.1 Ownership. Subject to the license grants under this Agreement, as between the Parties, Karuna shall own and retain all right, title and interest in and to all Product Inventions (and any intellectual property associated therewith), and Zai shall own and retain all right, title and interest in and to all Zai Inventions (and any intellectual property associated therewith). Inventorship shall be determined in accordance with U.S. patent laws. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 46 12.2 Disclosure of Inventions. Zai shall promptly disclose to Karuna in writing all Inventions created, conceived, developed or reduced to practice under this Agreement by or on behalf of Zai or its Affiliates. Zai, for itself and on behalf of its Affiliates, hereby assigns (and to the extent such assignment can only be made in the future hereby agrees to assign) to Karuna all its right, title and interest in and to any Product Inventions. Zai will cooperate, and will cause the foregoing persons and entities to cooperate, with Karuna to effectuate and perfect the foregoing ownership, including by promptly executing and recording assignments and other documents consistent with such ownership. For clarity, all Product Inventions assigned by Zai to Karuna shall be included in the Licensed Technology and licensed back to Zai under the terms and conditions of this Agreement, but Licensed Patents claiming such Product Inventions shall not be included in Valid Claim to determine Royalty Term. 12.3 Patent Prosecution. (a) Licensed Patents in the Licensed Territory. Karuna shall have the first right, but not the obligation, to conduct Patent Prosecution of the Licensed Patents in the Licensed Territory at its sole cost and expense. Karuna shall consult with Zai and keep Zai reasonably informed of the Patent Prosecution of the Licensed Patents in the Licensed Territory and shall provide Zai with all material correspondence received from any patent authority in the Licensed Territory in connection therewith. In addition, Karuna shall provide Zai with drafts of all proposed material filings and correspondence to any patent authority in the Licensed Territory in connection with the Patent Prosecution of the Licensed Patents for Zai’s review and comment prior to the submission of such proposed filings and correspondence. Karuna shall consider in good faith Zai’s comments on such Patent Prosecution but shall have final decision-making authority under this Section 12.3(a). Further, Karuna shall notify Zai of any decision to cease Patent Prosecution of any Licensed Patent in the Licensed Territory at least [***] before any due date for filing, payment or other action to avoid loss of rights, in which case Zai shall have the right to continue the Patent Prosecution of such Licensed Patent at Zai’s discretion and expense. If Zai decides to take over Patent Prosecution of a Licensed Patent in such Region(s) in the Licensed Territory, then Karuna shall promptly deliver to Zai copies of all necessary files related to such Licensed Patent in such Region(s) in the Licensed Territory and shall take all actions and execute all documents reasonably necessary for Zai to assume such responsibility. For the avoidance of doubt, Zai’s assumption of responsibility for Patent Prosecution of any Licensed Patent in any Region(s) in the Licensed Territory pursuant to this Section 12.3(a) shall not change the Parties’ respective ownership rights with respect to such Licensed Patent. 47 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED (b) Zai Patents. Zai shall, at its sole cost and expense, (i) have the sole right, but not the obligation, in the Licensed Territory to conduct the Patent Prosecution and maintenance of any Zai Patents; and (ii) have the first right, but not the obligation, outside the Licensed Territory, to conduct the Patent Prosecution and maintenance of any Zai Patents that are used by a Party or its Affiliates in the Exploitation of the Licensed Product, if any (“Zai Implemented Patents”). Zai shall keep Karuna reasonably informed of the status of all actions taken, including its plans to enter into national phase for PCT applications of Zai Implemented Patent in any country outside the Licensed Territory, and shall consider in good faith Karuna’s recommendations with respect to the Zai Implemented Patents prosecuted by Zai in the PCT stage or outside the Territory. Further, Zai shall notify Karuna of any decision to cease Patent Prosecution or maintenance of any Zai Implemented Patent outside the Licensed Territory (including any decision of not entering into national phase in any country outside the Licensed Territory) at least [***] before any due date for filing, payment or other action to avoid loss of rights, in which case Karuna shall have the right, but not the obligation, to continue the Patent Prosecution or maintenance of such Zai Implemented Patent outside the Licensed Territory (including entering into national phase in any country outside the Licensed Territory that Zai has decided not to enter) at Karuna’s discretion and expense. If Karuna decides to take over Patent Prosecution or maintenance of a Zai Implemented Patent outside the Licensed Territory, then Zai shall promptly deliver to Karuna copies of all necessary files related to such Zai Implemented Patent outside the Licensed Territory and shall take all actions and execute all documents reasonably necessary for Karuna to assume such responsibility. For the avoidance of doubt, Karuna’s assumption of responsibility for Patent Prosecution or maintenance of any Zai Implemented Patent outside the Territory pursuant to this Section 12.3(b) shall not change the Parties’ respective ownership rights with respect to such Zai Implemented Patent. 48 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 12.4 Enforcement. (a) Product Infringement. i. Each Party shall notify the other within [***] of becoming aware of any alleged or threatened infringement by a Third Party of any of the Licensed Patents in the Licensed Territory, by commercializing (or seeking Regulatory Approval to commercialize) the Licensed Product or any other product containing the Compound in the Field in the Licensed Territory, and any related declaratory judgment, opposition, or similar action by a Third Party alleging the invalidity, unenforceability or non-infringement of any Licensed Patent in the Licensed Territory, in each case, within the scope of the license grants in Section 2.1 (collectively “Product Infringement”). ii. Zai shall have the first right to bring and control any legal action in connection with such Product Infringement in the Licensed Territory at its own expense as it reasonably determines appropriate, provided that Karuna may, [***], elect to be represented by its own counsel and participate in such legal action. Notwithstanding the foregoing, Zai shall not settle or consent to entry of any judgment that would have a material adverse effect on the Licensed Product or any Licensed Patent without Karuna’s prior written consent. If Zai does not bring such legal action prior to the earlier of: (A) [***] following the receipt or delivery of the notice under Section 12.4(a)(i), or (B) [***] before the deadline, if any, set forth in the Applicable Laws for the filing of such actions, or discontinues the prosecution of any such action after filing without abating such infringement, Karuna shall have the right to bring and control any legal action in connection with such Product Infringement at its own expense as it reasonably determines appropriate. (b) Non-Product Infringement. Karuna shall have the exclusive right, but not the obligation, to bring and control any legal action in connection with any alleged or threatened infringement by a Third Party of any Licensed Patent that is not a Product Infringement, and any related declaratory judgment, opposition, or similar action by a Third Party alleging the invalidity, unenforceability or non-infringement of such Licensed Patent, at its own expense as it reasonably determines appropriate. (c) Enforcement of Zai Patents. Karuna shall have the first right, but not the obligation, to bring and control any legal action in connection with any alleged or threatened infringement by a Third Party of any of the Zai Implemented Patents, which infringement takes place outside the Licensed Territory by commercializing (or seeking Regulatory Approval to commercialize) the Licensed Product or any other product containing the Compound in the Field outside the Licensed Territory, and any related declaratory judgment, opposition, or similar action by a Third Party alleging the invalidity, unenforceability or non-infringement of any of the Zai Implemented Patents outside the Licensed Territory, at its own expense as it reasonably determines appropriate, in each case within the scope of the license grants in Section 2.2. Notwithstanding the foregoing, Karuna shall not settle or consent to entry of any judgment that would have a material adverse effect on any Zai Implemented Patent without Zai’s prior written consent. If Karuna does not bring such legal action prior to the earlier of: (i) [***] following receipt or delivery of notice between the Parties regarding such alleged infringement, or (ii) [***] before the deadline, if any, set forth in the Applicable Laws for the filing of such actions, or discontinues the prosecution of any such action after filing without abating such infringement, Zai shall have the right to bring and control any legal action in connection with infringement at its own expense as it reasonably determines appropriate. Except as otherwise provided under this Section 12.4(c), Zai shall have the exclusive right, but not the obligation, to bring and control any legal action in connection with any alleged or threatened infringement by a Third Party of any of the Zai Patents, and any related declaratory judgment, opposition, or similar action by a Third Party alleging the invalidity, unenforceability or non-infringement of any of the Zai Patents anywhere in the world, at its own expense as it reasonably determines appropriate. 49 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED (d) Coordination. At the request of the Party bringing an action related to Product Infringement or otherwise as described in this Section 12.4, the other Party shall provide reasonable assistance in connection therewith, including by executing reasonably appropriate documents, cooperating in discovery and joining as a party to the action if required by Applicable Laws to pursue such action, at each such Party’s sole cost and expense. In connection with an action related to Product Infringement or otherwise as described in this Section 12.4, the Party bringing the action shall not enter into any settlement admitting the invalidity or non-infringement of, or otherwise impairing the other Party’s rights in the Licensed Patents or Zai Patents, as applicable, without the prior written consent of the other Party (which consent shall not be unreasonably delayed, withheld or conditioned). The enforcing Party shall keep the non-enforcing Party reasonably informed of the status of any action it brought in connection with such Product Infringement or otherwise as described in this Section 12.4. The non-enforcing Party shall be entitled to attend any substantive meetings, hearings, or other proceedings related to any such action pursued by the enforcing Party. The enforcing Party shall provide the non-enforcing Party with copies of all pleadings and other documents to be filed with the court reasonably in advance and shall consider in good faith reasonable and timely input from the non- enforcing Party during the course of the action. (e) Recoveries. Any recoveries resulting from enforcement action relating to a claim of Product Infringement or otherwise as described in this Section 12.4 shall be first applied against payment of the enforcing Party’s costs and expenses in connection therewith and then the non-enforcing Party’s costs and expenses in connection therewith. Any such recoveries in excess of such costs and expenses shall [***]. 12.5 Defense. (a) Each Party shall notify the other in writing of any allegations it receives from a Third Party that the Exploitation of the Compound or Licensed Product in the Field in the Licensed Territory or any embodiment of any technology or intellectual property licensed by the other Party under this Agreement infringes the intellectual property rights of such Third Party. Such notice shall be provided promptly, but in no event after more than [***] following receipt of such allegations. Such written notice shall include a copy of any summons or complaint (or the equivalent thereof) received regarding the foregoing. Thereafter, the Parties shall promptly meet to consider the claim or assertion and the appropriate course of action and may, if appropriate, agree on and enter into a “common interest agreement” wherein the Parties agree to their shared, mutual interest in the outcome of such potential dispute. Each Party shall assert and not waive the joint defense privilege with respect to all communications between the Parties. (b) As between the Parties, Zai shall have the first right, but not the obligation to control and be solely responsible for the defense of any such suit against Zai, at Zai’s sole cost and expense; provided, however, Zai shall not enter into any compromise or settlement relating to such suit that (i) admits the invalidity or unenforceability of any Licensed Patents; or (ii) requires abandonment of any Licensed Patents; or (iii) contemplates payment or other action by Karuna or has a material adverse effect on Karuna’s business, in all cases ((i) through (iii)), without obtaining the prior written consent of Karuna (which consent shall not be unreasonably delayed, withheld or conditioned). (c) If Zai decides not to bring such legal action subject to its first right, it shall so inform Karuna promptly and Karuna shall have the right, but not the obligation, to bring and control any such legal action in connection with such infringement in the Licensed Territory at its own expense as it reasonably determines appropriate; provided, however, Karuna shall not enter into any compromise or settlement relating to such suit that (i) admits the invalidity or unenforceability of any Licensed Patents; or (ii) requires abandonment of any Licensed Patents; or (iii) contemplates payment or other action by Zai or has a material adverse effect on Zai’s business, in all cases ((i) through (iii)), without obtaining the prior written consent of Zai (which consent shall not be unreasonably delayed, withheld or conditioned). 50 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED (d) Upon the defending Party’s request and at the defending Party’s expense, the non-defending Party shall provide reasonable assistance to the defending Party for such defense and shall join such suit if deemed a necessary party. If the non- defending Party does not join such suit, the defending Party shall keep the non-defending Party reasonably informed of the status of such suit. The non-defending Party shall be entitled to attend any substantive meetings, hearings, or other proceedings related to such suit. The defending Party shall provide the non-defending Party with copies of all pleadings and other documents to be filed with the court reasonably in advance and shall consider in good faith reasonable and timely input from the non-defending Party during the course of the suit. 12.6 Patent Marking. Zai agrees to mark, and have its Affiliates and Sublicensees mark, all patented Licensed Product they sell or distribute pursuant to this Agreement in accordance with the applicable patent statutes or regulations in the Regions of sale thereof. 12.7 Bankruptcy Protection. All licenses granted by one Party to the other Party under this Agreement are and shall otherwise be deemed to be for purposes of Section 365(n) of Title 11, United States Code or any applicable foreign equivalent laws (the “Bankruptcy Code”) licenses of rights to “intellectual property” as defined in Section 101 of the Bankruptcy Code. Each Party, as the licensee, shall retain and may fully exercise all of its rights and elections under the Bankruptcy Code. To the extent permitted under Applicable Law, upon the bankruptcy of a Party, the other Party shall further be entitled to a complete duplicate of, or complete access to, any such intellectual property, and such, if not already in its possession, shall be promptly delivered to such other Party, unless the bankruptcy Party elects to continue, and continues, to perform all of its obligations under this Agreement. ARTICLE 13 TERMS AND TERMINATION 13.1 Term and Expiration. Term. The term of this Agreement shall be effective as of the Effective Date, and shall continue in effect until the expiration of the last Royalty Term with respect to for all Licensed Product in each Region in the Licensed Territory (the “Term”, and the date of such expiration with respect to such Region, the “Expiration Date”). Following the Expiration Date, [***]. (a) (b) Expiration of Royalty Term. On a Region-by-Region and Licensed Product-by-Licensed Product basis, upon the expiration of the Royalty Term for a given Licensed Product in a given Region, the licenses granted by Karuna to Zai under Section 2.1 of this Agreement in such Region with respect to the Licensed Product in the Field shall become fully paid-up, non-exclusive, perpetual, irrevocable and sublicenseable in multiple tiers. 13.2 Termination for Convenience. This Agreement may be terminated by Zai at any time for convenience upon [***] advance written notice to Karuna. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 51 13.3 Termination for Material Breach. This Agreement may be terminated in its entirety, at any time during the Term upon [***] (or [***] with respect to any payment breach) written notice by either Party if the other Party is in material breach of this Agreement and, if such breach is curable, such breach has not been cured within [***] (or [***] with respect to any payment breach) of such written notice. Notwithstanding the foregoing, if the alleged breaching Party disputes the existence or materiality of the alleged breach, the other Party shall not have the right to terminate this Agreement unless and until it is determined in accordance with ARTICLE 14 that the alleged breaching Party has materially breached this Agreement and such breaching Party fails to cure such breach within [***] (or [***] with respect to any payment breach) after such determination. 13.4 Termination for Insolvency. Each Party shall have the right to terminate this Agreement upon delivery of written notice to the other Party in the event that (a) such other Party files in any court or agency pursuant to any statute or regulation of any jurisdiction a petition in bankruptcy or insolvency or for reorganization under the Chapter 7 of the United States of Bankruptcy Code or other similar Applicable Law or similar arrangement for the benefit of creditors or for the appointment of a receiver or trustee of such other Party or its assets, (b) such other Party is served with an involuntary petition against it in any insolvency proceeding and such involuntary petition has not been stayed or dismissed within [***] of its filing, or (c) such other Party makes an assignment of substantially all of its assets for the benefit of its creditors. 13.5 Termination for Patent Challenge. Except to the extent the following is unenforceable under the laws of a particular jurisdiction, Karuna may terminate this Agreement in its entirety upon [***] written notice to Zai if Zai or its Affiliates or Sublicensees commences a legal, administrative or other action challenging the validity, enforceability or scope of any Licensed Patent anywhere in the world, unless (a) such action is withdrawn during such [***] period or, (b) if such action is commenced by a Sublicensee, Zai terminates its sublicense during such [***] period; provided however that Karuna shall not have the right to terminate this Agreement under this Section 13.5 if such action (i) is made as a defense against any claim, action or proceeding with respect to infringement of a Licensed Patent asserted against Zai or its Affiliate or Sublicensee; or (ii) is a legal or administrative proceeding derived from a bona fide inventorship dispute or an argument to distinguish the Product Invention from other inventions in the ordinary course of patent prosecution. 13.6 Termination by Mutual Agreement. This Agreement may be terminated by the Parties’ mutual written agreement. 13.7 Election to Terminate. If either Party has the right to terminate under Sections 13.3 through 13.5, it may at its sole option, elect either to (a) terminate this Agreement and pursue any legal or equitable remedy available to it, or (b) maintain this Agreement in effect and pursue any legal or equitable remedy available to it. 13.8 Effects of Termination. Upon the termination of this Agreement for any reason, unless otherwise provided in this Section 13.8, all rights and licenses granted to each Party herein shall immediately terminate, and all sublicenses of such rights and licenses shall also terminate. Upon termination of this Agreement, [***]. (a) (b) Upon termination of this Agreement for any reason, the following additional provisions shall apply: 52 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED i. Reversion of Rights to Karuna. Any rights and licenses with respect to the Licensed Product granted to Zai under this Agreement shall immediately terminate, and all such rights shall revert back to Karuna. In addition, the licenses granted by Zai to Karuna pursuant to Section 2.2 shall continue and become exclusive with respect to the Licensed Territory, and shall automatically be extended to include Exploitation of the Licensed Product in the Field in the Licensed Territory, provided that, if this Agreement is terminated by Zai pursuant to Section 13.3, such license shall only be granted by Zai upon agreement by the Parties on a reasonable reversion royalty payment to Zai, in which case, Clauses (ii) through (v) below shall apply only after the Parties’ agreement on such reversion royalty. ii. Regulatory Materials; Data. Zai shall, and shall cause its Affiliates and Sublicensees to, [***], to the maximum extent permitted by Applicable Laws at the time of any such termination to promptly (A) assign all Regulatory Submissions and Regulatory Approvals and pricing and reimbursement approvals of Licensed Product to Karuna, and (B) assign all data generated by or on behalf of Zai or its designee while conducting Development or Commercialization activities under this Agreement to Karuna or its designee, including non-clinical and clinical studies conducted by or on behalf of Zai on Licensed Product and all pharmacovigilance data (including all Adverse Event database information) on Licensed Product. Trademarks. Zai shall, and shall cause its Affiliates and Sublicensees, to promptly transfer and assign to Karuna or its designee, [***], all Product Marks (excluding the corporate name and logo of Zai, its Affiliates and Sublicensees). iii. iv. Transition Assistance. Zai shall, and shall cause its Affiliates and Sublicensees, to provide reasonable administrative assistance, [***], as may be reasonably necessary or useful for Karuna or its designee to commence or continue Developing or Commercializing Licensed Product in the Licensed Territory, including transferring or amending as appropriate, upon request of Karuna, any agreements or arrangements with Third Party to Develop, Manufacture and Commercialize the Licensed Product in the Licensed Territory. To the extent that any such contract between Zai and a Third Party is not assignable to Karuna or its designee, then Zai shall reasonably cooperate with Karuna to arrange to continue to and provide such services from such entity (for clarity, Karuna shall be responsible for paying the cost of such services), including, where applicable, continue to supply the Licensed Product in the Field in the Licensed Territory to Karuna or its designee for a reasonable period of time (which period shall not exceed [***] to ensure a smooth transitioning and continuous operation of any Development, Manufacture and Commercialization activities for the Licensed Product in the Field in the Licensed Territory. v. Ongoing Clinical Trial. If at the time of such termination, any Clinical Trials for the Licensed Product are being conducted by or on behalf of Zai, then, at Karuna’s election on a Clinical Trial-by-Clinical Trial basis: (1) Zai shall, and shall cause its Affiliates and Sublicensees to, (A) fully cooperate with Karuna to transfer the conduct of all such Clinical Trial to Karuna or its designee, or (B) continue to conduct such Clinical Trials for so long as necessary to enable such transfer to be completed without interruption of any such Clinical Trials but no more than [***], and in each case of (A) and (B), [***], unless this Agreement is terminated by Zai pursuant to Section 13.3, in which case Karuna shall be responsible for all such costs; and (2) Zai shall, and shall cause its Affiliates and Sublicensees to, [***], orderly wind down the conduct of any such Clinical Trial which is not assumed by Karuna under clause (1). 53 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED vi. Preclinical Studies. In the event that as of the date a notice of termination has been issued Zai is conducting any ongoing preclinical work with respect to the Licensed Product in support of a current Regulatory Approval or future regulatory filings for an Indication that is the subject of ongoing clinical development, including without limitation ongoing stability or toxicology studies of the Licensed Product, Zai agrees to promptly inform Karuna of the status of each preclinical activity and at Karuna’s election either: (A) terminate such preclinical activity, (B) continue to conduct any such preclinical studies for a period of no more than [***] after the effective date of such termination, or (C) promptly transition to Karuna or its designee such preclinical studies, in each case, [***], unless this Agreement is terminated by Zai pursuant to Section 13.3, in which case Karuna shall be responsible for all such costs. vii. Inventory. At Karuna’s election and request, Zai shall (A) upon Karuna’s request, transfer to Karuna or its designee all inventory of the Licensed Product provided by Karuna [***] then in possession or control of Zai, its Affiliates or Sublicensees; provided that Karuna shall pay Zai a price equal to [***] or (B) (x) continue to use Commercially Reasonable Efforts to Commercialize all inventory of the Licensed Product then in possession or control of Zai for a period [***] after the effective date of such termination and make the corresponding payments, including any Milestone Payments or royalties to Karuna under this Agreement as though this Agreement had not been terminated and (y) after such for a period [***] after the effective date of such termination, transfer to Karuna or its designee any remaining inventory of the Licensed Product to Karuna or its designee at a price equal to [***]. viii. Return of Confidential Information. At the Disclosing Party’s election, the Receiving Party shall return (at Disclosing Party’s expense) or destroy all tangible materials comprising, bearing, or containing any Confidential Information of the Disclosing Party relating to the Licensed Product that are in the Receiving Party’s or its Affiliates’ or Sublicensees’ possession or control and provide written certification of such destruction (except to the extent any information is the Confidential Information of both Parties or to the extent that the Receiving Party has the continuing right to use the Confidential Information under this Agreement); provided that the Receiving Party may retain one copy of such Confidential Information for its legal archives. Notwithstanding anything to the contrary set forth in this Agreement, the Receiving Party shall not be required to destroy electronic files containing such Confidential Information that are made in the ordinary course of its business information back-up procedures pursuant to its electronic. Other Remedies. Termination or expiration of this Agreement for any reason shall not constitute a waiver or release of, or otherwise be deemed to prejudice or adversely affect, any rights, remedies or claims, whether for damages or otherwise, that a Party may have hereunder or that may arise out of or in connection with such termination or expiration. (a) pursuant to Section 13.3, all of the provisions of Section 13.8(b) shall apply, except that [***]. (b) Termination by Zai Due to Material Breach. Upon the termination of this Agreement by Zai 13.9 Survival. Termination or expiration of this Agreement shall not affect any rights or obligations of the Parties under this Agreement that have accrued prior to the date of termination or expiration. The following provisions shall survive the termination or expiration of this Agreement for any reason: [***]. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 54 ARTICLE 14 DISPUTE RESOLUTION 14.1 General. The Parties recognize that a claim, dispute or controversy may arise relating to this Agreement or to the breach, enforcement, interpretation or validity of this Agreement (a “Dispute”). Any Dispute, including Disputes that may involve the Affiliates of any Party, shall be resolved in accordance with this ARTICLE 14. 14.2 Continuance of Rights and Obligations during Pendency of Dispute Resolution. If there are any Disputes in connection with this Agreement, including Disputes related to termination of this Agreement under ARTICLE 13, all rights and obligations of the Parties shall continue until such time as any Dispute has been resolved in accordance with the provisions of this ARTICLE 14. 14.3 Escalation. Any Dispute shall be referred to the Executive Officers for attempted resolution by notice served pursuant to Section 15.5. In the event the Executive Officers are unable to resolve such Dispute within [***] of such Dispute being referred to them, then, upon the written request of either Party to the other Party, the Dispute shall be subject to arbitration in accordance with Section 14.4. 14.4 Arbitration. (a) If the Parties fail to resolve the Dispute through escalation to the Executive Officers under Section 14.3, and a Party desires to pursue resolution of the Dispute, the Dispute shall be submitted by either Party for final resolution by arbitration under the Rules of Arbitration of the International Chamber of Commerce (“ICC Rules”), excepted as modified herein. Any disputes concerning the propriety of the commencement of the arbitration or the scope or applicability of this agreement to arbitrate shall be finally settled by the arbitral tribunal. The arbitration shall be conducted by a tribunal of [***] arbitrators, each with at least [***] of pharmaceutical industry experience and independent of both Parties. An arbitrator shall be deemed to meet this qualification unless a Party objects within [***] after the arbitrator is nominated. Within [***] after initiation of arbitration, each Party shall nominate one (1) arbitrator and the two (2) Party- nominated arbitrators shall nominate a third arbitrator, who shall serve as the chairperson of the tribunal, [***] of the second arbitrator’s appointment (if the two Party-nominated arbitrators cannot agree on the third arbitrator, the third arbitrator shall be appointed by ICC). The seat of arbitration shall be [***] and the language of the proceedings, including all communications, shall be English. (b) The Parties agree that any award or decision made by the arbitral tribunal shall be final and binding upon them and may be enforced in the same manner as a judgment or order of a court of competent jurisdiction, and the Parties undertake to carry out any award without delay. The arbitral tribunal shall render its final award or decision within [***] from the date on which the request for arbitration by one of the Parties wishing to have recourse to arbitration is received by the ICC Secretariat. The arbitral tribunal shall resolve the Dispute by applying the provisions of this Agreement and the governing law set forth in Section 15.1. (c) By agreeing to arbitration, the Parties do not intend to deprive any court of its jurisdiction to issue, at the request of a Party, a pre-arbitral injunction, pre-arbitral attachment or other order to avoid irreparable harm, maintain the status quo, preserve the subject matter of the Dispute, or aid the arbitration proceedings and the enforcement of any award. Without prejudice to such provisional or interim remedies in aid of arbitration as may be available under the jurisdiction of a competent court, the arbitral tribunal shall have full authority to grant provisional or interim remedies and to award damages for the failure of any Party to the dispute to respect the arbitral tribunal’s order to that effect. 55 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED (d) EACH PARTY HERETO WAIVES ITS RIGHT TO TRIAL OF ANY ISSUE BY JURY. (e) Each Party shall bear its own attorney’s fees, costs, and disbursements arising out of the arbitration, and shall pay an equal share of the fees and costs of the administrator and the arbitrators; provided, however, that the arbitrators shall be authorized to determine whether a Party is the prevailing party, and if so, to award to that prevailing party reimbursement for any or all of its reasonable attorneys’ fees, costs and disbursements (including, for example, expert witness fees and expenses, photocopy charges, travel expenses, etc.), or the fees and costs of the administrator and the arbitrators. (f) Notwithstanding anything in this Section 14.4, in the event of a Dispute with respect to (i) the validity, scope, enforceability or ownership of any Patent or other intellectual property rights, (ii) a matter for which this Agreement assigns decision- making to the Parties or to the JSC or requires the consent of one or both of the Parties, or (iii) any antitrust, anti-monopoly or competition law or regulation, whether or not statutory, and such Dispute is not resolved in accordance with Section 14.3, such Dispute shall not be submitted to an arbitration proceeding in accordance with this Section 14.4, and instead shall be resolved, (A) in the case of subsections (ii), in accordance with the respective terms of the relevant provisions, or, (B) in the case of subsection (i) and (iii), unless otherwise agreed by the Parties in writing, via litigation initiated by either Party in a court of competent jurisdiction in any country in which such rights apply. ARTICLE 15 MISCELLANEOUS 15.1 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, U.S. without reference to any rules of conflict of laws. The United Nations Convention on Contracts for the International Sale of Goods does not apply to this Agreement and is expressly and entirely excluded. 15.2 Force Majeure. Neither Party shall be held liable to the other Party nor be deemed to have defaulted under or breached this Agreement for failure or delay in performing any obligation under this Agreement to the extent such failure or delay is caused by or results from causes beyond the reasonable control of the affected Party including embargoes, war, acts of war (whether war be declared or not), insurrections, riots, civil commotions, strikes, lockouts or other labor disturbances, fire, floods, pandemics, epidemics or other acts of God or any other deity (or orders of any Governmental Authority related to any of the foregoing), or acts, omissions or delays in acting by any Governmental Authority (each, a “Force Majeure Event”). The affected Party shall notify the other Party of any Force Majeure Event as soon as reasonably practical, the JSC shall review and discuss any such matter to the extent related to any Clinical Trials in the Licensed Territory, including adjustment to any Development Target and the associated Development Target Deadlines affected by such Force Majeure Event, and the affected Party shall promptly undertake all reasonable efforts necessary to mitigate the impact of such Force Majeure Event. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 56 15.3 Assignment. Neither Party may assign this Agreement to a Third Party without the other Party’s prior written consent (such consent not to be unreasonably withheld); except that (a) subject to Section 2.9, either Party may make such an assignment without the other Party’s prior written consent to a successor to substantially all of the business of such Party to which this Agreement relates (whether by merger, spinoff, sale of stock, sale of assets, exclusive license or other transaction), provided that such successor shall agree in writing to comply with the terms of this Agreement, including, in the case of Zai, its obligations under Sections 2.9, 4.2, 5.1(b) and 7.1, and (b) either Party may assign this Agreement to an Affiliate without the other Party’s prior written consent for so long as such Affiliate remains an Affiliate of the Party making the assignment. For clarity, each Party may discharge any obligations and exercise any right hereunder through any of its Affiliates and each Party hereby guarantees the performance by its Affiliates of such Party’s obligations under this Agreement, and shall cause its Affiliates to comply with the provisions of this Agreement in connection with such performance. This Agreement shall inure to the benefit of and be binding on the Parties’ successors and permitted assignees. Any assignment or transfer in violation of this Section 15.3 shall be null and void and wholly invalid, the assignee or transferee in any such assignment or transfer shall acquire no rights whatsoever, and the non-assigning non-transferring Party shall not recognize, nor shall it be required to recognize, such assignment or transfer. 15.4 Severability. If any one or more of the provisions contained in this Agreement is held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby, unless the absence of the invalidated provision(s) adversely affects the substantive rights of the Parties. The Parties shall in such an instance use their best efforts to replace the invalid, illegal or unenforceable provision(s) with valid, legal and enforceable provision(s) which, insofar as practical, implement the purposes of this Agreement. 15.5 Notices. All notices which are required or permitted hereunder shall be in writing and sufficient if delivered personally, sent by facsimile (and promptly confirmed by personal delivery, registered or certified mail or overnight courier), sent by internationally- recognized overnight courier or sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to Karuna: Karuna Therapeutics, Inc. Attention: [***] 99 High Street, 26th Floor Boston, MA 02110, USA with a copy to (which shall not constitute notice): Goodwin Procter LLP Attention: [***] 100 Northern Avenue Boston, MA 02210 If to Zai: Zai Lab Attention: [***] 314 Main Street, Suite 04-100 Cambridge, MA 02142, USA [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 57 with a copy to (which shall not constitute notice): Cooley LLP 3175 Hanover Street Palo Alto, CA 94303-1130 USA Attention: [***] with an electronic copy to [***] or to such other address as the Party to whom notice is to be given may have furnished to the other Party in writing in accordance herewith. Any such notice shall be deemed to have been given: (a) when delivered if personally delivered; (b) if sent by email, upon electronic confirmation of receipt; (c) on [***] after dispatch if sent by internationally-recognized overnight courier; or (d) on [***] following the date of mailing if sent by mail. 15.6 Entire Agreement; Amendments. This Agreement contains the entire understanding of the Parties with respect to the subject matter hereof. All express or implied agreements and understandings, either oral or written, with regard to the subject matter hereof (including the licenses granted hereunder) are superseded by the terms of this Agreement. Neither Party is relying on any representation, promise, nor warranty not expressly set forth in this Agreement. This Agreement may be amended, or any term hereof modified, only by a written instrument duly executed by authorized representatives of both Parties hereto. 15.7 Export Control Regulations. The rights and obligations of the Parties under this Agreement shall be subject in all respects to United States laws and regulations as shall from time to time govern the license and delivery of technology and products abroad, including the United States Foreign Assets Control Regulations, Transaction Control Regulations and Export Control Regulations, as amended, and any successor legislation issued by the applicable Governmental Authorities in the United States. Without limiting the provisions of this Agreement, Zai agrees that, unless prior authorization is obtained from the Office of Export Licensing or other applicable Governmental Authority of the United States, it will not export, re-export, or transship, directly or indirectly, via an Affiliate or a Third Party, to any country, any technical data, information or materials provided to it by Karuna hereto if such export would violate the laws of the United States or the regulations of any Governmental Authority of the United States. 15.8 Headings. The captions to the several Sections hereof are not a part of this Agreement, but are merely for convenience to assist in locating and reading the Sections of this Agreement. 15.9 Independent Contractors. It is expressly agreed that Karuna and Zai shall be independent contractors and that the relationship between the two Parties shall not constitute a partnership, joint venture or agency. Neither Karuna nor Zai shall have the authority to make any statements, representations or commitments of any kind, or to take any action, which shall be binding on the other Party, without the prior written consent of the other Party. 15.10 Waiver. The waiver by either Party of any right hereunder, or the failure of the other Party to perform, or a breach by the other Party, shall not be deemed a waiver of any other right hereunder or of any other breach or failure by such other Party whether of a similar nature or otherwise. 15.11 Waiver of Rule of Construction. Each Party has had the opportunity to consult with counsel in connection with the review, drafting and negotiation of this Agreement. Accordingly, the rule of construction that any ambiguity in this Agreement shall be construed against the drafting Party shall not apply. [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED 58 15.12 Construction. Except where the context expressly requires otherwise, (a) the use of any gender herein shall be deemed to encompass references to either or both genders, and the use of the singular shall be deemed to include the plural (and vice versa), (b) the words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”, (c) the word “will” shall be construed to have the same meaning and effect as the word “shall”, (d) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (e) any reference herein to any person shall be construed to include the person’s successors and assigns, (f) the words “herein”, “hereof” and “hereunder”, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (g) all references herein to Sections, Schedules, or Exhibits shall be construed to refer to Sections, Schedules or Exhibits as described in this Agreement, (h) the word “notice” means notice in writing (whether or not specifically stated) and shall include notices, consents, approvals and other written communications contemplated under this Agreement, (i) provisions that require that a Party, the Parties or any committee hereunder “agree”, “consent” or “approve” or the like shall require that such agreement, consent or approval be specific and in writing, whether by written agreement, letter, approved minutes or otherwise (but excluding e-mail and instant messaging), (j) references to any specific law, rule or regulation, or Section, section or other division thereof, shall be deemed to include the then-current amendments thereto or any replacement or successor law, rule or regulation thereof, and (k) the term “or” shall be interpreted in the inclusive sense commonly associated with the term “and/or” where applicable. 15.13 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Each Party shall be entitled to rely on the delivery of executed facsimile copies of counterpart execution pages of this Agreement and such facsimile copies shall be legally effective to create a valid and binding agreement among the Parties. 15.14 Language. This Agreement is in the English language only, which language shall be controlling in all respects, and all versions hereof in any other language shall be for accommodation only and shall not be binding upon the Parties. All communications and notices to be made or given pursuant to this Agreement, and any dispute proceeding related to or arising hereunder, shall be in the English language. If there is a discrepancy between any translation of this Agreement and this Agreement, this Agreement shall prevail. [Signature Page Follows] 59 [***] = CERTAIN CONFIDENTIAL INFORMATION OMITTED IN WITNESS WHEREOF, the Parties intending to be bound have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date. Karuna Therapeutics, Inc. Zai Lab (Shanghai) Co., Ltd By: /s/ Steven M. Paul, M.D._______ By: /s/ Samantha Du_____________ Name: Steven M. Paul, M.D._______ Name: _Samantha Du_____________ Title: CEO, President & Chairman___ Title: CEO and Chairperson________ Signature Page to the License Agreement 116157565_4 ACTIVE/114792017.5 KarXT is combination of xanomeline tartrate, a muscarinic agonist developed by Lilly, and trospium chloride, a muscarinic agonist, indicated for treating overactive bladder. Xanomeline has the IUPAC name of 3-(hexyloxy)-4-(1-methyl-1,2,5,6- Schedule 1.23 Compound tetrahydropyridin-3-yl)-1,2,5-thiadiazole tartrate and the structure name of [(1R,5S)-spiro[8-azoniabicyclo[3.2.1]octane-8,1'-azolidin-1-ium]-3-yl] 2-hydroxy-2,2-diphenylacetate chloride and the . Trospium chloride has the IUPAC structure of . 116157565_4 ACTIVE/114792017.5 116157565_4 ACTIVE/114792017.5 Schedule 1.42 Existing In-License Agreement [***] Schedule 1.43 Claims in the Existing Patent Application [***] 116157565_4 ACTIVE/114792017.5 116157565_4 ACTIVE/114792017.5 Schedule 1.58 [***] 116157565_4 ACTIVE/114792017.5 Schedule 1.59 [***] Schedule 1.79 Licensed Patents [***] 116157565_4 ACTIVE/114792017.5 Schedule 2.5 Hong Kong License Terms [***] 116157565_4 ACTIVE/114792017.5 Schedule 2.11 Existing In-License Agreement Terms [***] 116157565_4 ACTIVE/114792017.5 Schedule 4.1 Initial Development Plan [***] 116157565_4 Schedule 9.3(a) Initial Press Release Karuna Therapeutics and Zai Lab Announce Strategic Collaboration for Development, Manufacturing, and Commercialization of KarXT in Greater China Zai Lab obtains exclusive rights to develop and commercialize KarXT in Greater China Karuna to receive upfront cash payment of $35 million, up to $152 million in potential near- and long-term development and commercial milestones and other payments, and low-double-digit to high-teens tiered royalties BOSTON, SHANGHAI and SAN FRANCISCO – Nov. 9, 2021 -- Karuna Therapeutics, Inc. (NASDAQ: KRTX), a clinical-stage biopharmaceutical company driven to create and deliver transformative medicines for people living with psychiatric and neurological conditions, and Zai Lab Limited (NASDAQ: ZLAB; HKEX: 9688), a patient-focused, innovative, commercial-stage, global biopharmaceutical company, today announced their entry into an exclusive license agreement for the development, manufacturing, and commercialization of KarXT (xanomeline-trospium) in Greater China, including mainland China, Hong Kong, Macau, and Taiwan. KarXT is an oral, investigational M1/M4-preferring muscarinic agonist that stimulates receptors in the central nervous system implicated in various psychiatric conditions. KarXT was designed to unlock the therapeutic potential of xanomeline, which demonstrated significant benefits in reducing symptoms of psychosis in Phase 2 studies in schizophrenia and Alzheimer’s disease, while ameliorating side effects seen in earlier studies. In the Phase 2 EMERGENT-1 trial, KarXT demonstrated clinically meaningful and statistically significant improvements in the primary endpoint of Positive and Negative Syndrome Scale (PANSS) total score, and in key secondary endpoints, including PANSS-positive subscore and PANSS-negative subscore, at week 5, and was generally well-tolerated. 116157565_4 Karuna is evaluating KarXT in late-stage clinical trials for the treatment of schizophrenia and psychosis in Alzheimer’s disease. The EMERGENT program, the clinical program evaluating KarXT for the treatment of schizophrenia, is underway. The EMERGENT program is comprised of the previously completed Phase 2 EMERGENT-1 trial and four ongoing Phase 3 trials, with data from EMERGENT-2 and EMERGENT-3, the two Phase 3 acute efficacy and safety trials, expected in mid-2022 and in the second half of 2022, respectively. Karuna plans to initiate the Phase 3 ARISE trial evaluating KarXT as an adjunctive treatment for schizophrenia in adults who inadequately respond to atypical antipsychotics in the fourth quarter of 2021. Additionally, Karuna also plans to initiate a Phase 3 program evaluating KarXT for the treatment of psychosis in Alzheimer’s disease in mid-2022 following encouraging results from the completed Phase 1b healthy elderly volunteer trial, which suggest that potentially therapeutic doses of KarXT can be administered to elderly adults while maintaining a favorable tolerability profile. Zai Lab will work with Karuna to design the optimal strategy to accelerate the development and regulatory timeline of KarXT in Greater China. Under the terms of the agreement, Karuna will receive a $35 million upfront payment and is eligible to receive up to an additional $80 million in development and regulatory milestones. Karuna is also eligible to receive up to $72 million in sales milestones and low-double-digit to high-teens tiered royalties based on annual net sales of KarXT in Greater China. Zai Lab will fund substantially all development, regulatory, and commercialization activities in Greater China. “We are thrilled to collaborate with Zai Lab, who shares our commitment to bringing transformative medicines to people living with psychiatric conditions globally,” said Steve Paul, M.D., chief executive officer, president, and chairman of Karuna Therapeutics. “With their proven record of successfully developing and commercializing novel therapies in Greater China, we believe that Zai Lab is the ideal partner to expand the global footprint for KarXT alongside our ongoing efforts in the U.S., with the goal of providing meaningful treatments to millions of people living with mental illness globally.” “Our collaboration with Karuna is a significant milestone for Zai Lab, marking the expansion and diversification of our development and commercial portfolio into neuroscience, our fourth therapeutic area,” said Samantha Du, Ph.D., founder, chairperson and chief executive officer of Zai Lab. “KarXT is well positioned to serve as the anchor asset in our new neuroscience franchise. Zai Lab’s mission is to deliver innovative medicines to address unmet medical needs of patients, and we look forward to working with Karuna to bring KarXT to patients in need in Greater China as soon as possible.” 116157565_4 “There is a significant need for new and more effective therapies with improved safety to treat serious psychiatric conditions in Greater China,” said Gang Wang, M.D., Director of National Clinical Research Center for Mental Disorders, Dean of Beijing Anding Hospital, Capital Medical University. “Currently, more than 8 million people in Greater China are living with schizophrenia, yet fewer than half are receiving treatment, and even fewer are obtaining adequate symptom improvement from current treatment. We believe KarXT has the potential to provide a meaningful new treatment option for many patients living with schizophrenia and other conditions with disabling symptoms of psychosis.” Goldman Sachs & Co. LLC is acting as financial advisor to Karuna Therapeutics. About KarXT KarXT (xanomeline-trospium) is an oral, investigational M1/M4-preferring muscarinic acetylcholine receptor agonist in development for the treatment of psychiatric and neurological conditions, including schizophrenia and dementia- related psychosis. KarXT preferentially stimulates muscarinic receptors in the central nervous system implicated in these conditions, as opposed to current antipsychotic medicines, which bind to the D2 dopamine receptor. KarXT has the potential to usher in a new class of treatment for schizophrenia and dementia-related psychosis based on its differentiated mechanism of action. About Karuna Therapeutics Karuna Therapeutics is a clinical-stage biopharmaceutical company driven to create and deliver transformative medicines for people living with psychiatric and neurological conditions. At Karuna, we understand there is a need for differentiated and more effective treatments that can help patients navigate the challenges presented by these severe and disabling disorders. Utilizing our extensive knowledge of neuroscience, we are harnessing the untapped potential of the brain in pursuit of novel pathways to develop medicines that make meaningful differences in peoples’ lives. For more information, please visit www.karunatx.com. About Zai Lab Zai Lab (NASDAQ: ZLAB; HKEX: 9688) is a patient-focused, innovative, commercial-stage, global biopharmaceutical company focused on developing and commercializing therapies that address medical conditions with unmet needs in oncology, autoimmune disorders, infectious diseases, and neuroscience. To that end, our experienced team has secured partnerships with leading global biopharmaceutical companies in order to generate a broad pipeline of innovative marketed products and product candidates. We have also built an in-house team with strong product discovery and translational research capabilities and are establishing a pipeline of proprietary product candidates with global rights. Our vision is to become a leading global biopharmaceutical company, discovering, developing, manufacturing and commercializing our portfolio in order to impact human health worldwide. 116157565_4 For additional information about the company, please visit www.zailaboratory.com or follow us at www.twitter.com/ZaiLab_Global. Karuna Therapeutics Forward-Looking Statements This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the potential benefits and results that may be achieved through our collaboration with Zai Lab, our ongoing and planned clinical trials and regulatory filings, our goals to develop and commercialize our product candidates, and other statements identified by words such as “could,” “expects,” “intends,” “may,” “plans,” “potential,” “should,” “will,” “would,” or similar expressions and the negatives of those terms. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties, many of which are beyond our control, and which could cause actual results to differ materially from those contemplated in such forward-looking statements. These factors include risks related to our limited operating history, our ability to obtain necessary funding, our ability to generate positive clinical trial results for our product candidates and other risks inherent in clinical development, the timing and scope of regulatory approvals, changes in laws and regulations to which we are subject, competitive pressures, risks relating to business interruptions resulting from the coronavirus (COVID-19) pandemic, and other risks set forth under the heading “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020. Our actual results could differ materially from the results described in or implied by such forward-looking statements. Forward-looking statements speak only as of the date hereof, and, except as required by law, we undertake no obligation to update or revise these forward-looking statements. 116157565_4 Zai Lab Forward-Looking Statements This press release contains statements about future expectations, plans and prospects, including, without limitation, statements relating to the potential, benefits, safety and efficacy of KarXT; the clinical development of KarXT; the potential treatment of schizophrenia and dementia-related psychosis; the potential of Zai Lab’s commercial business and pipeline programs; the anticipated benefits and potential of Zai Lab’s collaboration arrangement with Karuna Therapeutics, Inc. and other risks and uncertainties associated with drug development and commercialization. These forward-looking statements may contain words such as “aim,” “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “plan,” “possible,” “potential,” “will,” “would” and other similar expressions. Such statements constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact nor are they guarantees or assurances of future performance. Forward-looking statements are based on our expectations and assumptions as of the date of this press release and are subject to inherent uncertainties, risks and changes in circumstances that may differ materially from those contemplated by the forward-looking statements. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including but not limited to (1) our ability to successfully commercialize and generate revenue from our approved products; (2) our ability to finance our operations and business initiatives and obtain funding for such activities, (3) our results of clinical and pre-clinical development of our product candidates, (4) the content and timing of decisions made by the relevant regulatory authorities regarding regulatory approvals of our product candidates, (5) the effects of the novel coronavirus (COVID- 19) pandemic on our business and general economic, regulatory and political conditions and (6) the risk factors identified in our most recent annual or quarterly report and in other reports we have filed with the U.S. Securities and Exchange Commission. We anticipate that subsequent events and developments will cause our expectations and assumptions to change, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this press release. Karuna Contact Investor Relations: Alexis Smith +1 (518) 338-8990 asmith@karunatx.com 116157565_4 Zai Lab Contacts Investor Relations: Ron Aldridge +1 (781) 434-8465 ronald.aldridge@zailaboratory.com Lina Zhang +86 136 8257 6943 lina.zhang@zailaboratory.com Media: Danielle Halstrom +1 (215) 280-3898 danielle.halstrom@zailaboratory.com / Xiaoyu Chen +86 185 0015 5011 xiaoyu.chen@zailaboratory.com 116157565_4 EMPLOYMENT AGREEMENT Exhibit 10.24 This Employment Agreement (“Agreement”) is made between Karuna Therapeutics, Inc., a Delaware corporation (the “Company”), and Charmaine Lykins (the “Executive”) and is entered into on October 26, 2021 and made effective as of November 29, 2021 (the “Effective Date”). WHEREAS, the Company desires to employ the Executive and the Executive desires to be employed by the Company on the terms and conditions contained herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows: 1. Employment. a. Term. The term of this Agreement shall commence on the Effective Date and continue until terminated in accordance with the provisions hereof (the “Term”). The Executive’s employment with the Company shall be “at will,” meaning that the Executive’s employment may be terminated by the Company or the Executive at any time and for any reason, subject to the terms of this Agreement. b. Position and Duties. During the Term, the Executive shall serve as the Chief Commercial Officer of the Company (“CCO”) and shall have such powers and duties as may from time to time be prescribed by the Board of Directors (the “Board”) or the Chief Executive Officer of the Company (the “CEO”). The Executive shall devote her full time efforts to the business and affairs of the Company; provided that she will be required to travel as necessary for business-related purposes. Notwithstanding the foregoing, the Executive may serve on other boards of directors, with the approval of the Board, or engage in religious, charitable or other community activities or other business activities as long as such services and activities are disclosed to the Board and do not interfere with the Executive’s performance of her duties to the Company, provided the Executive shall not perform an operational or fundraising role for another for-profit entity. 2. Compensation and Related Matters. a. Base Salary. During the Term, the Executive’s initial base salary shall be paid at the rate of $475,000 per year. The Executive’s base salary shall be reviewed annually by the Board or the Compensation Committee of the Board (the “Compensation Committee”). The base salary in effect at any given time is referred to herein as “Base Salary.” The Base Salary shall be payable in a manner that is consistent with the Company’s usual payroll practices for executive officers. ACTIVE/112934517.1 a. Sign On Bonus. Additionally, the Company will provide (i) a one-time payment in the amount of $100,000 to be paid within thirty (30) days from the Effective Date, and (ii) a one-time payment in the amount of $75,000 to be paid in 2022 within thirty (30) days from the date the Executive establishes a primary residence in the Boston, Massachusetts area, provided such date must be within six (6) months from the Effective Date. The Executive agrees that in the event she resigns from or her employment is terminated by the Company for Cause (as defined below), in either case within two (2) years following the Effective Date, she will repay the Company $175,000 within 10 days following the Date of Termination (as defined below). b. Incentive Compensation. During the Term, the Executive shall be eligible to receive cash incentive compensation as determined by the Board or the Compensation Committee from time to time. The Executive’s initial target annual incentive compensation shall be 40 percent of her Base Salary (the “Target Bonus”) and be based on predetermined metrics as determined by the Board or the Compensation Committee. Except as otherwise provided herein, to earn incentive compensation, the Executive must be employed by the Company on the day such incentive compensation is paid. Expenses. The Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by her during the Term in performing services hereunder, in accordance with the policies and procedures then in effect and established by the Company for its executive officers. c. benefits under the Company’s employee benefit plans in effect from time to time, subject to the terms of such plans. d. Other Benefits. During the Term, the Executive shall be eligible to participate in or receive e. Vacations. During the Term, the Executive shall be entitled to take paid time off in accordance with the Company’s applicable paid time off policy for executives as may be in effect from time to time. The Executive shall also be entitled to all paid holidays given by the Company to its executive officers. f. Equity. The Executive’s equity compensation shall be governed by the terms and conditions of the Company’s Stock Option and Incentive Plan, as many be amended, and the applicable award agreement(s) (collectively, the “Equity Documents”). In connection with the commencement of the Executive’s employment, the Company will request that the Board grant the Executive an option to purchase 75,000 shares of the Company’s common stock, which will vest over four years, with 25% vesting on the first anniversary of the Executive’s start of employment and the balance vesting in 12 equal quarterly installments thereafter, provided the Executive remains an employee or other service provider of the Company on such vesting dates. In the event of any conflict between the Equity Documents and this Agreement, the Equity Documents shall control. 3. Termination. During the Term, the Executive’s employment hereunder may be terminated without any breach of this Agreement under the following circumstances: a. Death. The Executive’s employment hereunder shall terminate upon her death. ACTIVE/112934517.1 2 b. Disability. The Company may terminate the Executive’s employment if she is disabled and unable to perform the essential functions of the Executive’s then existing position or positions under this Agreement with or without reasonable accommodation for a period of 180 days (which need not be consecutive) in any 12-month period. If any question shall arise as to whether during any period the Executive is disabled so as to be unable to perform the essential functions of the Executive’s then existing position or positions with or without reasonable accommodation, the Executive may, and at the request of the Company shall, submit to the Company a certification in reasonable detail by a physician selected by the Company to whom the Executive or the Executive’s guardian has no reasonable objection as to whether the Executive is so disabled or how long such disability is expected to continue, and such certification shall for the purposes of this Agreement be conclusive of the issue. The Executive shall cooperate with any reasonable request of the physician in connection with such certification. If such question shall arise and the Executive shall fail to submit such certification, the Company’s determination of such issue shall be binding on the Executive. Nothing in this Section 3(b) shall be construed to waive the Executive’s rights, if any, under existing law including, without limitation, the Family and Medical Leave Act of 1993, 29 U.S.C. §2601 et seq. and the Americans with Disabilities Act, 42 U.S.C. §12101 et seq. c. Termination by Company for Cause. The Company may terminate the Executive’s employment hereunder for Cause. For purposes of this Agreement, “Cause” shall mean: (i) conduct by the Executive constituting a material act of misconduct in connection with the performance of her duties, including, without limitation, willful failure or refusal to perform material responsibilities that have been requested by the Board, misappropriation of funds or property of the Company or any of its subsidiaries or affiliates other than the occasional, customary and de minimis use of Company property for personal purposes, or dishonesty to the Board with respect to any material matter; (ii) the commission by the Executive of any acts satisfying the elements of felony or a misdemeanor involving moral turpitude, deceit, dishonesty or fraud, or any conduct by the Executive that would reasonably be expected to result in material injury or reputational harm to the Company or any of its subsidiaries or affiliates if she were retained in her position; (iii) continued non-performance by the Executive of her duties hereunder (other than by reason of the Executive’s physical or mental illness, incapacity or disability) which has continued for more than 30 days following written notice of such non-performance from the CEO; (iv) a breach by the Executive of any of the provisions contained in Section 8 of this Agreement or the Restrictive Covenants Agreement; (v) a material violation by the Executive of the Company’s written employment policies; or (vi) failure to cooperate with a bona fide internal investigation or an investigation by regulatory or law enforcement authorities, after being instructed by the Company to cooperate, or the willful destruction or failure to preserve documents or other materials known to be relevant to such investigation or the inducement of others to fail to cooperate or to produce documents or other materials in connection with such investigation. d. Termination without Cause. The Company may terminate the Executive’s employment hereunder at any time without Cause. Any termination by the Company of the Executive’s employment under this Agreement which does not constitute a termination for Cause under Section 3(c) and does not result from the death or disability of the Executive under Section 3(a) or (b) shall be deemed a termination without Cause. ACTIVE/112934517.1 3 e. Termination by the Executive. The Executive may terminate her employment hereunder at any time for any reason, including but not limited to Good Reason. For purposes of this Agreement, “Good Reason” shall mean that the Executive has complied with the “Good Reason Process” (hereinafter defined) following the occurrence of any of the following events: (i) a material diminution in the Executive’s responsibilities, authority or duties; (ii) a material diminution in the Executive’s Base Salary except for across-the-board salary reductions based on the Company’s financial performance similarly affecting all or substantially all senior management employees of the Company; (iii) a material change in the geographic location at which the Executive provides services to the Company following her relocation to Boston, Massachusetts; or (iv) the material breach of this Agreement by the Company. “Good Reason Process” shall mean that (i) the Executive reasonably determines in good faith that a “Good Reason” condition has occurred; (ii) the Executive notifies the Company in writing of the first occurrence of the Good Reason condition within 60 days of the first occurrence of such condition; (iii) the Executive cooperates in good faith with the Company’s efforts, for a period not less than 30 days following such notice (the “Cure Period”), to remedy the condition; (iv) notwithstanding such efforts, the Good Reason condition continues to exist; and (v) the Executive terminates her employment within 60 days after the end of the Cure Period. If the Company cures the Good Reason condition during the Cure Period, Good Reason shall be deemed not to have occurred. 4. Notice and Date of Termination. a. Notice of Termination. Except for termination as specified in Section 3(a), any termination of the Executive’s employment by the Company or any such termination by the Executive shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a “Notice of Termination” shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon. b. Date of Termination. “Date of Termination” shall mean: (i) if the Executive’s employment is terminated by her death, the date of her death; (ii) if the Executive’s employment is terminated on account of disability under Section 3(b) or by the Company for Cause under Section 3(c), the date on which Notice of Termination is given; (iii) if the Executive’s employment is terminated by the Company under Section 3(d), the date on which a Notice of Termination is given or another date as specified in the Notice of Termination; (iv) if the Executive’s employment is terminated by the Executive under Section 3(e) without Good Reason, 30 days after the date on which a Notice of Termination is given, and (v) if the Executive’s employment is terminated by the Executive under Section 3(e) for Good Reason, the date on which a Notice of Termination is given after the end of the Cure Period. Notwithstanding the foregoing, in the event that the Executive gives a Notice of Termination to the Company, the Company may unilaterally accelerate the Date of Termination and such acceleration shall not result in a termination by the Company for purposes of this Agreement. ACTIVE/112934517.1 4 5. Compensation Upon Termination. a. Termination Generally. If the Executive’s employment with the Company is terminated for any reason, the Company shall pay or provide to the Executive (or to her authorized representative or estate) (i) any Base Salary earned through the Date of Termination, unpaid expense reimbursements (subject to, and in accordance with, Section 2(c) of this Agreement) and unused vacation that accrued through the Date of Termination on or before the time required by law but in no event more than 30 days after the Executive’s Date of Termination; and (ii) any vested benefits the Executive may have under any employee benefit plan of the Company through the Date of Termination, which vested benefits shall be paid and/or provided in accordance with the terms of such employee benefit plans (collectively, the “Accrued Benefit”). b. Termination by the Company without Cause or by the Executive with Good Reason. During the Term, if the Executive’s employment is terminated by the Company without Cause as provided in Section 3(d), or the Executive terminates her employment for Good Reason as provided in Section 3(e), then the Company shall pay the Executive her Accrued Benefit. In addition, subject to (i) the Executive signing a separation agreement in a form and manner satisfactory to the Company, which shall contain, among other provisions, a general release of claims in favor of the Company and related persons and entities, confidentiality, return of property and non-disparagement and a reaffirmation of all of the Executive’s Continuing Obligations (as defined below) (the “Separation Agreement and Release”) and (ii) the Separation Agreement and Release becoming fully irrevocable, all within 60 days after the Date of Termination (or such shorter period as set forth in the Separation Agreement and Release), which shall include a seven (7) business day revocation period: Executive’s then current Base Salary; and i. the Company shall pay the Executive an amount equal to nine (9) months of the ii. the Company shall pay the Executive a pro-rata amount of the Executive’s Target Bonus based on the performance of the Company and consistent with bonuses paid to other Company executives, both as determined by the Board in its reasonable good faith discretion; and iii. if the Executive was participating in the Company’s group health plan immediately prior to the Date of Termination and elects COBRA health continuation, then the Company shall pay to the Executive a monthly cash payment for nine (9) months or the Executive’s COBRA health continuation period, whichever ends earlier, in an amount equal to the monthly employer contribution that the Company would have made to provide health insurance to the Executive if the Executive had remained employed by the Company. ACTIVE/112934517.1 5 The amounts payable under Sections 5(b)(i) and (iii) shall be paid out in substantially equal installments in accordance with the Company’s payroll practice over nine (9) months commencing within 60 days after the Date of Termination; provided, however, that if the 60-day period begins in one calendar year and ends in a second calendar year, such payments, to the extent they qualify as “non-qualified deferred compensation” within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), shall begin to be paid in the second calendar year by the last day of such 60-day period; provided, further, that the initial payment shall include a catch-up payment to cover amounts retroactive to the day immediately following the Date of Termination. Each payment pursuant to this Agreement is intended to constitute a separate payment for purposes of Treasury Regulation Section 1.409A-2(b)(2). The amount payable under Section 4(b)(ii) shall be paid on the date bonuses are paid to the Company’s other executives but no later than March 15 following the year in which the Date of Termination occurs. Notwithstanding the foregoing, if the Executive breaches any of the provisions contained in Section 8 of this Agreement or the Restrictive Covenants Agreement (as defined below), all payments under this Section 5(b) shall immediately cease. 6. Change in Control Payment. The provisions of this Section 6 set forth certain terms of an agreement reached between the Executive and the Company regarding the Executive’s rights and obligations upon the occurrence of a Change in Control of the Company. These provisions are intended to assure and encourage in advance the Executive’s continued attention and dedication to her assigned duties and her objectivity during the pendency and after the occurrence of any such event. These provisions shall apply in lieu of, and expressly supersede, the provisions of Section 5(b) regarding severance pay and benefits upon a termination of employment, if such termination of employment occurs within twelve (12) months after the occurrence of the first event constituting a Change in Control (the “Change in Control Period”). These provisions shall terminate and be of no further force or effect beginning after the Change in Control Period. a. Change in Control. During the Term, if during the Change in Control Period, the Executive’s employment is terminated by the Company without Cause as provided in Section 3(d) or the Executive terminates her employment for Good Reason as provided in Section 3(e), then, subject to the Executive signing a Separation Agreement and Release that conforms with the requirements of Section 5(b)(i) and the Separation Agreement and Release becoming fully irrevocable, all within 60 days after the Date of Termination (or such shorter period as set forth in the Separation Agreement and Release), which shall include a seven (7) business day revocation period: i. the Company shall pay the Executive a lump sum in cash in an amount equal to one times the sum of (A) the Executive’s then current Base Salary (or the Executive’s Base Salary in effect immediately prior to the Change in Control, if higher) plus (B) the Executive’s Target Bonus for the then current year; and ACTIVE/112934517.1 6 ii. notwithstanding anything to the contrary in any applicable option agreement or other equity award agreement, all outstanding equity grants subject to time-based vesting held by the Executive shall immediately accelerate and become fully exercisable or nonforfeitable as of the Date of Termination; and iii. if the Executive was participating in the Company’s group health plan immediately prior to the Date of Termination and elects COBRA health continuation, then the Company shall pay to the Executive a monthly cash payment for twelve (12) months or the Executive’s COBRA health continuation period, whichever ends earlier, in an amount equal to the monthly employer contribution that the Company would have made to provide health insurance to the Executive if the Executive had remained employed by the Company. The amounts payable under Sections 6(a)(i) and (iii) shall be paid or commence to be paid within 60 days after the Date of Termination; provided, however, that if the 60-day period begins in one calendar year and ends in a second calendar year, such payments, to the extent they qualify as “non-qualified deferred compensation” within the meaning of Section 409A of the Code, shall be paid or commence to be paid in the second calendar year by the last day of such 60-day period. Notwithstanding the foregoing, if the Executive breaches any of the provisions contained in Section 8 of this Agreement, all payments under this Section 6(a) shall immediately cease. b. Additional Limitation. i. Anything in this Agreement to the contrary notwithstanding, in the event that the amount of any compensation, payment or distribution by the Company to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, calculated in a manner consistent with Section 280G of the Code and the applicable regulations thereunder (the “Aggregate Payments”), would be subject to the excise tax imposed by Section 4999 of the Code, then the Aggregate Payments shall be reduced (but not below zero) so that the sum of all of the Aggregate Payments shall be $1.00 less than the amount at which the Executive becomes subject to the excise tax imposed by Section 4999 of the Code; provided that such reduction shall only occur if it would result in the Executive receiving a higher After Tax Amount (as defined below) than the Executive would receive if the Aggregate Payments were not subject to such reduction. In such event, the Aggregate Payments shall be reduced in the following order, in each case, in reverse chronological order beginning with the Aggregate Payments that are to be paid the furthest in time from consummation of the transaction that is subject to Section 280G of the Code: (1) cash payments not subject to Section 409A of the Code; (2) cash payments subject to Section 409A of the Code; (3) equity-based payments and acceleration; and (4) non-cash forms of benefits; provided that in the case of all the foregoing Aggregate Payments all amounts or payments that are not subject to calculation under Treas. Reg. §1.280G-1, Q&A-24(b) or (c) shall be reduced before any amounts that are subject to calculation under Treas. Reg. §1.280G-1, Q&A-24(b) or (c). ACTIVE/112934517.1 7 ii. For purposes of this Section 6(b), the “After Tax Amount” means the amount of the Aggregate Payments less all federal, state, and local income, excise and employment taxes imposed on the Executive as a result of the Executive’s receipt of the Aggregate Payments. For purposes of determining the After Tax Amount, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation applicable to individuals for the calendar year in which the determination is to be made, and state and local income taxes at the highest marginal rates of individual taxation in each applicable state and locality, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. iii. The determination as to whether a reduction in the Aggregate Payments shall be made pursuant to Section 6(b)(i) shall be made by a nationally recognized accounting firm selected by the Company (the “Accounting Firm”), which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the Date of Termination, if applicable, or at such earlier time as is reasonably requested by the Company or the Executive. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. c. Definitions. For purposes of this Section 5, the following terms shall have the following meanings: “Change in Control” shall mean any of the following: i. any “person,” as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Act”) (other than the Company, any of its subsidiaries, or any trustee, fiduciary or other person or entity holding securities under any employee benefit plan or trust of the Company or any of its subsidiaries), together with all “affiliates” and “associates” (as such terms are defined in Rule 12b-2 under the Act) of such person, shall become the “beneficial owner” (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 50 percent or more of the combined voting power of the Company’s then outstanding securities having the right to vote in an election of the Board (“Voting Securities”) (in such case other than as a result of an acquisition of securities directly from the Company); or ii. the date a majority of the members of the Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board before the date of the appointment or election; or ACTIVE/112934517.1 8 iii. the consummation of (A) any consolidation or merger of the Company where the stockholders of the Company, immediately prior to the consolidation or merger, would not, immediately after the consolidation or merger, beneficially own (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, shares representing in the aggregate more than 50 percent of the voting shares of the Company issuing cash or securities in the consolidation or merger (or of its ultimate parent corporation, if any), or (B) any sale or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of the Company. Notwithstanding the foregoing, a “Change in Control” shall not be deemed to have occurred for purposes of the foregoing clause (i) solely as the result of an acquisition of securities by the Company which, by reducing the number of shares of Voting Securities outstanding, increases the proportionate number of Voting Securities beneficially owned by any person to 50 percent or more of the combined voting power of all of the then outstanding Voting Securities; provided, however, that if any person referred to in this sentence shall thereafter become the beneficial owner of any additional shares of Voting Securities (other than pursuant to a stock split, stock dividend, or similar transaction or as a result of an acquisition of securities directly from the Company) and immediately thereafter beneficially owns 50 percent or more of the combined voting power of all of the then outstanding Voting Securities, then a “Change in Control” shall be deemed to have occurred for purposes of the foregoing clause (i). 7. Section 409A. a. Anything in this Agreement to the contrary notwithstanding, if at the time of the Executive’s separation from service within the meaning of Section 409A of the Code, the Company determines that the Executive is a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code, then to the extent any payment or benefit that the Executive becomes entitled to under this Agreement on account of the Executive’s separation from service would be considered deferred compensation otherwise subject to the 20 percent additional tax imposed pursuant to Section 409A(a) of the Code as a result of the application of Section 409A(a)(2)(B)(i) of the Code, such payment shall not be payable and such benefit shall not be provided until the date that is the earlier of (A) six months and one day after the Executive’s separation from service, or (B) the Executive’s death. If any such delayed cash payment is otherwise payable on an installment basis, the first payment shall include a catch-up payment covering amounts that would otherwise have been paid during the six-month period but for the application of this provision, and the balance of the installments shall be payable in accordance with their original schedule. ACTIVE/112934517.1 9 b. All in-kind benefits provided and expenses eligible for reimbursement under this Agreement shall be provided by the Company or incurred by the Executive during the time periods set forth in this Agreement. All reimbursements shall be paid as soon as administratively practicable, but in no event shall any reimbursement be paid after the last day of the taxable year following the taxable year in which the expense was incurred. The amount of in-kind benefits provided or reimbursable expenses incurred in one taxable year shall not affect the in-kind benefits to be provided or the expenses eligible for reimbursement in any other taxable year (except for any lifetime or other aggregate limitation applicable to medical expenses). Such right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit. c. To the extent that any payment or benefit described in this Agreement constitutes “non- qualified deferred compensation” under Section 409A of the Code, and to the extent that such payment or benefit is payable upon the Executive’s termination of employment, then such payments or benefits shall be payable only upon the Executive’s “separation from service.” The determination of whether and when a separation from service has occurred shall be made in accordance with the presumptions set forth in Treasury Regulation Section 1.409A‑1(h). d. The parties intend that this Agreement will be administered in accordance with Section 409A of the Code. To the extent that any provision of this Agreement is ambiguous as to its compliance with Section 409A of the Code, the provision shall be read in such a manner so that all payments hereunder comply with Section 409A of the Code. Each payment pursuant to this Agreement is intended to constitute a separate payment for purposes of Treasury Regulation Section 1.409A‑2(b)(2). The parties agree that this Agreement may be amended, as reasonably requested by either party, and as may be necessary to fully comply with Section 409A of the Code and all related rules and regulations in order to preserve the payments and benefits provided hereunder without additional cost to either party. e. The Company makes no representation or warranty and shall have no liability to the Executive or any other person if any provisions of this Agreement are determined to constitute deferred compensation subject to Section 409A of the Code but do not satisfy an exemption from, or the conditions of, such Section. 8. Continuing Obligations. a. Restrictive Covenants Agreement. On or around the date hereof, the Executive will enter into the Employee Invention and Non-Disclosure Agreement, attached hereto as Exhibit A (the “Restrictive Covenants Agreement”). For purposes of this Agreement, the obligations in this Section 8 and those that arise in the Restrictive Covenants Agreement and any other agreement relating to confidentiality, assignment of inventions, or other restrictive covenants shall collectively be referred to as the “Continuing Obligations.” ACTIVE/112934517.1 10 b. Protected Disclosures and Other Protected Action. Nothing in this Agreement shall be interpreted or applied to prohibit the Executive from making any good faith report to any governmental agency or other governmental entity (a “Government Agency”) concerning any act or omission that the Executive reasonably believes constitutes a possible violation of federal or state law or making other disclosures that are protected under the anti-retaliation or whistleblower provisions of applicable federal or state law or regulation. In addition, nothing contained in this Agreement limits the Executive’s ability to communicate with any Government Agency or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including the Executive’s ability to provide documents or other information, without notice to the Company. In addition, for the avoidance of doubt, pursuant to the federal Defend Trade Secrets Act of 2016, the Executive shall not be held criminally or civilly liable under any federal or state trade secret law or under this Agreement or the Restrictive Covenants Agreement for the disclosure of a trade secret that (a) is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (b) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. 9. Consent to Jurisdiction. The parties hereby consent to the jurisdiction of the state and federal courts of the Commonwealth of Massachusetts. Accordingly, with respect to any such court action, the Executive (a) submits to the personal jurisdiction of such courts; (b) consents to service of process; and (c) waives any other requirement (whether imposed by statute, rule of court, or otherwise) with respect to personal jurisdiction or service of process. 10. Integration. This Agreement, along with the Restrictive Covenants Agreement and the Equity Documents, constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements between the parties concerning such subject matter. 11. Withholding; Tax Effect. All payments made by the Company to the Executive under this Agreement shall be net of any tax or other amounts required to be withheld by the Company under applicable law. Nothing in this Agreement shall be construed to require the Company to make any payments to compensate the Executive for any adverse tax effect associated with any payments or benefits or for any deduction or withholding from any payment or benefit. 12. Successor to the Executive. This Agreement shall inure to the benefit of and be enforceable by the Executive’s personal representatives, executors, administrators, heirs, distributees, devisees and legatees. In the event of the Executive’s death after her termination of employment but prior to the completion by the Company of all payments due to her under this Agreement, the Company shall continue such payments to the Executive’s beneficiary designated in writing to the Company prior to her death (or to her estate, if the Executive fails to make such designation). ACTIVE/112934517.1 11 13. Enforceability. If any portion or provision of this Agreement (including, without limitation, any portion or provision of any section of this Agreement) shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 14. Survival. The provisions of this Agreement shall survive the termination of this Agreement and/or the termination of the Executive’s employment to the extent necessary to effectuate the terms contained herein. 15. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 16. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and delivered in person or sent by a nationally recognized overnight courier service or by registered or certified mail, postage prepaid, return receipt requested, to the Executive at the last address the Executive has filed in writing with the Company or, in the case of the Company, at its main offices, attention of the Board. 17. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by a duly authorized representative of the Company. 18. Effect on Other Plans and Agreements. An election by the Executive to resign for Good Reason under the provisions of this Agreement shall not be deemed a voluntary termination of employment by the Executive for the purpose of interpreting the provisions of any of the Company's benefit plans, programs or policies. Nothing in this Agreement shall be construed to limit the rights of the Executive under the Company’s benefit plans, programs or policies except as otherwise provided in Section 8 hereof, and except that the Executive shall have no rights to any severance benefits under any Company severance pay plan, offer letter or otherwise. In the event that the Executive is party to an agreement with the Company providing for payments or benefits under such agreement and this Agreement, the terms of this Agreement shall govern and the Executive may receive payment under this Agreement only and not both. Further, Section 5 and Section 6 of this Agreement are mutually exclusive and in no event shall the Executive be entitled to payments or benefits pursuant to Section 5 and Section 6 of this Agreement. 19. Governing Law. This is a Massachusetts contract and shall be construed under and be governed in all respects by the laws of the Commonwealth of Massachusetts, without giving effect to the conflict of laws principles thereof. With respect to any disputes concerning federal law, such disputes shall be determined in accordance with the law as it would be interpreted and applied by the United States Court of Appeals for the First Circuit. ACTIVE/112934517.1 12 20. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be taken to be an original; but such counterparts shall together constitute one and the same document. 21. Successor to Company. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no succession had taken place. Failure of the Company to obtain an assumption of this Agreement at or prior to the effectiveness of any succession shall be a material breach of this Agreement. 22. Gender Neutral. Wherever used herein, a pronoun in the masculine gender shall be considered as including the feminine gender unless the context clearly indicates otherwise. IN WITNESS WHEREOF, the parties have executed this Agreement effective on the date and year first above written. Karuna Therapeutics, Inc. By: /s/ Andrew Miller Andrew Miller Chief Operating Officer EXECUTIVE /s/ Charmaine Lykins Charmaine Lykins 13 ACTIVE/112934517.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the registration statement (No. 333-239657) on Form S-3 and registration statements (No. 333-232521, No. 333‑237360 and No. 333-253501) on Form S-8 of our report dated February 24, 2022, with respect to the consolidated financial statements of Karuna Therapeutics, Inc. and subsidiary and the effectiveness of internal control over financial reporting. Exhibit 23.1 /s/ KPMG LLP Boston, Massachusetts February 24, 2022 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: February 24, 2022 /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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: February 24, 2022 /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, 2021 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: February 24, 2022 /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) 

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