UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition
period from to
Commission File Number 001-37773
MERUS N.V.
(Exact name of Registrant as specified in its Charter)
The Netherlands
(State or other jurisdiction of
incorporation or organization)
Yalelaan 62
3584 CM Utrecht
The Netherlands
(Address of principal executive offices)
Not Applicable
(I.R.S. Employer
Identification No.)
Not Applicable
(Zip Code)
Registrant’s telephone number, including area code: +31 30 253 8800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common shares, nominal value €0.09 per share
Trading
Symbol(s)
MRUS
Securities registered pursuant to Section 12(g) of the Act: None
Name of each exchange on which registered
The Nasdaq Stock Market LLC (Nasdaq Global Market)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the 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, 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
Emerging growth company
☐
☐
☒
Accelerated filer
Smaller reporting company
☒
☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the closing price of the shares of common stock on
The Nasdaq Stock Market on June 28, 2019, was approximately $342.7 million.
The number of shares of registrant’s Common Shares outstanding as of February 28, 2020 was 29,003,005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement that the registrant intends to file with the Securities and Exchange Commission pursuant to Regulation 14A in
connection with the registrant’s 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent stated
herein.
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
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
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements. All statements other than statements of historical facts contained in this Annual
Report on Form 10-K are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,”
“should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or
the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. All statements other than
statements of historical fact contained in this Annual Report on Form 10-K, including without limitation statements regarding our plans to develop and
commercialize our product candidates, the timing of our ongoing or planned clinical trials, the timing of and our ability to obtain and maintain regulatory
approvals, the clinical utility of our product candidates, our commercialization, marketing and manufacturing capabilities and strategy, our expectations
surrounding our collaborations, our expectations about the willingness of healthcare professionals to use our product candidates, the sufficiency of our
cash, cash equivalents and investments, and the plans and objectives of management for future operations and capital expenditures are forward-looking
statements.
The forward-looking statements in this Annual Report on Form 10-K are only predictions and are based largely on our current expectations and projections
about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking
statements speak only as of the date of this Annual Report on Form 10-K and are subject to a number of known and unknown risks, uncertainties and
assumptions, including those described under the sections in this Annual Report on Form 10-K entitled “Risk Factors” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report on Form 10-K.
Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which
are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in
our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking
statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for
management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-
looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise. We intend the
forward-looking statements contained in this Annual Report on Form 10-K to be covered by the safe harbor provisions for forward-looking statements
contained in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act.
1
Item 1. Business.
Overview
We are a clinical-stage oncology company developing innovative antibody therapeutics. Our pipeline of full-length human multispecific antibody
candidates are generated from our proprietary technology platforms, which are able to generate a diverse array of antibody binding domains, or Fabs,
against virtually any target. Each antibody binding domain consists of a target-specific heavy chain paired with a common light chain. Multiple binding
domains can be combined to produce novel bispecific and trispecific antibodies that bind to a wide range of targets and display novel and innovative
biology. These platforms referred to as Biclonics® and TriclonicsTM allows us to generate large numbers of diverse panels of bispecific and trispecific
antibodies, respectively, which can then be functionally screened in large-scale cell-based assays to identify those unique molecules that possess novel
biology, which we believe are best suited for a given therapeutic application. Further, by binding to multiple targets, Biclonics® and TriclonicsTM may be
designed to provide a variety of mechanisms of action, including simultaneously blocking receptors that drive tumor cell growth and survival and
mobilizing the patient’s immune response by engaging T cells, and/or activating various killer cells to eradicate tumors.
Our technology platforms employ an assortment of patented technologies and techniques to generate human antibodies. We utilize our patented MeMo®
mouse to produce a host of antibodies with diverse heavy chains and a common light chain that are capable of binding to virtually any antigen target. We
use our patented heavy chain dimerization technology to generate substantially pure bispecific and trispecific antibodies. We also employ our patented
Spleen to Screen® technology to efficiently screen panels of diverse heavy chains, designed to allow us to rapidly identify Biclonics® and TriclonicsTM
therapeutic candidates with differentiated modes of action for pre-clinical and clinical testing.
Using our Biclonics® platform we have produced, and are currently developing, the following candidates: MCLA-128 (zenocutuzumab) for the potential
treatment of solid tumors that harbor Neuregulin 1 (NRG1) gene fusions; MCLA-117 for the potential treatment of acute myeloid leukemia; MCLA-158 for
the potential treatment of solid tumors; and MCLA-145, developed in collaboration with Incyte Corporation, for the potential treatment of solid tumors and
a hematological malignancy, B-cell lymphoma. We are also developing a late-stage pre-clinical candidate, MCLA-129 in collaboration with Betta
Pharmaceuticals, for the potential treatment of solid tumors. Furthermore, we have a pipeline of proprietary antibody candidates in pre-clinical
development and intend to further leverage our Biclonics® technology platform to identify multiple additional antibody candidates and advance them to
clinical development. Further, Merus is developing its next generation TriclonicsTM technology, and has pre-clinical trispecific antibody candidates capable
of simultaneously binding three targets at once.
Our Strategy
Our goal is to become a leading oncology company developing innovative bispecific and multispecific antibodies to treat various types of cancer. Our
business strategy comprises the following components:
•
•
Successfully develop our most advanced bispecific antibody candidate, zenocutuzumab, for the treatment of NRG1 fusion solid tumors. We
are developing our most advanced bispecific antibody candidate, zenocutuzumab, for the potential treatment of solid tumors that contain NRG1
gene fusions The NRG1 protein is the ligand for the HER3 receptor—a known cause of cancer cell growth. The gene encoding NRG1 can form
genetic rearrangements referred to as NRG1 gene fusions. The protein product of the NRG1 gene fusion can drive signaling through the HER3
receptor and thus drive cancer cell growth. NRG1 gene fusions occur infrequently in a wide range of different cancer types. Zenocutuzumab,
Merus’ most advanced clinical candidate, has been show pre-clinically to potently disrupt binding of NRG1 (and NRG1-fusion proteins) to
HER3 and halt NRG1-stimulated tumor cell growth. In October 2019, we reported on the 9 patients with NRG1 gene fusion cancers who had
received zenocutuzumab as of that date, either on clinical trial or on an Early Access Program (EAP), including, for several patients, clinical
responses and reductions in serum tumor markers. We expect to present data from our Phase 1/2 NRG1 fusion-positive solid tumor trial,
eNRGy, at a medical conference by the end of 2020. We believe that if zenocutuzumab is successfully developed and obtains regulatory
approval, it has the potential to address disease-specific challenges that are not currently being met by existing therapies.
Successfully develop our bispecific antibody candidate, MCLA-117, for the treatment of Acute Myeloid Leukemia (AML). We are
developing MCLA-117 for potential treatment of AML. We previously reported preliminary anti-leukemic activity of MCLA-117 observed in
the ongoing clinical trial. In July 2019, we amended the MCLA-117 trial protocol to allow for the exploration of higher doses. We expect to
present interim data at a medical conference in the first half of 2020. If the results of this clinical trial are favorable, we plan to seek orphan
drug designation from the Food and Drug Administration (FDA) and the European Medicines Agency (EMA) for MCLA-117 for the treatment
of AML. We believe that if MCLA-117 is successfully developed and obtains regulatory approval, it has the potential to transform the
treatment of AML. We also intend to evaluate MCLA-117 for the potential treatment of myelodysplastic syndrome (MDS).
2
•
•
•
•
•
Successfully develop our bispecific antibody candidate MCLA-158. We are developing MCLA-158 for the potential treatment of solid tumors.
Our Phase 1 clinical trial of MCLA-158 is ongoing, with an amended protocol to allow for the exploration of higher dose cohorts.
Successfully develop our bispecific antibody candidate MCLA-145. We are developing MCLA-145, in collaboration with Incyte, in an
ongoing Phase 1 trial for the potential treatment of solid tumors and a hematological malignancy, B-cell lymphoma. MCLA-145 is designed to
recruit, activate and prevent the exhaustion of tumor-infiltrating T cells, and we believe has the potential to avoid the known side effects of
current CD137 agonists in development.
Successfully develop our pre-clinical bispecific antibody candidate MCLA-129. We are developing MCLA-129, in collaboration with Betta
Pharmaceuticals Co. Ltd. (Betta), currently in IND-enabling studies, for a potential Phase 1 trial as a potential treatment for solid tumors,
including non-small cell lung cancer (NSCLC). We presented at the AACR-NCI-EORTC International Conference on Molecular Targets and
Cancer Therapeutics in October 2019 pre-clinical data demonstrating the ability of MCLA-129 to inhibit tyrosine kinase inhibitor-resistant
NSCLC in pre-clinical xenograft models.
Accelerate the internal discovery and development of additional bispecific and trispecific antibody candidates. We believe we are well
positioned to expand our pipeline of Biclonics® and TriclonicsTM molecules for the potential treatment of cancer and other forms of disease.
We are conducting pre-clinical studies for our internal proprietary pipeline as well with our collaborators including Incyte Corporation (Incyte),
Simcere Pharmaceutical Group (Simcere), and Betta.
Seek strategic collaborations. We intend to seek strategic collaborations to facilitate the capital-efficient development of our pipeline and to
maximize the value of our Biclonics® and TriclonicsTM technology platforms and to access unique partner capabilities and capacity. We have
entered into collaborations with Incyte, Simcere, and Betta to develop bispecific antibody candidates based on our Biclonics® technology
platform. We plan to work with other potential future collaborators to further validate and expand the use of our Biclonics® and TriclonicsTM
platform in developing bispecific and trispecific antibody candidates. We are also working with ONO Pharmaceutical Co., Ltd., to generate
bispecific antibodies for indications outside oncology, which further underscore the breadth of the Merus platform. We believe these
collaborations and future agreements could potentially provide significant funding to advance our pipeline and allow us to benefit from the
additional resources, development and commercialization expertise of our collaborators.
Our Biclonics® and Triclonics™ Candidate Portfolio
We currently have four bispecific candidates in clinical development, with a variety bispecific and trispecific candidates in pre-clinical development. The
following table summarizes our development candidate pipeline:
3
Cancer Immunotherapeutics
Immunotherapy is relatively a new class of cancer treatment that works to harness a patient’s own immune system to attack the cancer cells. There are a
number of immunotherapies that are designed to engage various aspects of the immune system, for example: (1) adaptive immunity, specifically directing
genetically modified T cells to the tumor with chimeric antigen receptor, or CAR T-cells or T-cell receptor modification; or modulating T-cell activity
through co-stimulation or checkpoint signals; (2) innate immunity, including antibody-dependent cellular cytotoxicity (ADCC), cellular-dependent
cytotoxicity (CDC), monocyte/macrophage cytotoxicity, natural killer (NK) cell cytotoxicity, or other forms of T cell cytotoxicity; all directed at the cancer
cells. While these therapies vary in mechanism of action, they rely on specific components of the innate or adaptive immune system to kill tumor cells or
counteract signals produced by cancer cells that suppress immune responses.
While these approaches have advanced the field of oncology, each also have limitations. For example, the enhanced ADCC of monoclonal antibodies that
bind to a single target expressed by tumor cells can potentially induce an autoimmune “on-target, off-tumor” toxicity to normal non-tumor tissues that may
also express the same target antigen. Cell-based therapies such as genetically modified CAR-T cells can be difficult and expensive to manufacture, can
persist in patients for many months, can be associated with a toxic cytokine release syndrome as safety concerns, or can become ineffective if the tumor
loses expression of the single antigen against which the CAR-T cells are directed. We believe bispecific and trispecific antibody candidates developed from
our novel platforms offer the potential to overcome these limitations.
Background on Antibodies
The conventional antibody in full length immunoglobulin G (IgG) format is a Y-shaped molecule that consists of two identical heavy chains and two
identical light chains, as shown in the figure below. Each heavy chain pairs with the light chain to form two variable regions, or antigen binding fragment,
Fab, that bind to antigens, or targets, and a constant region, which includes a region known as the fragment crystallizable (Fc) that binds to receptors
present on effector cells in the immune system. In conventional full-length IgG, the variable regions are identical and bind to the same targets.
In bispecific antibodies, the two variable regions bind to two different targets. To achieve this in the full-length IgG format, two different heavy chain
variable regions that can both use an identical light chain, also referred to as the common light chain, are combined. In addition, modifications of the heavy
chain Fc regions are engineered to drive the formation of full-length IgG that use two different heavy chains rather that two copies of the same heavy chain,
which make a monospecific antibody.
In both conventional monoclonal antibodies (mAbs) and IgG bispecific antibodies, the Fc region can bind to Fc receptors present on effector cells. This
binding results in the recruitment and activation of immune effector cells and amplifies the immune system’s response to antigens bound by the variable
region of the antibody. This process is called ADCC. The Fc region can be modified to enhance ADCC so as to generate a more potent immune response
against a particular target. The Fc region can also be silenced to block interactions with the immune system.
4
Our Biclonics® and TriclonicsTM Platforms
Our two technology platforms use large-scale functional screening in molecular and cell-based assays to identify novel, innovative Biclonics® and
TriclonicsTM with the specific characteristics desired for further development.
We believe our Biclonics® and TriclonicsTM platforms allow us to approach cancer treatment through multiple innovative modes of action:
•
•
•
•
Blocking oncogenic growth factor signaling by disrupting the signaling pathways that drive tumor cell growth or resistance to monoclonal
antibody therapy. This includes, for example tumor cell growth driven by NRG1 fusions interacting with the HER3 receptor. Hard-to-target
receptors that may drive tumor growth or escape can be targeted by our Dock and Block® mechanism whereby the binding a tumor associated
target prevalent on cancer cells facilitates a second domain to bind and block lesser expressed targets that are critical for cancer growth.
Engaging an adaptive immune response by recruiting T-cells and/or modulating co-stimulation or checkpoint inhibition. We can produce
multispecific antibodies that are designed to simultaneously bind to the T-cell antigen CD3 or other effector cell engaging antigens, and/or
tumor-associated targets, for a potentially potent T-cell or other effector cell recruitment and engagement to selectively kill tumor cells.
Engaging the innate immune response through multiple mechanisms. We can produce enhanced ADCC modifications in the Fc region of our
Biclonics® or TriclonicsTM designed to facilitate the recruitment of immune effector cells, such as NK cells and macrophages, to directly kill
tumor cells. Specific binding domains engineered in multispecific antibodies can directly bind to macrophages and monocytes; natural killer
cells, each providing specific immune cell function to attack cancer cells.
Employing combinations of the above mechanisms. Using our platforms, we can design antibodies to simultaneously target a growth factor
receptor expressed by tumor cells and an immunomodulatory molecule involved in blocking and/or reactivating tumor-specific T cells.
Biclonics® and TriclonicsTM can be designed to target growth factor receptors, like epidermal growth factor receptors (EGFR) and HER2 that
are expressed on many tumors, while delivering an activation signal or checkpoint blockade to T cells.
Our process to select lead Biclonics® for clinical development is illustrated below. We use our patented MeMo® and Spleen to Screen® human antibody
generation and Biclonics® production technologies to rapidly build large collections of Biclonics® directed against particular target pairs. We then test
these collections in cell-based functional assays to identify Biclonics® that have novel and innovative modes of action. We select the most potent or
efficacious Biclonics® and evaluate them in multiple in vitro and in vivo assays to identify lead candidates for clinical development.
Selection of Lead Biclonics®
5
Our Biclonics® technology platform includes the following:
Human antibody generation. Our platform for generating human antibodies employs our patented transgenic mice, which we refer to as MeMo®, which
harbors human heavy chain variable regions and a human common light chain in its germline. MeMo® harnesses the power of the in vivo immune system
to yield human antibodies with the potential for high affinity, specificity, optimal biophysical characteristics and low immunogenicity. Upon immunization,
MeMo® is capable of generating large and diverse panels of human common light chain antibodies against a broad variety of targets. These human
common light chain antibodies are then used to generate large and diverse panels of Biclonics®, human multispecific antibodies capable of
binding different targets of virtually any combination
•
Patented dimerization technology and the full-length Immunoglobulin G format. Our Biclonics® consist of two different heavy chains that
need to stably form, or heterodimerize, inside a manufacturing cell line. Using our patented dimerization technology, we employ amino acid
residues with opposite charges in each of these heavy chains to efficiently drive the formation of the heterodimer bispecific antibody rather
than the homodimer antibody consisting of two copies of the same heavy chain. In addition, the use of a single, or common, light chain in our
human Biclonics® antibodies ensures that each heavy chain pairs with the correct, common light chain to efficiently form the intended
functional antigen binding regions. The combination of these approaches prevents the need for additional, more artificial techniques, such as
the use of linkers or chemical reactions, to force the pairing of different parts of the bispecific antibody. In addition, the format is designed to
retain favorable attributes of conventional human IgG mAbs, including their stability and predictability during manufacturing as well as their
long half-life and low immunogenicity during treatment of patients. The resulting Biclonics® are bispecific heterodimeric IgG antibodies that
are designed to closely mimic IgG antibodies that are produced naturally by the immune system.
The Biclonics® format also permits us to make modifications to the Fc region of the IgG antibody in order to enhance or limit effector functions associated
with this part of the molecule. This strategy has been successfully executed with conventional therapeutic mAbs. In order to enhance efficacy and promote
immunotherapeutic activity, we can use glycoengineered cell lines used in production to generate Biclonics® that are enhanced for ADCC, resulting in the
improved ability to recruit NK cells and macrophages. This ADCC enhancement has been made to our most advanced bispecific antibody candidate,
zenocutuzumab, and other of our antibody candidates, MCLA-158 and MCLA-129. In order to improve safety and tolerability, we can modify our
Biclonics® to prevent the excessive release of signaling proteins called cytokines, which can overstimulate the immune system. This process is called Fc-
silencing as it blocks the ability of our Biclonics® to bind to certain protein receptors on cells, known as Fc receptors, which are associated with cytokine
release. We utilize Fc silencing in the design of our bispecific antibody candidates, MCLA-117 and MCLA-145.
•
High-throughput functional screening. We employ our patented Spleen to Screen® technology to rapidly screen panels of new target-specific
heavy chains that form common light chain binding domains, or we employ our already established panels of common light chain antibodies.
To date we have discovered over 10,000 unique common light chain antibodies directed at more than 30 different antigens, including tumor-
associated antigens such as EGFR and CLEC12a; T-cell binding, stimulating or co-stimulating proteins such as CD3 and CD137 (also called 4-
1BB); and other immune-cell engaging antigens. We then generate DNA constructs that encode target-specific human antibodies and express
them in mammalian cells. The common light chain format and proprietary dimerization modifications to the Fc region of the IgG promote the
secretion of virtually pure Biclonics® into the cell culture medium. The medium of thousands of cell cultures that each express a different
Biclonics® is harvested and individually used in high throughput molecular and cell-based functional assays to identify Biclonics® with
specific novel characteristics for further development.
6
For example, the chart below shows the results of a pre-clinical study in which hundreds of different Biclonics® targeting HER2 and HER3 were
functionally screened for cell growth inhibition of tumor cell samples in the presence or absence of the HER3 ligand NRG1. Forty of the Biclonics®
depicted in the chart exhibited superior inhibition of cell growth compared to trastuzumab, a drug commonly prescribed for the treatment of breast cancer,
and were selected in the process leading to identification of zenocutuzumab.
Advantages of Biclonics®
We believe our Biclonics® technology platform provides the following advantages:
•
•
•
•
•
Rapid generation of human IgG antibodies having diversity at the heavy chain targeting an array of antigens, that are ready to be paired to
produce our Biclonics®, bispecific antibodies. Use of our patented MeMo®, Spleen to Screen®, heterodimerization and Fc modification
technologies, permits us to rapidly generate a large amount of diverse bispecific antibodies capable of targeting an array of antigen
combinations.
Biclonics® are stable, bispecific, full-length human IgG antibodies with no linkers or fusion proteins. Biclonics® retain the IgG format of
antibodies that are produced naturally by the immune system. Additionally, in contrast to many other bispecific antibody formats, Biclonics®
do not require linkers or modifications to force the correct pairing of heavy and light chain variable regions or exploit fusion proteins to add
functionality to the molecule. These qualities minimize time-consuming engineering efforts and allow us to create Biclonics® with predictable
behavior during pre-clinical development.
Our Biclonics® technology platform allows for functional evaluation of Biclonics® in the relevant therapeutic format leading to the
discovery of therapeutic candidates with novel and innovative properties. Our Biclonics® technology platform permits rapid functional
screening of large collections of bispecific antibodies which allows us to identify lead candidates with multiple mechanisms of action that have
the potential to effectively kill tumor cells with high potency. This is an important step in the identification of lead bispecific antibody
candidates with functionalities that compare favorably against other forms of immunotherapeutics, such as conventional mAbs as well as their
combinations.
Biclonics® preserve the stability, behavior and adaptability of normal IgG antibodies. Biclonics® are based on the robust and commonly used
IgG format to yield the favorable in vivo qualities associated with conventional mAbs, such as stability, long half-life and low immunogenicity.
As a result, our Biclonics® format provides attractive options for dosage schedules and methods of administration, rendering them compatible
with multiple modes of action for the efficient killing of tumor cells. Further, the IgG format allows us to apply previously established
technologies to further optimize our Biclonics® for therapeutic use.
Biclonics® can be reliably manufactured with high yields. Because our Biclonics® retain the IgG format of antibodies, our Biclonics® are
manufactured using the large-scale industry-standard processes that are also used for the production of conventional mAbs, and the yields of
Biclonics® we obtain are comparable to those of normal IgG antibodies. In stable cell lines, we are able to obtain over 90% of bispecific
antibody formation using these processes and the IgG-based purification process results in up to greater than 98% purity for our Biclonics®.
7
Our TriclonicsTM Platform
Our next generation proprietary TriclonicsTM technology is covered by existing Merus patents and other pending applications. This new format and the
suite of technologies that underpin it permit the development of immunotherapeutic candidates designed to bind three targets with a single multivalent
molecule. In pre-clinical studies and modeling, TriclonicsTM have shown similar qualities of a natural IgG antibody, including favorable half-life, stability,
low immunogenicity and favorable developability characteristics. We believe TriclonicsTM have the potential to produce tumor cell-killing activity and/or
to modulate the immune system to promote more robust anti-tumor immune responses, and have the potential for less on-target off-tumor toxicity. This
format allows us to leverage our proprietary genetically modified MeMo® mice, which as described above, harbors human heavy chain variable region
gene segments and a human common light chain in its germline. MeMo® harnesses the power of the in vivo immune system to yield human antibodies
with the potential for high affinity, specificity, optimal biophysical characteristics and low immunogenicity, which can be combined into a single trispecific
antibody produced with relative high purity. The Triclonics™ platform employs our proprietary technologies to produce large panels of substantially pure
trispecific antibodies. In addition, we have engineered a panel of novel linkers that attach a third binding domain to the antibody. This panel of linkers vary
in properties such as length and flexibility, and are empirically selected for stability and other drug-like properties, while remaining stable and are predicted
to have low immunogenicity. The linker panel provides another lever of flexibility in optimizing functional characteristics in our high-throughput screening
while maintaining high quality, stability and low risk of immunogenicity.
One application of the TriclonicsTM platform is as a T cell engager for solid tumors. By binding to three targets, we can generate TriclonicsTM designed to
specifically engage a combination of two tumor antigens for enhanced specificity, binding preferentially to tumor cells expressing both antigens, over
normal tissues that may express either antigen, but not both. In this construct, the third binding domain can for example engage an innate or adaptive
immune effector cell protein, to stimulate killing of the tumor cell. We believe our TriclonicsTM platform will permit us to develop molecules with
enhanced on target, on tumor specificity, while optimally engaging the immune system mechanisms.
Our process to select lead TriclonicsTM leverages our patented MeMo® and Spleen to Screen® human antibody generation and heterodimerization
technologies, along with our proprietary linkers based on natural structures to undertake high throughput unbiased functional screening of TriclonicsTM.
With this approach, we have been able to evaluate up to 1,800 different trispecific antibodies targeting three different antigens to identify those unique
combinations that pre-clinically have been observed to have desired characteristics for further development.
8
Our Bispecific and Trispecific Antibody Candidate Portfolio
We currently have four bispecific antibody candidates in clinical development, with additional bispecific and trispecific programs in pre-clinical
development.
Zenocutuzumab (MCLA-128, HER3 x HER2 Biclonics®)
Zenocutuzumab is an antibody-dependent cell-mediated cytotoxicity (ADCC) -enhanced Biclonics® that utilizes Merus’ Dock & Block® mechanism to
bind to HER2 and bind to and disrupt the interaction between HER3 and ligand, NRG1 in solid tumors. HER2, or human epidermal growth factor receptor
2, is amplified in many solid tumors and is associated with poor prognosis, and the activation of HER3, or human epidermal growth factor receptor 3, is
associated with tumor progression and treatment resistance. On the surface of tumor cells, HER2 pairs, or dimerizes, with HER3, and the resulting pair
drives malignant progression of HER2-expressing cancer cells. NRG1, which is the ligand for HER3, causes cancer cells to grow and become resistant to
treatment with HER2-targeted therapies. Zenocutuzumab is believed to target the HER3 signaling pathway by disrupting the interaction of Her3 with its
ligand NRG1 and to overcome the resistance of tumor cells to HER2-targeted therapies using two mechanisms: blocking growth and survival pathways to
stop tumor expansion and recruitment and ADCC enhanced elimination of the tumor via effector cells.
In addition, we have identified a rare, genetically defined patient population whose cancers harbor NRG1 fusions. The NRG1 gene encodes for neuregulin,
the ligand for HER3. Fusions between NRG1 and other genes in the genome are rare genetic events occurring in lung, pancreatic and other solid tumors,
and are associated with activation of HER2/HER3 signaling and growth of cancer cells. Overall estimates of the incidence of NRG1 fusions’ occurrence
are based on limited published information. Based on the current literature available, we estimate NRG1 fusions occur at a rate of approximately 0.3% –
3.0% in non-small cell lung cancer (NSCLC) 0.5% - 1.5% in pancreatic ductal adenocarcinoma (PDAC), and less than 1% in all other tumor types.
Importantly, NRG1 fusions occur more frequently in the invasive mucinous adenocarcinoma subtype of lung cancer, and in the subset of patients with
PDAC lacking a mutation in the K-RAS gene. The NRG1 fusion is a powerful driver of cancer cell growth. Pre-clinical studies and early clinical
evaluation suggests zenocutuzumab (binding to HER2 and blocking NRG1 fusion protein interaction with HER3) has the potential to be particularly
effective against tumors harboring NRG1 fusions.
9
Development
In our pre-clinical studies, the administration of zenocutuzumab resulted in the inhibition of NRG-induced growth in cultures of cancer cells.
Zenocutuzumab also blocked activation of two key signaling pathways for the growth and survival of tumor cells more than Herceptin (trastuzumab) or the
combination of Herceptin and Perjeta (pertuzumab) (shown in red below) or experimental anti-HER3 mAbs (shown in green below). See Geuijen et al.
Cancer Cell (2018).
* indicates analog antibodies.
In a patient-derived tumor xenograph mouse model (PDX model) zenocutuzumab significantly blocked tumor growth of a cancer containing an NRG1 gene
fusion.
Based on these encouraging pre-clinical results, we initiated a Phase 1/2 study of zenocutuzumab in solid tumors. As of January 2019, zenocutuzumab
administered as a single-agent had been evaluated in 117 patients, who received the recommended Phase 2 doses. Zenocutuzumab has been well-tolerated
as a single agent, with low observed immunogenicity, and most reported adverse events (AEs) have been mild to moderate. Also as of January 2019, the
incidence of grade 3 and 4 AEs irrespective of causality was 37% and 3%, respectively, with the incidence of suspected drug-related grade 3 AEs of about
4%, no suspected drug-related grade 4 adverse events, and one patient experienced a grade 5 hypersensitivity reaction.
•
NRG1 Fusions
In June 2019, we opened a zenocutuzumab Early Access Program (EAP) and amended the Phase 1/2 trial to focus on patients with solid tumors harboring
an NRG1 fusion (the eNRGy trial). Patients treated under EAP and protocol amendment receive zenocutuzumab at 750 mg administered intravenously
every other week. As of October 27, 2019, nine patients identified with cancers harboring NRG1 fusions (three PDAC and six NSCLC) who had
previously progressed through standard of care, had been enrolled and treated with zenocutuzumab across the EAP under single patient investigational new
drug applications, and the eNRGy trial. Of the nine patients treated, six had at least one evaluation and thus were considered evaluable.
10
On October 27, 2019, investigators from the Memorial Sloan Kettering Cancer Center (MSKCC) provided an oral presentation at the AACR-NCI-EORTC
International Conference on Molecular Targets and Cancer Therapeutics, in Boston, Massachusetts, entitled “Clinical proof-of-concept for zenocutuzumab,
a bispecific HER2/3 antibody therapy, in NRG1 fusion-positive cancers”, reporting a summary and initial data concerning the treatment of three cancer
patients harboring NRG1 fusions with zenocutuzumab at 750 mg administered intravenously every other week. Assessments of these patients were
conducted locally at MSKCC. All three patients, two having PDAC and one having NSCLC, exhibited tumor shrinkage, symptomatic improvement and
durability up to the then most recent assessment. All three patients remained on treatment as of October 29, 2019.
Of the two patients having PDAC reported by MSKCC on October 27, 2019, one exhibited a 54% reduction in tumor diameter at a confirmatory 5 months
scan (partial response (PR) by RECIST v1.1).
The other PDAC patient exhibited a 25% reduction in tumor diameter at a confirmatory 5 months scan (stable disease (SD) by RECIST v1.1). Both patients
remained on treatment for over 7 months as of October 29, 2019.
The third patient reported by MSKCC on October 27, 2019 has NSCLC and exhibited a 41% reduction in tumor diameter at a confirmatory scan (PR by
RECIST v1.1) and improvement in brain metastases. Prior to zenocutuzumab treatment the patient progressed on six lines of therapy, including the tyrosine
kinase inhibitor afatinib. The patient remained on treatment for approximately 5 months as of October 29, 2019.
We also reported that as of October 29, 2019, we had previously treated six additional patients with NRG1 + cancers, one having PDAC and five having
NSCLC. The one patient with PDAC, who was enrolled under a single patient IND outside of MSKCC, had received two treatments with zenocutuzumab,
at a four-week non-standard interval due to the severity of the patient’s illness, and was non-evaluable, passing away due to complications related to the
underlying disease prior to a first tumor evaluation.
For the five patients with NRG1+ NSCLC enrolled in the eNRGy clinical trial that received treatment with zenocutuzumab, one patient had SD for greater
than 7 months but discontinued the trial due to poor adherence to the treatment protocol (unrelated to any AE or lack of efficacy); two patients had
progressive disease and are no longer on the trial; and two patients as of October 29, 2019, had only recently started treatment and had not yet undergone
initial assessment for tumor response.
We reported in October 2019 that the safety profile of zenocutuzumab in patients with cancers harboring NRG1 gene fusions has been consistent with what
has been previously reported in the overall patient population treated with zenocutuzumab.
We are currently enrolling patients for the Phase 1/2 eNRGy trial to assess the anti-tumor activity of monotherapy zenocutuzumab in NRG1+ cancers. The
eNRGy trial enrolls patients with NRG1+ pancreatic cancer, non-small cell lung cancer and other solid tumors. All patients will receive 750mg of
zenocutuzumab every two weeks. We expect to present data at a medical conference by the end of 2020.
• Metastatic Breast Cancer
We have completed enrollment in our Phase 2 study of zenocutuzumab in combination with other therapies for the treatment of patients with metastatic
breast cancer (MBC) and expect to present results, including the primary endpoint of clinical benefit rate at 24 weeks at a medical conference in 2020. The
Phase 2 study consists of two cohorts: “HER2+” and “ER+/HER2low” patients. The HER2+ cohort receives zenocutuzumab, Herceptin (trastuzumab) and
chemotherapy (vinorelbine). The ER+/HER2low cohort receives zenocutuzumab and hormone therapy. Patients in both cohorts receive 750mg of
zenocutuzumab every three weeks.
11
With completion of our Phase 2 study, we do not have plans to advance into a Phase 3 clinical trial in metastatic breast cancer in the absence of a
collaborator and intend to focus efforts on the eNRGy trial going forward.
MCLA-117 (CD3 x CLEC12A Biclonics®)
MCLA-117 is a Biclonics® T-cell engager that is designed to bind to CD3, a cell-surface molecule present on all T cells, and to CLEC12A, a cell surface
molecule present on acute myeloid leukemia (AML) tumor cells and stem cells. CLEC12A is expressed on approximately 90-95% of AML cases and is not
found on normal blood stem cells nor on cells that give rise to red blood cells and platelets, nor is it present on other non-hematopoietic cells in the body.
Since the expression of CLEC12A is restricted to the hematopoietic system and not found on normal cells, there is the potential for less off-tumor toxicity.
By binding to CD3 and CLEC12A, MCLA-117 is designed to recruit and activate T cells to kill CLEC12A-expressing AML tumor cells and stem cells. We
believe that the expression pattern of CLEC12A makes it an attractive, novel and innovative molecule for targeted therapy in cancer patients.
12
Development
In our pre-clinical studies, MCLA-117 exhibited potent activation of T cells. Specifically, MCLA-117 targeted and killed AML tumor cells mediated by a
high affinity of the Biclonics® for CLEC12A and a relatively low affinity for CD3. In these studies, MCLA-117 recruited T cells to selectively kill tumor
cells in blood samples of AML patients, while preserving of platelets and red blood cells during therapy. MCLA-117 induced a >60-fold increase in T-cell
expansion and a >90% increase in AML tumor cell killing.
•
Acute Myeloid Leukemia (AML)
In December 2018, we announced that preliminary anti-tumor activity had been observed in our Phase 1 AML trial. The Phase 1 trial is a single-arm, open-
label, global study to assess the safety, tolerability and anti-tumor activity of MCLA-117 in up to 50 patients with relapsed/refractory AML. The first phase
of the MCLA-117 study is designed as a dose escalation study, followed by a second safety dose expansion phase. The initial dose of the trial was
determined using minimal anticipated biological effect level (MABEL) dose escalation requirements, and careful dose escalation is being explored due to
the inherent potent activity of T-cell engagers. The primary endpoint is safety and tolerability; secondary endpoints include pharmacokinetic measures, anti-
tumor response and clinical benefit.
In July 2019, we amended the MCLA-117 protocol to allow for the exploration of higher doses . Preliminary anti-tumor activity was reported in December
2018 and dose escalation for the Phase 1 clinical trial for MCLA-117 continues. We expect to present interim data at a medical conference in the first half
of 2020.
• Myelodysplastic syndrome (MDS)
We also intend to evaluate MCLA-117 for the potential treatment of myelodysplastic syndrome (MDS). MDS is a disease that occurs when the blood-
forming cells in the bone marrow lose the ability to develop normally. Patients with MDS have lower numbers of one or more types of cells in the blood,
such as red blood cells and platelets, and are at higher risk to develop AML. Similar to AML, in MDL cells, CLEC12A is also commonly expressed.
MCLA-158 (Lgr5 x EGFR Biclonics®)
MCLA-158 is an investigational antibody-dependent cell-mediated cytotoxicity (ADCC)-enhanced Biclonics® for the potential treatment of solid tumors
that is designed to bind to cancer stem cells expressing leucine-rich repeat-containing G protein-coupled receptor 5 (Lgr5) and epidermal growth factor
receptor (EGFR). Lgr5 is a WNT target gene expressed in cancer cells with aberrations in the WNT signaling pathway, while EGFR is a member of the
HER family of receptor tyrosine kinases and is important for growth and survival of cancer stem cells, including those with RAS mutations. It is estimated
that RAS mutations occur in approximately 50% of colorectal cancers, one of the most common cancers in the world. MCLA-158 is designed to use two
different mechanisms of action. The first is intended to block growth and survival pathways in cancer stem cells. The second involves the recruitment and
enhancement of immune effector cells in an effort to directly kill cancer stem cells that persist in solid tumors and cause relapse and metastasis.
13
Development
In our pre-clinical studies, MCLA-158 demonstrated superior growth inhibition and selectivity versus the EGFR-targeting mAb, cetuximab. MCLA-158
was significantly more potent than cetuximab in inhibiting the growth of patient-derived colorectal cancer organoids. Additionally, MCLA-158 was
observed to be selectively more active in human tumor-derived organoids than in organoids derived from normal human colon. The activity of MCLA-158
on the tumor organoid size was more than 100 times greater than on the normal colon organoids. In contrast, the activity of cetuximab was similar to the
activity of MCLA-158 on normal colon organoids and 20 to 100 times less than the activity of MCLA-158 on tumor organoids. These ex-vivo observations
of MCLA-158 with organoid models were further observed in vivo in xenograft models generated from the same patient-derived organoids.
•
Solid Tumors
MCLA-158 is currently being evaluated in a Phase 1 open-label, multicenter dose escalation study, which includes a safety dose expansion phase, in
patients with solid tumors. The primary endpoint is safety and tolerability of the defined dose; secondary endpoints include single-agent preliminary anti-
tumor activity. The Phase 1 protocol was amended to allow for the exploration of higher dose cohorts. Dose escalation has been ongoing and as of year-
end, MCLA-158 has demonstrated a favorable safety profile with no observed dose limiting toxicities.
We amended the trial protocol to allow for the exploration of higher dose cohorts which is ongoing.
MCLA-145 (CD137 x PD-L1 Biclonics®)
MCLA-145 is a Biclonics® T-cell engager that binds to human programmed death-ligand 1 (PD-L1) and CD137. MCLA-145 is designed to recruit, activate
and prevent the exhaustion of tumor-infiltrating T cells, and to cause a potent and durable T-cell activation in the tumor microenvironment. MCLA-145’s
binding to a cell is predicted to lead to clustering of CD137 on T cells when PD-L1 is expressed on adjacent cells, and block the T cell inhibitory PD-1/PD-
L1 interactions in the tumor. Because T cell activation in our pre-clinical studies was shown to be context-dependent, requiring PD-L1 expression in the
tumor microenvironment, MCLA-145 has the potential to overcome known side effects of CD137 agonists currently in development.
MCLA-145 is the first drug candidate co-developed under our global research and collaboration with Incyte Corporation, which permits the development
and commercialization of up to 11 bispecific and monospecific antibodies from our Biclonics® platform. Under the terms of the collaboration, Merus
retains all rights to develop and commercialize MCLA-145, if approved, in the United States, while Incyte has rights to develop and commercialize
MCLA-145, if approved, outside the United States.
14
Development
In our pre-clinical studies, MCLA-145 showed binding to PD-L1 and C1D37, recruitment of T cells into the tumor, blocking of inhibitory PD-1/PD-L1 axis
and potent T cell activation.
Further, MCLA-145 demonstrated superior tumor cell killing as compared to the administration of a combination of monospecific anti-PD-L1 and anti-
CD137 antibodies in PDX models.
•
Solid Tumors and Hematological Malignancy
In May 2019, we commenced a Phase 1 open-label, single-agent clinical trial of MCLA-145, consisting of dose escalation followed by dose expansion, for
the potential treatment of patients with advanced solid tumors. We have since amended the trial to include patients with a hematological malignancy, B-cell
lymphoma. The primary objectives of the Phase 1 trial are dose finding and evaluation of safety and tolerability in patients. The trial will also examine
potential preliminary antitumor activity and functional target engagement of single-agent MCLA-145.
15
MCLA-129 (EGFR x cMET Biclonics®)
MCLA-129 is an investigational Biclonics®, designed to bind EGFR and cMET, for the potential treatment of solid tumors. EGFR is an important
oncogenic driver in many cancers. The upregulation of c-MET signaling has been associated with resistance to EGFR inhibition. MCLA-129 has two
distinct mechanisms of action. First, MCLA-129 is designed to block the signaling of EGFR as well as c-MET, in an effort to inhibit tumor growth and
survival. Second, MCLA-129 utilizes ADCC-enhancement technology, which is designed for greater cell-killing potential. Because both mechanisms of
action are dependent on the co-expression of EGFR and c-MET, we believe MCLA-129 has the potential for less toxicity compared to agents targeting
EGFR alone.
MCLA-129 is being developed in collaboration with Betta Pharmaceuticals Co. Ltd. (Betta). Under the terms of the collaboration, Betta is responsible for
the clinical development and commercialization of MCLA-129, if approved, in China and we retain all rights to MCLA-129 outside of China.
Development
Pre-clinical data on MCLA-129 was presented in October 2019, at the AACR-NCI-EORTC International Conference on Molecular Targets and Cancer
Therapeutics. The poster, entitled “Pre-clinical evaluation of MCLA-129: a bispecific antibody targeting c-MET and EGFR,” showed that MCLA-129
inhibited and reversed resistance to tyrosine kinase resistant non-small cell lung cancer (NSCLC), cell lines resulting in tumor growth inhibition in
xenograft models of NSCLC. In these xenograft models, MCLA-129 showed dramatic tumor shrinkage in mice whose tumors are resistant to the EGFR
small molecule inhibitor erlotinib.
MCLA-129 Inhibited TKI Resistant NSCLC
|
MCLA-129 Reversed Acquired TKI Resistance
These pre-clinical data suggest MCLA-129, if successfully developed and approved, could benefit patients having NSCLC that become resistant to EGFR
targeted therapies. In collaboration with Betta, we are currently conducting IND-enabling studies of MCLA-129 for the potential treatment of various solid
tumors.
Pre-clinical Discovery Programs
We intend to further leverage our Biclonics® and TriclonicsTM technology platforms to identify multiple additional antibody candidates and advance them
to clinical development. Each of these antibody candidates are designed to bind to targets believed to be useful in the treatment of cancer with an intention
to establish efficacy and obtain information for submission to the FDA. Using our platform, we will continue to evaluate new targets and combinations to
identify potential candidates with the highest immunotherapeutic potential and select those candidates to be advanced into clinical trials.
Collaboration Agreements
As part of our business strategy, we collaborate with a range of partners, including pharmaceutical, biotechnology, and diagnostic companies as well as
academic institutions. We intend to continue to seek collaborations and license agreements to develop and commercialize therapeutics in order to exploit
the potential of our Biclonics® and TriclonicsTM platforms.
Incyte Corporation
We have entered into a collaboration and license agreement (Collaboration Agreement) with Incyte Corporation (Incyte). Under the terms of the
Collaboration Agreement, we and Incyte have agreed to collaborate with respect to the research, discovery and development of monospecific or bispecific
antibodies utilizing our proprietary Biclonics® technology platform. The collaboration encompasses up to 11 independent programs, including some of our
current pre-clinical immuno-oncology discovery programs. For one of the current clinical programs, concerning MCLA-145, we retain the exclusive right
to develop and commercialize the product candidate in the United States, while Incyte has the exclusive right to develop and commercialize the product
candidate outside the United States. For MCLA-145, we and Incyte will conduct and share equally the costs of mutually agreed global development
activities and will be solely responsible for independent development activities in our respective territories.
16
We have the option to co-fund development of products, if any, arising from one specified program, and subject to certain conditions, to a second specified
program, in each case in exchange for a share of profits in the United States, as well as the right to participate in a specified proportion of detailing
activities in the United States for one of such programs. If we exercise our co-funding option for a program, we would be responsible for funding 35% of
the associated future global development costs and, for certain of such programs, would be responsible for reimbursing Incyte for certain development
costs incurred prior to the option exercise. All products as to which we have exercised our option to co-fund development would be subject to joint
development plans and overseen by a joint development committee, with Incyte having final determination as to such plans in cases of dispute.
For each program other than MCLA-145, where we have not elected to co-fund development or where we do not have such a co-funding option, Incyte is
solely responsible for all costs of global development and commercialization activities. We retain the rights to, among other things, our Biclonics®
technology platform as well as clinical and pre-clinical candidates and future programs emerging from our platform that are outside the scope of the
Collaboration Agreement.
In January 2017, upon the Collaboration Agreement becoming effective, Incyte made an upfront non-refundable payment to us of $120 million for the
rights granted under the Collaboration Agreement. For each program as to which we do not have commercialization or co-development rights, we are
eligible to receive up to $100 million in future contingent development and regulatory milestones and up to $250 million in commercialization milestones,
as well as tiered royalties ranging from 6% to 10% of global net sales. For each program as to which we have exercised our option to co-fund development,
we are eligible to receive a 50% share of profits (or sustain 50% of any losses) in the United States and tiered royalties ranging from 6% to 10% of net sales
of products outside of the United States. If we opt to cease co-funding a program as to which we exercised our co-development option, then we will no
longer receive a share of profits in the United States but will be eligible to receive the same milestones from the co-funding termination date and the same
tiered royalties described above with respect to non-co-developed programs and, depending on the stage at which we choose to cease co-funding
development costs, additional royalties ranging up to 4% of net sales in the United States. For MCLA-145, for which we retain all commercial rights in the
United States, we and Incyte are each eligible to receive tiered royalties on net sales in the other’s territory at rates ranging from 6% to 10%.
The Collaboration Agreement will continue on a program-by-program basis until neither party has any royalty payment obligations with respect to such
program or, if earlier, the termination of the Collaboration Agreement or any program in accordance with the terms of the Collaboration Agreement. The
Collaboration Agreement may be terminated in its entirety, or on a program-by-program basis, by Incyte for convenience. The Collaboration Agreement
may also be terminated by either party under certain other circumstances, including material breach, or on a program-by-program basis for patent challenge
of patents under the applicable program, in each case as set forth in the Collaboration Agreement. If the Collaboration Agreement is terminated in its
entirety or with respect to one or more programs, all rights in the terminated programs revert to us, subject to payment to Incyte of a reverse royalty of up to
4% on sales of future products, if we elect to pursue development and commercialization of products arising from the terminated programs.
In connection with the Collaboration Agreement, we entered into a Share Subscription Agreement with Incyte, pursuant to which, in January 2017, we
issued and sold to Incyte 3,200,000 common shares for an aggregate purchase price of $80.0 million.
ONO Pharmaceutical
In April 2014, we entered into a strategic research and license agreement with ONO, under which we granted ONO an exclusive, worldwide, royalty-
bearing license to research, test, make, use and market a limited set of bispecific antibody candidates, if approved, based on our Biclonics® technology
platform, directed to two undisclosed targets.
ONO paid us a non-refundable upfront fee of €1.0 million, and we are eligible to receive up to an aggregate of €57.0 million in milestone payments upon
achievement of specified research and clinical development milestones. To date, we have achieved four of the specified pre-clinical milestones under this
research and license agreement and have received an aggregate of €2.7 million in milestone payments. For products commercialized under this agreement,
if any, we are also eligible to receive a mid-single digit royalty on net sales. For a designated period, which may include limited time periods following
termination of this agreement, in certain circumstances we and our affiliates are prohibited from researching, developing or commercializing bispecific
antibodies against the target combination that are the subject of this agreement. ONO also provides funding for our research and development activities
under an agreed-upon plan. This research and license agreement will expire after all milestone payments have been received and all related patent rights
have expired, unless terminated earlier. ONO has the right to terminate this agreement at any time for any reason, with or without cause. The licenses
granted to ONO may convert to royalty-free, fully-paid, perpetual licenses if ONO terminates the agreement for uncured material breach. We retain all
rights to use and commercialize any antibodies directed to one target utilized under the collaborative research program, and any antibodies directed to the
second target developed under the collaborative research program, excluding the up to five lead and/or selected antibodies against the second target ONO is
pursuing, provided that the use and commercialization is not with respect to the particular target combination.
17
On March 14, 2018, we entered into a second contract research and license agreement with ONO. Pursuant to an exclusive option granted to ONO in the
prior agreement executed in April 2014, ONO exercised its option to enter into the March 2018 agreement. We granted ONO an exclusive, worldwide,
royalty-bearing license, with the right to sublicense, research, test, make, use and market bispecific antibody candidates based on our Biclonics®
technology platform against two undisclosed targets directed to a particular undisclosed target combination. ONO identifies and selects the licensed
bispecific antibodies for which it is responsible for conducting further non-clinical and clinical development activities for such licensed bispecific
antibodies and pharmaceutical products containing such antibodies, including manufacture and process development. ONO controls and has exclusive
rights over the worldwide commercialization of any approved products, including worldwide supply, and is solely responsible for all costs and expenses
related to commercialization. ONO has agreed to fund our research and development activities and be responsible for the payment of all costs and expenses
for its own research and development activities, which are set out in a mutually agreed upon research plan. We retain all rights to use and commercialize
any antibodies that are generated under the collaborative research program, excluding the up to five lead and/or selected antibodies against the targets ONO
is pursuing, provided that the use and commercialization is not with respect to the particular target combination.
ONO has agreed to pay an upfront non-refundable payment of €700,000 for the rights granted and we are also eligible to receive an aggregate of
€57.0 million in milestone payments upon achievement of specified research and clinical development milestones. To date, we have achieved four of the
specified pre-clinical milestones under this research and license agreement and have received an aggregate of €3.7 million in milestone payments. For
products commercialized under the License Agreement, if any, the Company is eligible to receive a mid-single digit royalty on net sales.
For a designated period, which may include limited time periods following termination of this agreement, in certain circumstances we are prohibited from
researching, developing or commercializing bispecific antibodies against the undisclosed target combination that are the subject of this agreement. ONO
also provides funding for our research and development activities under an agreed-upon plan. This research and license agreement will expire after all
milestone payments have been received and all related patent rights have expired, unless terminated earlier. ONO has the right to terminate this agreement
at any time for any reason, with or without cause. The licenses granted to ONO may convert to royalty-free, fully-paid, perpetual licenses if ONO
terminates the agreement for uncured material breach.
Simcere Pharmaceutical Group
On January 8, 2018, we entered into an agreement with Simcere Pharmaceutical Group (Simcere) granting Simcere an exclusive license to develop and
commercialize in China three bispecific antibodies to be produced by Merus utilizing our proprietary Biclonics® technology platform. We retain all rights
outside of China.
We have agreed to lead research and discovery activities while Simcere has agreed to be responsible for the IND-enabling studies, clinical development,
regulatory filings and commercialization of these product candidates in China. Under the terms of the agreement, Simcere will retain a contract
manufacturing organization with experience in filing IND applications with U.S. authorities and clinical trial agreements (CTAs) with European regulatory
authorities in order to produce clinical trial materials. We received an upfront payment, and are eligible to receive milestone payments contingent upon
Simcere achieving certain specified development and commercial goals. To date, we have achieved one undisclosed milestone payment under this
agreement. We are eligible to receive tiered royalty payments on sales of any products resulting from the collaboration in China from Simcere. Simcere is
eligible to receive tiered royalty payments on sales outside of China from us.
Betta Pharmaceuticals Co. Ltd.
On December 10, 2018, we entered into a collaboration and license agreement with Betta Pharmaceuticals Co. Ltd. (Betta) where we granted Betta an
exclusive license to develop and commercialize in China MCLA-129, a Merus proprietary Biclonics® produced by our Biclonics® technology platform.
We retain all rights outside of China. Under the terms of the agreement, Betta will retain a contract manufacturing organization with experience in filing
IND applications with U.S. authorities and CTAs with European regulatory authorities in order to produce clinical trial materials for the Chinese market
and the rest of the world.
In addition to a non-refundable upfront payment, we and Betta will share equally the cost of the transfer of the manufacturing technology to a contract
manufacturing organization. We are also eligible to receive milestone payments contingent upon Betta achieving certain specified development and
commercial goals as well as tiered royalty payments of net sales of any products resulting from the collaboration in China. Betta is eligible to receive
milestone payments contingent upon us achieving certain specified development and commercial goals, and is eligible to receive tiered royalty payments of
net sales outside of China.
18
Manufacturing
Our Biclonics® technology platform relies on third parties for biological materials. We rely on and expect to continue to rely on third-party contract
manufacturing organizations (CMOs) for the supply of current good manufacturing practice-grade (cGMP-grade) clinical trial materials and commercial
quantities of our bispecific antibody candidates and products, if approved. We currently do not have any agreements for the commercial production of
bispecific product candidates, but we have contracted several biopharmaceutical CMOs for the clinical manufacture of zenocutuzumab, MCLA-117,
MCLA-158 and MCLA-145, and for the planned clinical manufacture of MCLA-129 in collaboration with Betta. We believe that the standardized
Biclonics® manufacturing process can be transferred to additional CMOs and potential future co-development or co-commercialization collaborations or
partnerships for the production of clinical and commercial supplies of our Biclonics® in the ordinary course of business.
Sales and Marketing
We have not yet defined our sales, marketing or product distribution strategy for zenocutuzumab, MCLA-117, MCLA-158, MCLA-145 or any of our other
bispecific antibody candidates because our bispecific antibody candidates are still in pre-clinical or early-to-middle-stage clinical development. Our
commercial strategy may include the use of strategic partners, distributors, a contract sales force, or the establishment of our own commercial and specialty
sales force. We plan to further evaluate these alternatives as we approach approval, if any, for one of our bispecific antibody candidates.
Competition
We compete directly with companies that focus on oncology and companies dedicating their resources to cancer therapies. We also face competition from
academic research institutions, governmental agencies and other various public and private research institutions. With the proliferation of new drugs and
therapies into oncology, we expect to face increasingly intense competition as new technologies become available and new therapeutic candidates are
clinically developed or approved therapies are explored for new indications. Any antibody candidates that we successfully develop and commercialize will
compete with existing therapies and new therapies that may become available in the future.
Many of our competitors have significantly greater financial, manufacturing, marketing, drug development, technical and human resources than we do.
Mergers and acquisitions in the pharmaceutical, biotechnology and diagnostic industries may result in even more resources being concentrated among a
smaller number of our competitors. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative
arrangements with large and established companies. These competitors also compete with us in recruiting and retaining top qualified scientific and
management personnel and establishing clinical trial sites and patient registration for clinical trials, manufacturer’s production capacity, as well as in
acquiring technologies complementary to, or necessary for, our programs.
The key competitive factors affecting the success of all of our therapeutic antibody candidates, if approved, are likely to be their efficacy, safety, dosing
convenience, price, the effectiveness of companion diagnostics in guiding the use of related therapeutics, the level of generic competition and the
availability of reimbursement from government and other third-party payors.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, less
expensive, more convenient or easier to administer, or have fewer or less severe effects than any products that we may develop. Our competitors also may
obtain FDA, EMA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors
establishing a strong market position before we are able to enter the market. Even if our antibody candidates achieve marketing approval, they may be
priced at a significant premium over competitive products if any have been approved by then.
In addition to currently marketed therapies, there are also a number of products in late-stage clinical development to treat cancer, including other bispecific
antibodies or similar molecules. Our closest competitors in this area include Affimed N.V., Zymeworks Inc., Genmab A/S, MacroGenics, Inc., Rain
Therapeutics, Regeneron Pharmaceuticals, Inc. and Xencor, Inc. The antibody candidates in development by competitors may provide efficacy, safety,
dosing convenience and other benefits that are not provided by currently marketed therapies. As a result, they may provide significant competition for any
of our antibody candidates for which we obtain marketing approval.
Intellectual Property
We strive to protect and enhance the proprietary technologies, inventions, and improvements that we believe are important to our business, including
seeking, maintaining, and defending patent rights, whether developed internally or licensed from third parties. Our policy is to seek to protect our
proprietary position by, among other methods, pursuing and obtaining patent protection in the United States and in jurisdictions outside of the United States
related to our proprietary technology, inventions, improvements, platforms and antibody candidates that are important to the development and
implementation of our business.
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As of January 30, 2020:
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Our patent portfolio related to our bispecific antibody candidate zenocutuzumab consists of one application filed under the Patent Cooperation
Treaty (PCT) application, filed on February 27, 2015 with applications pending in the United States, Europe and 16 other foreign countries
with an expected expiry not earlier than February 27, 2035. Claims are directed to the zenocutuzumab composition of matter and methods of
using zenocutuzumab to treat subjects having or at risk of having an ErbB-2 and/or ErbB3 positive tumor. In addition, our portfolio includes
four PCT patent applications covering further methods of using zenocutuzumab, including in combination therapies, to treat patients,
concerning methods of treating patients with cancer harbor NRG1 gene fusions, three of which were filed on April 3, 2018, and one filed on
May 17, 2018. Three of these four PCT patent applications entered national phases in the United States, Europe and 16 other foreign countries.
One of these four PCT patent applications entered national phases in the United States, Europe and three other foreign countries.
Our patent portfolio related to our bispecific antibody candidate MCLA-117 consists of a first PCT application, filed on September 27, 2013,
with applications pending in the United States, Europe and 15 foreign countries with an expected expiry not earlier than September 27, 2033.
There is currently one issued US patent and one pending US application, one issued European Patent (EP) patent and a pending EP divisional
application, 14 pending foreign applications, and six issued patents in several foreign jurisdictions. In addition, we filed a second PCT
application related to MCLA-117 on July 8, 2016, which has entered national phases in the United States, Europe and 13 foreign countries with
an expected expiry not earlier than July, 2036. There are currently two issued U.S. patents and one pending U.S. application, one issued and
one pending EP application, and 13 pending foreign applications. Claims are related to the MCLA-117 composition of matter and methods of
using MCLA-117 in the treatment or prevention of MDS, chronic myelogenous leukemia (CML) or AML. In addition, our portfolio includes
one PCT patent application covering methods of using MCLA-117, including in combination therapies filed on November 11, 2018, with an
expected expiry not earlier than November 11, 2038. Lastly, our portfolio related to MCLA-117 includes one PCT patent application covering
dosage regimes and methods of treatment filed on December 20, 2019, with an expiry not earlier than December 20, 2039.
Our patent portfolio related to our bispecific antibody candidate MCLA-158 consists of one PCT filed on October 21, 2016, with applications
pending in the United States, Europe and 14 other foreign countries with an expiry no earlier than October 21, 2036. Claims are directed to the
MCLA-158 composition of matter and methods of using MCLA-158 in the treatment or prevention of various solid tumors.
Our patent portfolio related our bispecific antibody candidate MCLA-145 consists of one PCT filed on September 22, 2017, with application
pending in the United States, Europe and 19 other foreign countries with an expiry no earlier than September 2037. Claims are directed to the
MCLA-145 composition of matter and methods of using MCLA-145 in the treatment or prevention of various solid tumors.
Our patent portfolio related our bispecific antibody candidate MCLA-129 consists of one PCT filed on August 9, 2018, with a pending
application in Taiwan and national phase pending, with an expiry no earlier than August 2038. Claims are directed to the MCLA-129
composition of matter and methods of using MCLA-129 in the treatment or prevention of various solid tumors.
Our patent portfolio related to our MeMo® mouse consists of three issued U.S. patents, nine pending U.S. applications, one issued European
patent that has been validated in many countries, and five pending European applications, 13 issued foreign patents and 13 pending foreign
applications, all with an expected expiry not earlier than June 29, 2029. Claims are directed to a common light chain animal and methods of
producing hybridomas, host cells, and antibodies relating to the use of a common light chain and by exposing the animal to an antigen.
Our patent portfolio related to our Spleen to Screen® technology consists of two issued U.S. patents, one pending U.S. application, one issued
European Patent, which was revoked in opposition and currently subject to appeal before the Technical Board of Appeals, one pending
European application and two issued foreign patents, with three foreign pending applications, all with an expected expiry not earlier than
September 26, 2032. For a discussion concerning opposition proceedings against this patent family see Item 3 “Legal Proceedings” and Note
10 to our Consolidated Financial Statements included in this Annual Report.
Our patent portfolio related to recombinant production of mixtures of antibodies includes claims directed to host cells generating multispecific
antibodies and consists of six issued U.S. patents, and three pending U.S. applications, two issued European patents, 16 issued foreign patents,
and four pending foreign applications, all with an expected expiry not earlier than July, 2023.
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Our patent portfolio related to efficient dimerization of heavy chains promoting efficient production of Biclonics® and mixtures of antibodies,
methods and host cells for recombinant production thereof, and consists of two PCT applications filed on April 19, 2013, which resulted in six
issued U.S. patents, one pending U.S. application, two issued European patents, 2 pending European applications, 14 issued foreign patents,
and twenty-three pending foreign applications, all with an expected expiry not earlier than April, 2033.
Our patent portfolio related to our trispecific antibody technology consists of one PCT application, filed on March 29, 2019, with an expiry no
earlier than March 2039. Claims are directed to a multivalent antibody format, including the TriclonicsTM format.
We plan to continue to expand our intellectual property estate by filing patent applications directed to dosage forms, methods of treatment and additional
compositions created or identified from our Biclonics® technology platform, improvements to our Biclonics® technology platform, our next generation
TriclonicsTM platform and ongoing development of our antibody candidates. Specifically, we seek patent protection in the United States and internationally
for novel compositions of matter directed to aspects of the molecules, basic structures and processes for manufacturing these molecules and the use of these
molecules in a variety of therapies.
Our patent portfolio is intended to cover, but is not limited to, the composition of matter of our bispecific antibody candidates, their methods of use, the
Biclonics® and TriclonicsTM technology platforms used to generate them, related technologies and/or other aspects of the inventions that are important to
our business, including our MeMo® mouse, Spleen to Screen® technology, and recombinant host cells capable of producing our antibody candidates,
methods of purification, and heterodimerization, among other proprietary technology. We also rely on trademarks, trade secrets and careful monitoring of
our proprietary information to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection.
We also rely on know-how, continuing technological innovation and in-licensing opportunities to develop, strengthen, and maintain our proprietary
positions.
Our success will depend on our ability to obtain and maintain patent and other proprietary protection for commercially important technology, inventions
and know-how related to our business, defend and enforce our patents, maintain our licenses to use intellectual property owned by third parties, preserve
the confidentiality of our trade secrets and operate without infringing valid and enforceable patents and other proprietary rights of third parties. For
important factors related to our proprietary technology, inventions, improvements, platforms and antibody candidates, please see the section entitled “Risk
Factors—Risks Related to Intellectual Property and Information Technology.”
Government Regulation
We are subject to extensive regulation. We expect our antibody candidates to be regulated as biologics. Biological products are subject to regulation under
the Federal Food, Drug, and Cosmetic Act (FD&C Act) and the Public Health Service Act (PHS Act) and other federal, state, local and foreign statutes and
regulations. Both the FD&C Act and the PHS Act and their corresponding regulations govern, among other things, the testing, manufacturing, safety,
efficacy, labeling, packaging, storage, record keeping, distribution, reporting, advertising and other promotional practices involving biological products.
U.S. Biological Products Development Process
The process required by the FDA before a biologic may be marketed in the United States generally involves the following:
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completion of extensive nonclinical, sometimes referred to as pre-clinical laboratory tests, and pre-clinical animal trials and applicable
requirements for the humane use of laboratory animals and formulation studies in accordance with applicable regulations, including good
laboratory practices (GLPs);
submission to the FDA of an IND, which must become effective before human clinical trials may begin;
performance of adequate and well-controlled human clinical trials according to the FDA’s regulations, commonly referred to as good clinical
practice (GCP), regulations and any additional requirements for the protection of human research subjects and their health information, to
establish the safety and efficacy of the proposed biological product for its intended use;
submission to the FDA of a Biologics License Application (BLA) for marketing approval that includes substantive evidence of safety, purity,
and potency from results of nonclinical testing and clinical trials;
satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the biological product is produced to assess
compliance with current Good Manufacturing Practice (cGMP) requirements to assure that the facilities, methods and controls are adequate to
preserve the biological product’s identity, strength, quality and purity;
potential FDA audit of the nonclinical and clinical trial sites that generated the data in support of the BLA; and
FDA review and approval, or licensure, of the BLA.
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Before testing any antibody candidate in humans, the antibody candidate enters the pre-clinical testing stage. Pre-clinical tests, also referred to as
nonclinical trials, generally include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies to assess the potential
safety and activity of the antibody candidate. The conduct of the pre-clinical tests must comply with federal regulations and requirements including GLPs.
The clinical trial sponsor must submit the results of the pre-clinical tests, together with manufacturing information, analytical data, any available clinical
data or literature and a proposed clinical protocol, to the FDA as part of the IND. Some pre-clinical testing may continue even after the IND is submitted.
The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA places the clinical trial on a clinical hold within that 30-day
time period. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. The FDA may also
impose clinical holds on an antibody candidate, including bispecific antibody candidates, at any time before or during clinical trials due to safety concerns
or non-compliance. If the FDA imposes a clinical hold, trials may not recommence without FDA authorization and then only under terms authorized by the
FDA.
Clinical trials involve the administration of the biological antibody candidate to healthy volunteers or patients under the supervision of qualified
investigators, generally physicians not employed by or under the trial sponsor’s control. Clinical trials are conducted under protocols detailing, among other
things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitor subject
safety, including stopping rules that assure a clinical trial will be stopped if certain adverse events should occur. Each protocol and any amendments to the
protocol must be submitted to the FDA as part of the IND. Clinical trials must be conducted and monitored in accordance with the FDA’s regulations
comprising the GCP requirements, including the requirement that all research subjects provide informed consent. Further, each clinical trial must be
reviewed and approved by an independent institutional review board (IRB) at or servicing each institution at which the clinical trial will be conducted. An
IRB is charged with protecting the welfare and rights of trial participants and considers such items as whether the risks to individuals participating in the
clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the form and content of the informed consent that
must be signed by each clinical trial subject or his or her legal representative and must monitor the clinical trial until completed.
Human clinical trials are typically conducted in three sequential phases that may overlap or be combined:
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Phase 1. The biological antibody candidate is initially introduced into healthy human subjects and tested for safety. In the case of some
products for severe or life-threatening diseases, especially when the product may be too inherently toxic to ethically administer to healthy
volunteers, the initial human testing is often conducted in patients.
Phase 2. The biological antibody candidate is evaluated in 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, optimal dosage and dosing
schedule.
Phase 3. Clinical trials are undertaken to further evaluate dosage, clinical efficacy, potency, and safety in an expanded patient population at
geographically dispersed clinical trial sites. These clinical trials are intended to establish the overall risk/benefit ratio of the product and
provide an adequate basis for product labeling.
Post-approval clinical trials, sometimes referred to as Phase 4 clinical trials, may be conducted after initial marketing approval. These clinical trials are
used to gain additional experience from the treatment of patients in the intended therapeutic indication, particularly for long-term safety follow-up.
During all phases of clinical development, regulatory agencies require extensive monitoring and auditing of all clinical activities, clinical data, and clinical
trial investigators. Annual progress reports detailing the results of the clinical trials must be submitted to the FDA. Written IND safety reports must be
promptly submitted to the FDA and the investigators for serious and unexpected adverse events, any findings from other trials, tests in laboratory animals
or in vitro testing that suggest a significant risk for human subjects, or any clinically important increase in the rate of a serious suspected adverse reaction
over that listed in the protocol or investigator brochure. The sponsor must submit an IND safety report within 15 calendar days after the sponsor determines
that the information qualifies for reporting. 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. The FDA or the sponsor or its data safety monitoring board may suspend a
clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk.
Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the
IRB’s requirements or if the biological antibody candidate has been associated with unexpected serious harm to patients.
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There are also requirements governing the reporting of ongoing clinical trials and completed clinical trial results to public registries. Sponsors of clinical
trials of FDA-regulated products, including biologics, are required to register and disclose certain clinical trial information, which is publicly available at
www.clinicaltrials.gov. Information related to the product, patient population, phase of investigation, trial sites and investigators, and other aspects of the
clinical trial is then made public as part of the registration. Sponsors are also obligated to discuss the results of their clinical trials after completion.
Disclosure of the results of these trials can be delayed until the new product or new indication being studied has been approved.
Concurrent with clinical trials, companies usually complete additional animal trials and must also develop additional information about the physical
characteristics of the biological antibody candidate as well as finalize a process for manufacturing the product in commercial quantities in accordance with
cGMP requirements. To help reduce the risk of the introduction of adventitious agents with use of biological products, the PHS Act emphasizes the
importance of manufacturing control for products whose attributes cannot be precisely defined. The manufacturing process must be capable of consistently
producing quality batches of the biological antibody candidate and, among other things, the sponsor must develop methods for testing the identity, strength,
quality, potency and purity of the final biological product. Additionally, appropriate packaging must be selected and tested and stability studies must be
conducted to demonstrate that the biological antibody candidate does not undergo unacceptable deterioration over its shelf life.
U.S. Review and Approval Processes
After the completion of clinical trials of a biological antibody candidate, FDA approval of a BLA must be obtained before commercial marketing of the
biological product. The BLA must include results of product development, laboratory and animal trials, human trials, information on the manufacture and
composition of the product, proposed labeling and other relevant information. In addition, under the Pediatric Research Equity Act (PREA) a BLA or
supplement to a BLA must contain data to assess the safety and effectiveness of the biological antibody candidate for the claimed indications in all relevant
pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. A sponsor
who is planning to submit a marketing application for a drug or biological product that includes a new active ingredient, new indication, new dosage form,
new dosing regimen or new route of administration must submit an initial Pediatric Study Plan (PSP) within sixty days after an end-of-Phase 2 meeting or
as may be agreed between the sponsor and FDA. Unless otherwise required by regulation, PREA does not apply to any biological product for an indication
for which orphan designation has been granted.
Under the Prescription Drug User Fee Act (PDUFA), as amended, each BLA must be accompanied by a user fee. The FDA adjusts the PDUFA user fees on
an annual basis. Fee waivers or reductions are available in certain circumstances, including a waiver of the application fee for the first application filed by a
small business. Additionally, no user fees are assessed on BLAs for products designated as orphan drugs, unless the product also includes a non-orphan
indication.
Within 60 days following submission of the application, the FDA reviews a BLA submitted to determine if it is substantially complete before the agency
accepts it for filing. The FDA may refuse to file any BLA that it deems incomplete or not properly reviewable at the time of submission and may request
additional information. In this event, the BLA must be resubmitted with the additional information. The resubmitted application also is 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 of the BLA. The FDA
reviews the BLA to determine, among other things, whether the proposed product is safe, pure and potent, and whether the product is being manufactured
in accordance with cGMP requirements to assure and preserve the product’s identity, safety, strength, quality, potency and purity. The FDA may refer
applications for novel biological products or biological products that present difficult questions of safety or efficacy to an advisory committee, typically a
panel that includes clinicians and other experts, for review, evaluation and 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. During the biological product approval process, the FDA also will determine whether a Risk Evaluation and Mitigation Strategy (REMS) is
necessary to assure the safe use of the biological antibody candidate. If the FDA concludes a REMS is needed, the sponsor of the BLA must submit a
proposed REMS; the FDA will not approve the BLA without a REMS, if required.
Before approving a BLA, the FDA will inspect the facilities at which the product is manufactured. The FDA will not approve the product 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. Additionally, before approving a BLA, the FDA will typically inspect one or more clinical sites to assure that the
clinical trials were conducted in compliance with IND trial requirements and GCP requirements.
Notwithstanding the submission of relevant data and information, the FDA may ultimately decide that the BLA does not satisfy its regulatory criteria for
approval and deny approval. If the FDA decides not to approve the BLA in its present form, the FDA will issue a complete response letter that usually
describes all of the specific deficiencies in the BLA identified by the FDA. The deficiencies identified may be minor, for example, requiring labeling
changes, or major, for example, requiring additional clinical trials. Additionally, the complete response letter may include recommended actions that the
applicant might take to place the application in a condition for approval. If a complete response letter is issued, the applicant may either resubmit the BLA,
addressing all of the deficiencies identified in the letter, or withdraw the application.
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If a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may
otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings or
precautions be included in the product labeling. The FDA may impose restrictions and conditions on product distribution, prescribing, or dispensing in the
form of a REMS, or otherwise limit the scope of any approval. In addition, the FDA may require post marketing clinical trials, sometimes referred to as
Phase IV clinical trials, designed to further assess a biological product’s safety and effectiveness, and testing and surveillance programs to monitor the
safety of approved products that have been commercialized.
One of the performance goals agreed to by the FDA under the PDUFA is to review 90% of standard BLAs in 10 months from the filing date and 90% of
priority BLAs in six months from the filing date, whereupon a review decision is to be made. The FDA does not always meet its PDUFA goal dates for
standard and priority BLAs and its review goals are subject to change from time to time. The review process and the PDUFA goal date may be extended by
three months if the FDA requests or the BLA sponsor otherwise provides additional information or clarification regarding information already provided in
the submission within the last three months before the PDUFA goal date.
Orphan Drug Designation
The FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition that affects fewer than 200,000 individuals in the United
States, or if it affects more than 200,000 individuals in the United States, there is no reasonable expectation that the cost of developing and marketing the
drug for this type of disease or condition will be recovered from sales in the United States. Orphan product designation must be requested before submitting
a BLA. After the FDA grants orphan product designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the
FDA. Orphan product designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.
In the United States, orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax
advantages and user-fee waivers. In addition, if a product receives the first FDA approval for the indication for which it has orphan designation, the product
is entitled to orphan drug exclusivity, which means the FDA may not approve any other application to market the same drug for the same indication for a
period of seven years, except in limited circumstances, such as a showing of clinical superiority over the product with orphan exclusivity or where the
manufacturer with orphan exclusivity is unable to assure sufficient quantities of the approved orphan designated product. Competitors, however, may
receive approval of different products for the indication for which the orphan product has exclusivity or obtain approval for the same product but for a
different indication for which the orphan product has exclusivity. Orphan product exclusivity also could block the approval of one of our products for seven
years if a competitor obtains approval of the same biological product as defined by the FDA or if our antibody candidate is determined to be contained
within the competitor’s product for the same indication or disease. If a drug or biological product designated as an orphan product receives marketing
approval for an indication broader than what is designated, it may not be entitled to orphan product exclusivity.
Expedited Development and Review Programs
The FDA has a Fast Track program that is intended to expedite or facilitate the process for reviewing new biological products that meet certain criteria.
Specifically, new biological products are eligible for Fast Track designation if they are intended to treat a serious or life-threatening disease or condition
and demonstrate the potential to address unmet medical needs for the disease or condition. Fast Track designation applies to the combination of the product
and the specific indication for which it is being studied. The sponsor of a new biologic may request that the FDA designate the biologic as a Fast Track
product at any time during the clinical development of the product. With regard to a Fast Track product, the FDA may consider for review sections of the
marketing application on a rolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections
of the application, the FDA agrees to accept sections of the application and determines that the schedule is acceptable, and the sponsor pays any required
user fees upon submission of the first section of the application.
Any product submitted to the FDA for marketing, including under a Fast Track program, may be eligible for other types of FDA programs intended to
expedite development and review, such as priority review and accelerated approval. Any product is eligible for priority review if it is intended to treat a
serious disease or condition, if approved, would provide a significant improvement in safety or effectiveness compared to marketed products. The FDA will
attempt to direct additional resources to the evaluation of an application for a new biological product designated for priority review in an effort to facilitate
the review. Additionally, a product may be eligible for accelerated approval. Biological products studied for their safety and effectiveness in treating serious
or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may be eligible for accelerated approval, which means
that they may be approved on the basis of adequate and well-controlled clinical trials establishing that the product has an effect on a surrogate endpoint that
is reasonably likely to predict a clinical benefit, or on the basis of an effect on a clinical endpoint other than survival or irreversible morbidity or mortality
or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments. As a
condition of approval, the FDA may require that a sponsor of a biological product subject to accelerated approval perform adequate and well-controlled
post-marketing clinical trials. Biological products receiving accelerated approval may be subject to expedited withdrawal procedures if the sponsor fails to
conduct the required post-market clinical trials or if such trials fail to verify the predicted clinical benefit. In addition, the FDA currently requires as a
condition for accelerated approval pre-approval of promotional materials, which could adversely impact the timing of the commercial launch of the
product.
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In addition, under the provisions of the Food and Drug Administration Safety and Innovation Act (FDASIA) enacted in 2012, the FDA established a
Breakthrough Therapy designation which is intended to expedite the development and review of products that treat serious or life-threatening diseases or
conditions. 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 existing therapies
on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. The designation includes all of
the features of Fast Track designation, as well as more intensive FDA interaction and guidance. The Breakthrough Therapy designation is a distinct status
from both accelerated approval and priority review, but these can also be granted to the same antibody candidate if the relevant criteria are met. The FDA
must take certain actions, such as holding timely meetings and providing advice, intended to expedite the development and review of an application for
approval of a breakthrough therapy. All requests for breakthrough therapy designation will be reviewed within 60 days of receipt, and FDA will either grant
or deny the request.
Fast Track designation, priority review and Breakthrough Therapy designation do not change the standards for approval but may expedite the development
or approval process. Even if we receive one of these designations for our antibody candidates, the FDA may later decide that our antibody candidates no
longer meet the conditions for qualification. In addition, these designations may not provide us with a material commercial advantage.
Post-Approval Requirements
Maintaining substantial compliance with applicable federal, state, and local statutes and regulations requires the expenditure of substantial time and
financial resources. Rigorous and extensive FDA regulation of biological products continues after approval, particularly with respect to cGMP
requirements. We will rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of any products that we
may commercialize. Manufacturers of our products are required to comply with applicable requirements in the cGMP regulations, including quality control
and quality assurance and maintenance of records and documentation. Other post-approval requirements applicable to biological products include record-
keeping requirements, reporting of adverse effects, and reporting updated safety and efficacy information.
We also must comply with the FDA’s advertising and promotion requirements, such as those related to direct-to-consumer advertising, the prohibition on
promoting products for uses or in patient populations that are not described in the product’s approved labeling (known as “off-label use”), industry-
sponsored scientific and educational activities, and promotional activities involving the internet. Discovery of previously unknown problems or the failure
to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market
as well as possible civil or criminal sanctions. Failure to comply with the applicable U.S. requirements at any time during the product development process,
approval process or after approval, may subject an applicant or manufacturer to administrative or judicial civil or criminal sanctions and adverse publicity.
FDA sanctions could include refusal to approve pending applications, withdrawal of an approval, clinical hold, warning or untitled letters, product recalls,
product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, mandated corrective
advertising or communications with doctors, debarment, restitution, disgorgement of profits, or civil or criminal penalties.
Biological product manufacturers and other entities involved in the manufacture and distribution of approved biological products are required to register
their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for
compliance with cGMP requirements and other laws. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production
and quality control to maintain cGMP compliance. In addition, changes to the manufacturing process or facility generally require prior FDA approval
before being implemented and other types of changes to the approved product, such as adding new indications and additional labeling claims, are also
subject to further FDA review and approval.
U.S. Patent Term Restoration and Marketing Exclusivity
Depending upon the timing, duration and specifics of the FDA approval of the use of our antibody candidates, some of our U.S. patents may be eligible for
limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman
Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product
development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14
years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND and the
submission date of a BLA plus the time between the submission date of a BLA and the approval of that application, except that the review period is
reduced by any time during which the applicant failed to exercise due diligence. Only one patent applicable to an approved biological product is eligible for
the extension and the application for the extension must be submitted prior to the expiration of the patent and within a 60-day period from the date the
product is first approved for commercial marketing. The U.S. PTO, in consultation with the FDA, reviews and approves the application for any patent term
extension or restoration. In the future, we may apply for restoration of patent term for one of our currently owned patents to add patent life beyond its
current expiration date, depending on the expected length of the clinical trials and other factors involved in the filing of the relevant BLA; however, there
can be no assurance that any such extension will be granted to us.
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Biosimilars and Exclusivity
The Biologics Price Competition and Innovation Act of 2009 (BPCIA) created an abbreviated approval pathway for biological products that are biosimilar
to or interchangeable with an FDA-licensed reference biological product. The FDA has issued several guidance documents outlining an approach to review
and approve biosimilars.
Biosimilarity, which requires that there be no clinically meaningful differences between the biological product and the reference product in terms of safety,
purity, and potency, can be shown through analytical studies, animal studies, and a clinical trial or studies. Interchangeability requires that a product is
biosimilar to the reference product and the product must demonstrate that it can be expected to produce the same clinical results as the reference product in
any given patient and, for products that are administered multiple times to an individual, the biologic and the reference biologic may be alternated or
switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference
biologic. However, complexities associated with the larger, and often more complex, structures of biological products, as well as the processes by which
such products are manufactured, pose significant hurdles to implementation of the abbreviated approval pathway that are still being worked out by the
FDA. For example, in May 2019 the FDA issued final guidance outlining considerations for sponsors seeking to demonstrate interchangeability with a
reference biologic. However, to date the FDA has not approved a BLA for an interchangeable biological product.
Under the BPCIA, an application for a biosimilar product may not be submitted to the FDA until four years following the date that the reference product
was first licensed by the FDA. In addition, the approval of a biosimilar product may not be made effective by the FDA until 12 years from the date on
which the reference product was first licensed. During this 12-year period of exclusivity, another company may still market a competing version of the
reference product if the FDA approves a full BLA for the competing product containing the sponsor’s own pre-clinical data and data from adequate and
well-controlled clinical trials to demonstrate the safety, purity and potency of their product. The BPCIA also created certain exclusivity periods for
biosimilars approved as interchangeable products. At this juncture, it is unclear whether products deemed “interchangeable” by the FDA will, in fact, be
readily substituted by pharmacies, which are governed by state pharmacy law.
A biological product can also obtain pediatric market exclusivity in the United States. Pediatric exclusivity, if granted, adds six months to existing
exclusivity periods and patent terms. This six-month exclusivity, which runs from the end of other exclusivity protection or patent term, may be granted
based on the voluntary completion of a pediatric trial in accordance with an FDA-issued “Written Request” for such a trial.
The BPCIA is complex and continues to be interpreted and implemented by the FDA. Certain aspects of the BPCIA, some of which may impact the BPCIA
exclusivity provisions, have also been the subject of recent litigation. As a result, the ultimate impact, implementation, and meaning of the BPCIA remain
subject to significant uncertainty.
FDA Regulation of Companion Diagnostics
We expect that our antibody candidates may require use of an in vitro diagnostic to identify appropriate patient populations for our products. These
diagnostics, often referred to as companion diagnostics, are regulated as medical devices. In the United States, the FD&C Act and its implementing
regulations, and other federal and state statutes and regulations govern, among other things, medical device design and development, pre-clinical and
clinical testing, premarket clearance or approval, registration and listing, manufacturing, labeling, storage, advertising and promotion, sales and
distribution, export and import, and post-market surveillance. Unless an exemption applies, diagnostic tests require marketing clearance or approval from
the FDA prior to commercial distribution. The two primary types of FDA marketing authorization applicable to a medical device are premarket
notification, also called 510(k) clearance, and premarket approval (PMA) approval. We expect that any companion diagnostic developed for use with our
antibody candidates may utilize the PMA pathway.
If use of a companion diagnostic is essential to safe and effective use of a drug or biologic product, then the FDA generally will require approval or
clearance of the diagnostic contemporaneously with the approval of the therapeutic product. On August 6, 2014, the FDA issued a final guidance document
addressing the development and approval process for “ In Vitro Companion Diagnostic Devices.” According to the guidance, for novel candidates such as
our antibody candidates, a companion diagnostic device and its corresponding drug or biologic candidate may be required to be approved or cleared
contemporaneously by the FDA for the use indicated in the therapeutic product labeling, although the FDA may decide that it is appropriate to approve a
therapeutic product even though a companion diagnostic device is not approved or cleared contemporaneously. In general, the FDA expects that a
companion diagnostic that is intended for use with the therapeutic product will be later approved or cleared through an appropriate submission and the
therapeutic product labeling will be revised to stipulate the use of the companion diagnostic. The guidance also explains that a companion diagnostic device
used to make treatment decisions in clinical trials of a drug generally will be considered an investigational device, unless it is employed for an intended use
for which the device is already approved or cleared. If used to make critical treatment decisions, such as patient selection, the diagnostic device generally
will be considered a significant risk device under the FDA’s Investigational Device Exemption (IDE) regulations. Thus, the sponsor of the diagnostic
device will be required to comply
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with the IDE regulations. According to the guidance, if a diagnostic device and a drug are to be studied together to support their respective approvals, both
products can be studied in the same investigational study, if the study meets both the requirements of the IDE regulations and the IND regulations. The
guidance provides that depending on the details of the study plan and subjects, a sponsor may seek to submit an IND alone, or both an IND and an IDE. In
July 2016, the FDA issued a draft guidance document intended to further assist sponsors of therapeutic products and sponsors of in vitro companion
diagnostic devices on issues related to co-development of these products, and in December 2018, the FDA issued a draft guidance describing
considerations for the development and labeling of in vitro companion diagnostic devices to support the indicated uses of multiple drug or biological
oncology products.
The FDA generally requires companion diagnostics intended to select the patients who will respond to cancer treatment to obtain approval of a PMA for
that diagnostic contemporaneously with approval of the therapeutic. The review of these in vitro companion diagnostics in conjunction with the review of a
cancer therapeutic involves coordination of review by the FDA’s Center for Biologics Evaluation and Research and by the FDA’s Center for Devices and
Radiological Health. The PMA process, including the gathering of clinical and pre-clinical data and the submission to and review by the FDA, can take
several years or longer. It involves a rigorous premarket review during which the applicant must prepare and provide the FDA with reasonable assurance of
the device’s safety and effectiveness and information about the device and its components regarding, among other things, device design, manufacturing and
labeling. PMA applications are subject to an application fee. In addition, PMAs for certain devices must generally include the results from extensive pre-
clinical and adequate and well-controlled clinical trials to establish the safety and effectiveness of the device for each indication for which FDA approval is
sought. In particular, for a diagnostic, the applicant must demonstrate that the diagnostic produces reproducible results when the same sample is tested
multiple times by multiple users at multiple laboratories. As part of the PMA review, the FDA will typically inspect the manufacturer’s facilities for
compliance with the Quality System Regulation (QSR) which imposes elaborate testing, control, documentation and other quality assurance requirements.
If the FDA evaluations of both the PMA application and the manufacturing facilities are favorable, the FDA will either issue an approval letter or an
approvable letter, which usually contains a number of conditions that must be met in order to secure the final approval of the PMA, such as changes in
labeling, or specific additional information, such as submission of final labeling, in order to secure final approval of the PMA. If the FDA concludes that
the applicable criteria have been met, the FDA will issue a PMA for the approved indications, which can be more limited than those originally sought by
the applicant. The PMA can include post-approval conditions that the FDA believes necessary to ensure the safety and effectiveness of the device,
including, among other things, restrictions on labeling, promotion, sale and distribution.
If the FDA’s evaluation of the PMA or manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. A
not approvable letter will outline the deficiencies in the application and, where practical, will identify what is necessary to make the PMA approvable. The
FDA may also determine that additional clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the
trials are conducted and then the data is submitted in an amendment to the PMA. Once granted, PMA approval may be withdrawn by the FDA if
compliance with post approval requirements, conditions of approval or other regulatory standards is not maintained or problems are identified following
initial marketing. PMA approval is not guaranteed, and the FDA may ultimately respond to a PMA submission with a not approvable determination based
on deficiencies in the application and require additional clinical trials or other data that may be expensive and time-consuming to generate and that can
substantially delay approval.
After a device is placed on the market, it remains subject to significant regulatory requirements. Medical devices may be marketed only for the uses and
indications for which they are cleared or approved. Device manufacturers must also establish registration and device listings with the FDA. A medical
device manufacturer’s manufacturing processes and those of its suppliers are required to comply with the applicable portions of the QSR, which cover the
methods and documentation of the design, testing, production, processes, controls, quality assurance, labeling, packaging and shipping of medical devices.
Domestic facility records and manufacturing processes are subject to periodic unscheduled inspections by the FDA. The FDA also may inspect foreign
facilities that export products to the United States.
Government Regulation Outside of the United States
In addition to regulations in the United States, we will be subject to a variety of regulations in other jurisdictions governing, among other things, clinical
trials and any commercial sales and distribution of our products. Because biologically sourced raw materials are subject to unique contamination risks, their
use may be restricted in some countries.
Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in foreign countries prior to the
commencement of clinical trials or marketing of the product in those countries. Certain countries outside of the United States have a similar process that
requires the submission of a clinical trial application much like the IND prior to the commencement of human clinical trials. In the European Union, for
example, a CTA must be submitted to each country’s national health authority and an independent ethics committee, much like the FDA and the IRB,
respectively. Once the CTA is approved in accordance with a country’s requirements, clinical trial development may proceed.
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The requirements and process governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In all
cases, the clinical trials are conducted in accordance with GCP and the applicable regulatory requirements and the ethical principles that have their origin in
the Declaration of Helsinki.
To obtain regulatory approval of an investigational biological product under European Union regulatory systems, we must submit a marketing authorization
application. The application used to file the BLA in the United States is similar to that required in the European Union, with the exception of, among other
things, country-specific document requirements. The European Union also provides opportunities for market exclusivity. For example, in the European
Union, upon receiving marketing authorization, new chemical entities generally receive eight years of data exclusivity and an additional two years of
market exclusivity. If granted, data exclusivity prevents regulatory authorities in the European Union from referencing the innovator’s data to assess a
generic application. During the additional two-year period of market exclusivity, a generic marketing authorization can be submitted, and the innovator’s
data may be referenced, but no generic product can be marketed until the expiration of the market exclusivity. However, there is no guarantee that a product
will be considered by the European Union’s regulatory authorities to be a new chemical entity, and products may not qualify for data exclusivity. Products
receiving orphan designation in the European Union can receive ten years of market exclusivity; during this period, no marketing authorization application
may be accepted and no marketing authorization may be granted for a similar medicinal product for the same indication. An orphan product can also obtain
an additional two years of market exclusivity in the European Union for pediatric studies. No extension to any supplementary protection certificate can be
granted on the basis of pediatric studies for orphan indications.
The criteria for designating an “orphan medicinal product” in the European Union are similar in principle to those in the United States. Under Article 3 of
Regulation (EC) 141/2000, a medicinal product may be designated as orphan if (1) it is intended for the diagnosis, prevention or treatment of a life-
threatening or chronically debilitating condition; (2) either (a) such condition affects no more than five in 10,000 persons in the European Union when the
application is made, or (b) the product, without the benefits derived from orphan status, would not generate sufficient return in the European Union to
justify investment; and (3) there exists no satisfactory method of diagnosis, prevention or treatment of such condition authorized for marketing in the
European Union, or if such a method exists, the product will be of significant benefit to those affected by the condition, as defined in Regulation (EC)
847/2000. Orphan medicinal products are eligible for financial incentives such as reduction of fees or fee waivers and are, upon grant of a marketing
authorization, entitled to ten years of market exclusivity for the approved therapeutic indication. The application for orphan drug designation must be
submitted before the application for marketing authorization. The applicant will receive a fee reduction for the marketing authorization application if the
orphan drug designation has been granted, but not if the designation is still pending at the time the marketing authorization is submitted. Orphan drug
designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process.
The 10-year market exclusivity may be reduced to six years if, at the end of the fifth year, it is established that the product no longer meets the criteria for
orphan designation, for example, if the product is sufficiently profitable not to justify maintenance of market exclusivity. Additionally, marketing
authorization may be granted to a similar product for the same indication at any time if:
•
•
•
the second applicant can establish that its product, although similar, is safer, more effective or otherwise clinically superior;
the applicant consents to a second orphan medicinal product application; or
the applicant cannot supply enough orphan medicinal product.
For other countries outside of the European Union, such as countries in Eastern Europe, Latin America or Asia, the requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary from country to country. In all cases, again, the clinical trials are conducted in accordance
with GCP and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.
If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines, suspension or withdrawal of
regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.
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Other Healthcare Laws
In addition to FDA restrictions on marketing of pharmaceutical and biological products, other U.S. federal and state healthcare regulatory laws restrict
business practices in the biopharmaceutical industry, which include, but are not limited to, state and federal anti-kickback, false claims, data privacy and
security, and physician payment and drug pricing transparency laws.
The federal Anti-Kickback Statute prohibits, among other things, any person or entity from knowingly and willfully offering, paying, soliciting, receiving
or providing any remuneration, directly or indirectly, overtly or covertly, to induce or in return for purchasing, leasing, ordering, or arranging for or
recommending the purchase, lease, or order of any item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federal healthcare
programs. The term “remuneration” has been broadly interpreted to include anything of value. The Anti-Kickback Statute has been interpreted to apply to
arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers, and formulary managers on the other. Although there are
a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are
drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases, or recommendations may be
subject to scrutiny if they do not meet the requirements of a statutory or regulatory exception or safe harbor. Failure to meet all of the requirements of a
particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the
legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all its facts and circumstances. Several courts have
interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal
healthcare covered business, the statute has been violated. Additionally, a person or entity does not need to have actual knowledge of the statute or specific
intent to violate it in order to have committed a violation. The majority of states also have anti-kickback laws, which establish similar prohibitions and in
some cases may apply to items or services reimbursed by any third-party payor, including commercial insurers.
The federal false claims laws, including the civil False Claims Act, prohibit any person or entity from, among other things, knowingly presenting, or
causing to be presented, a false, fictitious or fraudulent claim for payment to, or approval by, the federal government, knowingly making, using, or causing
to be made or used a false record or statement material to a false or fraudulent claim to the federal government, or from knowingly making a false statement
to avoid, decrease or conceal an obligation to pay money to the U.S. federal government. A claim includes “any request or demand” for money or property
presented to the U.S. government. In addition, 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. Actions under the civil False Claims Act may be brought by the
Attorney General or as a qui tam action by a private individual in the name of the government. Violations of the civil False Claims Act can result in very
significant monetary penalties and treble damages. Several pharmaceutical and other healthcare companies have been prosecuted under these laws for,
among other things, allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product.
Other companies have been prosecuted for causing false claims to be submitted because of the companies’ marketing of products for unapproved ( e.g. ,
off-label) uses. In addition, the civil monetary penalties statute imposes penalties against any person who is determined to have presented or caused to be
presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or
fraudulent. Many states also have similar fraud and abuse statutes or regulations that apply to items and services reimbursed under Medicaid and other state
programs, or, in several states, apply regardless of the payor. Given the significant size of actual and potential settlements, it is expected that the
government authorities will continue to devote substantial resources to investigating healthcare providers’ and manufacturers’ compliance with applicable
fraud and abuse laws.
The federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) created additional federal criminal statutes that prohibit, among other
actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party
payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare
offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement
in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the U.S. federal Anti-Kickback Statute, a person or entity
does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians and certain other healthcare providers.
The ACA imposed, among other things, new annual reporting requirements through the Physician Payments Sunshine Act for covered manufacturers for
certain payments and “transfers of value” provided to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain
other healthcare professionals beginning in 2022, and teaching hospitals, as well as ownership and investment interests held by physicians, as defined by
statute, and their immediate family members. Failure to submit timely, accurately and completely the required information for all payments, transfers of
value and ownership or investment interests may result in civil monetary penalties. Covered manufacturers must submit reports by the 90th day of each
subsequent calendar year. In addition, certain states require implementation of compliance programs and compliance with the pharmaceutical industry’s
voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, impose restrictions on marketing practices,
and/or tracking and reporting of pricing and marketing information as well as gifts, compensation and other remuneration or items of value provided to
physicians and other healthcare professionals and entities. We are not currently a covered manufacturer under the ACA, but may become one if successful
in obtaining approval of one of our antibody candidates.
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We may also be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business. HIPAA, as
amended by the Health Information Technology for Economic and Clinical Health Act (HITECH) and their respective implementing regulations, impose
specified requirements relating to the privacy, security and transmission of individually identifiable health information held by covered entities and their
business associates. Among other things, HITECH made HIPAA’s security standards directly applicable to “business associates,” defined as independent
contractors or agents of covered entities that create, receive, maintain or transmit protected health information in connection with providing a service for or
on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and
possibly other persons, 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 attorney’s fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of
health information in certain circumstances, many of which differ from each other in significant ways and may not have the same requirements, thus
complicating compliance efforts. By way of example, California enacted the California Consumer Privacy Act (CCPA) effective January 1, 2020, which
gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing, and receive
detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action
for data breaches that is expected to increase data breach litigation. The CCPA may increase our compliance costs and potential liability.
If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to us, we may be subject to penalties,
including, without limitation, administrative, civil and criminal penalties, damages, fines, disgorgement, contractual damages, reputational harm,
diminished profits and future earnings, the curtailment or restructuring of our operations, exclusion from participation in federal and state healthcare
programs, reporting obligations and oversight if we become subject to a corporate integrity agreement or other agreement, and individual imprisonment,
any of which could adversely affect our ability to operate our business and our financial results.
To the extent that any of our antibody candidates, once approved, are sold in a foreign country, we may be subject to similar foreign laws and regulations,
which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws, and implementation of
corporate compliance programs and reporting of payments or other transfers of value to healthcare professionals.
Privacy and Data Protection Laws in Europe
We are subject to European laws relating to our and our suppliers’, collaborators’ and subcontractors’ (where they act as processors) collection, control,
processing and other use of personal data (i.e., any data relating to an identifiable living individual, whether that individual can be identified directly or
indirectly). We are subject to the supervision of local data protection authorities in those jurisdictions where we are established, and where we process
personal data in the context of the activities of that establishment (e.g., undertaking clinical trials). We and our suppliers, collaborators and subcontractors
process personal data including in relation to our employees, employees of customers, clinical trial patients, healthcare professionals and employees of
suppliers including health and medical information. The data privacy regime in the EU includes the General Data Protection Regulation (GDPR) and
national laws and regulations implementing or supplementing it.
The GDPR requires that personal data is only collected for specified, explicit and legal purposes as set out in the GDPR or local laws, and the data may
then only be processed in a manner compatible with those purposes. The personal data collected and processed must be adequate, relevant and not
excessive in relation to the purposes for which it is collected and processed, it must be held securely, not transferred outside of the European Economic
Area (EEA) unless certain steps are taken to ensure an adequate level of protection, and must not be retained for longer than necessary for the purposes for
which it was collected. In addition, the GDPR requires companies processing personal data to take certain organizational steps to ensure that they have
adequate records, policies, security, training and governance frameworks in place to ensure, and to be able to demonstrate, protection. For example, the
GDPR requires us to make more detailed disclosures to data subjects, requires disclosure of the legal basis on which we can process personal data, makes it
harder for us to obtain valid consent for processing, may require the appointment of a data protection officer where sensitive personal data (i.e., health data)
is processed on a sufficiently large scale, introduces mandatory data breach notification throughout the EU and imposes additional obligations on us when
we are contracting with certain service providers.
In addition, to the extent a company processes, controls or otherwise uses “special category” personal data (including patients’ health or medical
information, genetic information and biometric information), more stringent rules apply, further limiting the circumstances and the manner in which a
company is legally permitted to process that data. The GDPR provides a broad right for EU member states to create supplemental national laws which may
result in divergence across Europe making it harder to maintain a consistent operating model or standard operating procedures. Such laws, for example,
may relate to the processing of health, genetic and biometric data, which could further limit our ability to use and share such data or could cause our costs
to increase, and harm our business and financial condition.
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We are also subject to EU laws on personal data export, as we may transfer personal data from the EU to other jurisdictions which are not considered by the
European Commission to offer “adequate” protection of personal data. Such transfers need to be legitimized by a valid transfer mechanism under the
GDPR. There is currently ongoing litigation challenging the commonly used transfer mechanism, the EU model clauses. In addition, the U.S. Privacy
Shield is under review by the European Commission. As such, it is uncertain whether the Privacy Shield framework and/or model clauses will be
invalidated in the near future. Further, the United Kingdom’s decision to leave the EU has created uncertainty with regard to the status of the UK as an
“adequate country” for the purposes of data transfers outside the European Economic Area. In particular, it is unclear how data transfers to and from the
UK will be regulated. These changes could require us to make operational changes, including finding alternative bases for the compliant transfer of
personal data from the EEA to the United States, and increased costs and may lead to governmental enforcement actions, litigation, fines and penalties or
adverse publicity that could have an adverse effect on our business.
There are costs and administrative burdens associated with compliance with the GDPR and the resultant changes in the EU and EEA member states’
national laws. Any failure or perceived failure to comply with global privacy laws carries with it the risk of significant penalties and sanctions of up to
€20 million or 4% of global turnover. These laws or new interpretations, enactments or supplementary forms of these laws, could create liability for us,
could impose additional operational requirements on our business, could affect the manner in which we use and transmit patient information and could
increase our cost of doing business. Claims of violations of privacy rights or contractual breaches, even if we are not found liable, could be expensive and
time-consuming to defend and could result in adverse publicity that could harm our business.
Coverage and Reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of any pharmaceutical or biological products for which we obtain regulatory
approval. 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. Patients are unlikely to use our products
unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products. Sales of any products for which we
receive regulatory approval for commercial sale will therefore depend, in part, on the availability of coverage and adequate reimbursement from third-party
payors. Third-party payors include government authorities, managed care plans, private health insurers and other organizations.
In the United States, the process for determining whether a third-party payor will provide coverage for a pharmaceutical or biological product typically is
separate from the process for setting the price of such product or for establishing the reimbursement rate that the payor will pay for the product once
coverage is approved. For products administered under the supervision of a physician, obtaining coverage and adequate reimbursement may be particularly
difficult because of the higher prices often associated with such drugs. Additionally, separate reimbursement for the product itself or the treatment or
procedure in which the product is used may not be available, which may impact physician utilization. A decision by a third-party payor not to cover our
bispecific antibody candidates could reduce physician utilization of our products once approved and have a material adverse effect on our sales, results of
operations and financial condition. Moreover, a third-party payor’s decision to provide coverage for a pharmaceutical or biological product does not imply
that an adequate reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels
sufficient to realize an appropriate return on our investment in product development. Additionally, coverage and reimbursement for new products can differ
significantly from payor to payor. One third-party payor’s decision to cover a particular medical product or service does not ensure that other payors will
also provide coverage for the medical product or service, or will provide coverage at an adequate reimbursement rate. As a result, the coverage
determination process will require us to provide scientific and clinical support for the use of our products to each payor separately and will be a time-
consuming process.
In the European Union, governments influence the price of products through their pricing and reimbursement rules and control of national health care
systems that fund a large part of the cost of those products to consumers. Some jurisdictions operate positive and negative list systems under which
products may only be marketed once a reimbursement price has been agreed to by the government. To obtain reimbursement or pricing approval, some of
these countries may require the completion of clinical trials that compare the cost effectiveness of a particular product candidate to currently available
therapies. Other member states allow companies to fix their own prices for medicines, but monitor and control company profits. The downward pressure on
health care costs in general, particularly prescription products, has become very intense. As a result, increasingly high barriers are being erected to the entry
of new products. In addition, in some countries, cross border imports from low-priced markets exert a commercial pressure on pricing within a country.
The containment of healthcare costs has become a priority of federal, state and foreign governments, and the prices of pharmaceutical or biological
products have been a focus in this effort. Third-party payors are increasingly challenging the prices charged for medical products and services, examining
the medical necessity and reviewing the cost-effectiveness of pharmaceutical or biological products, medical devices and medical services, in addition to
questioning safety and efficacy. If these third-party payors do not consider our products to be cost-effective compared to other available therapies, they may
not cover our products after FDA approval or, if they do, the level of payment may not be sufficient to allow us to sell our products at a profit.
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Healthcare Reform
A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and other third-party payors have attempted to
control costs by limiting coverage and the amount of reimbursement for particular medical products. For example, in March 2010, the ACA was enacted,
which, among other things, increased the minimum Medicaid rebates owed by most manufacturers under the Medicaid Drug Rebate Program; introduced 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; extended the Medicaid Drug Rebate Program to utilization of prescriptions of individuals enrolled in Medicaid managed
care plans; imposed mandatory discounts for certain Medicare Part D beneficiaries as a condition for manufacturers’ outpatient drugs coverage under
Medicare Part D; subjected drug manufacturers to new annual fees based on pharmaceutical companies’ share of sales to federal healthcare programs; 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 judicial and Congressional challenges to certain aspects of the ACA. On December 14, 2018, a U.S. District Court
Judge in the Northern District of Texas, ruled that the individual mandate is a critical and inseverable feature of the ACA, and therefore, because it was
repealed as part of the Tax Cuts and Jobs Act, the remaining provisions of the ACA are invalid as well. On December 18, 2019, the U.S. Court of Appeals
for the 5th Circuit affirmed the District Court’s decision that the individual mandate was unconstitutional but remanded the case back to the District Court
to determine whether the remaining provisions of the ACA are invalid as well. It is unclear how these decisions, subsequent appeals, if any, or other efforts
to challenge, repeal or replace the ACA will impact the law.
We expect that other healthcare reform measures that may be adopted in the future, may result in additional reductions in Medicare and other healthcare
funding, more rigorous coverage criteria and lower reimbursement, new payment methodologies and additional downward pressure on the price that we
receive for any approved product. Any reduction in reimbursement from Medicare or other government-funded programs may result in a similar reduction
in payments from private payors. Moreover, recently there has been heightened governmental scrutiny over the manner in which manufacturers set prices
for their marketed products, which have resulted in several recent Congressional inquiries and proposed and enacted legislation designed to, among other
things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government
program reimbursement methodologies for pharmaceutical and biological products. 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 product access and marketing cost disclosure and transparency measures, and, in some cases,
designed to encourage importation from other countries and bulk purchasing. The implementation of cost containment measures or other healthcare reforms
may prevent us from being able to generate revenue, attain profitability or commercialize our drugs.
Additionally, on August 2, 2011, the Budget Control Act of 2011 was enacted, which, among other things, included aggregate reductions of Medicare
payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute will stay
in effect through 2029 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act was signed into law, which,
among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and
increased the statute of limitations period for the government to recover overpayments to providers from three to five years.
We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and
state governments will pay for healthcare products and services, which could result in reduced demand for our products once approved or additional pricing
pressures.
Employees
As of January 31, 2020, we had 87 full-time employees and 45 part-time employees, including 58 employees with M.D. or Ph.D. degrees. Of these
employees, 89 were primarily engaged in research and development activities and 43 were primarily engaged in general and administrative activities. None
of our employees are represented by a labor union, and we consider our employee relations to be good.
Corporate Information
We were incorporated as Merus B.V. under the laws of the Netherlands on June 16, 2003. Our principal executive offices are located at Yalelaan 62, 3584
CM Utrecht, The Netherlands. Our telephone number at the Utrecht address is +31 30 253 8800. Our website address is www.merus.nl. Information
contained on, or that can be accessed through, our website does not constitute a part of this Annual Report. We have included our website address in this
Annual Report solely as an inactive textual reference.
Available Information
We file electronically with the SEC our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and
other information. Our SEC filings are available to the public over the Internet at the SEC's website at http://www.sec.gov. We make available on our
website at www.merus.nl, under “Investors & Media,” free of charge, copies of these reports as soon as reasonably practicable after filing or furnishing
these reports with the SEC.
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Item 1A. Risk Factors.
Risks Related to Our Business and Industry
RISK FACTORS
We are a clinical-stage company and have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may
never achieve or maintain profitability.
We are a clinical-stage oncology company with a limited operating history. We have incurred net losses of $55.2 million, and $28.3 million for the years
ended December 31, 2019 and 2018, respectively. As of December 31, 2019, we had an accumulated loss of $314.6 million. Our losses have resulted
principally from expenses incurred in research and development of our antibody candidates and from management and administrative costs and other
expenses that we have incurred while building our business infrastructure. We expect to continue to incur significant operating losses for the foreseeable
future as we continue our research and development efforts and seek to obtain regulatory approval and commercialization of our antibody candidates. We
anticipate that our expenses will increase substantially as we:
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conduct our ongoing, single agent, Phase 1/2 clinical trial of zenocutuzumab, our most advanced bispecific antibody candidate, for the
treatment of solid tumors harboring neuregulin 1 (NRG1) gene fusions and conclude our ongoing Phase 2 clinical trial for the treatment of
metastatic breast cancer in combination with other therapies;
conduct our ongoing Phase 1 clinical trial of MCLA-117, our bispecific antibody candidate, for the treatment of acute myeloid leukemia
(AML);
conduct our ongoing Phase 1 clinical trial of MCLA-158 for the treatment of solid tumors;
conduct our ongoing Phase 1 clinical trial for MCLA-145 for the treatment of advanced solid tumors or B-cell lymphomas, which is being co-
developed with Incyte Corporation (Incyte);
continue the research and development of our other pre-clinical antibody candidates, including the development of MCLA-129 in collaboration
with Betta Pharmaceuticals Co. Ltd. (Betta);
expand our clinical programs to explore new potential combination therapies or indications;
expand and enhance our technology platforms, including our Biclonics® technology platform which generates our pipeline of bispecific
product candidates, our TriclonicsTM technology platform, which generates pre-clinical trispecific candidates and discover and develop
additional multispecific antibody candidates;
seek regulatory approvals for any antibody candidates that successfully complete clinical trials;
potentially establish a sales, marketing and distribution infrastructure and scale-up manufacturing capabilities to commercialize any products
for which we may obtain regulatory approvals;
maintain, expand and protect our intellectual property portfolio;
secure, maintain and/or obtain freedom to operate for our technologies and products;
add clinical, scientific, operational, financial, information technology and management information systems and personnel, including personnel
to support our product development and potential future commercialization efforts and to support our operation as a public company; and
experience any delays or encounter any issues with any of the above, including but not limited to failed studies, complex results, manufacturing
challenges, safety issues or other regulatory challenges.
We have financed our operations primarily through public offerings and private placements of our common shares and our collaboration and license
agreement with Incyte. We have devoted a significant portion of our financial resources and efforts to developing our full-length human bispecific antibody
therapeutics, which we refer to as Biclonics®, our technology platforms, identifying potential antibody candidates, conducting pre-clinical studies of a
variety of candidates, and conducting our clinical trials of zenocutuzumab, MCLA-117, MCLA-158, and MCLA-145. We are in the early stages of
development of our antibody candidates, and we have not completed development of any Biclonics® or any other drugs or biologics.
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To become and remain profitable, we must succeed in developing and eventually commercializing products that generate significant revenue. This will
require us to be successful in a range of challenging activities, including completing pre-clinical testing and clinical trials of our bispecific antibody
candidates, discovering and developing additional bispecific and trispecific antibody candidates, obtaining regulatory approval for any antibody candidates
that successfully complete clinical trials, establishing manufacturing and marketing capabilities and ultimately selling any products for which we may
obtain regulatory approval. We are only in the preliminary stages of most of these activities. We may never succeed in these activities and, even if we do,
may never generate revenue that is significant enough to achieve profitability.
Because of the numerous risks and uncertainties associated with pharmaceutical product and biological development, we are unable to accurately predict
the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. If we are required by the U.S. Food and Drug
Administration (FDA), or the European Medicines Agency (EMA), or other regulatory authorities to perform studies in addition to those we currently
anticipate, or if there are any delays in completing our clinical trials or the development of any of our antibody candidates, our expenses could increase and
commercial revenue could be further delayed.
Even if we do generate product royalties or product sales, we may never achieve or sustain profitability on a quarterly or annual basis. Our failure to sustain
profitability would depress the market price of our common shares and could impair our ability to raise capital, expand our business, diversify our product
offerings or continue our operations.
We will need additional funding in order to complete development of our antibody candidates and commercialize our products, if approved. If we are
unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.
We expect our expenses to increase in connection with our ongoing activities, particularly as we conduct our ongoing clinical trials of zenocutuzumab,
MCLA-117, MCLA-158, and MCLA-145 and continue to research, develop and conduct pre-clinical studies of our other antibody candidates. In addition,
if we obtain regulatory approval for any of our antibody candidates, we expect to incur significant commercialization expenses related to product
manufacturing, marketing, sales and distribution. Furthermore, we continue to incur additional costs associated with operating as a public company.
Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when
needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization
efforts.
Based on our current operating plan, we expect that our existing cash, cash equivalents and investments as of December 31, 2019 will be sufficient to fund
our operations into 2022. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we
currently expect. Our future capital requirements will depend on many factors, including:
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the cost, progress and results of our ongoing clinical trials of zenocutuzumab and the Phase 1 clinical trials of MCLA-117, MCLA-158, and
MCLA-145;
the success of our collaboration with Incyte to develop monospecific and bispecific antibodies candidates, including our ongoing Phase 1
clinical trial for MCLA-145;
the cost of manufacturing clinical supplies of our bispecific antibody candidates;
the scope, progress, results and costs of pre-clinical development, laboratory testing and clinical trials for our other bispecific and multispecific
antibody candidates;
the costs, timing and outcome of regulatory review of any of our antibody candidates;
the costs and timing of future commercialization activities, including manufacturing, marketing, sales and distribution, for any of our antibody
candidates to the extent any receive marketing approval;
the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and
defending any intellectual property-related claims, including any potential future claims by third parties that we are infringing upon their
intellectual property rights;
the costs and timing of securing, maintaining and/or obtaining freedom to operate for our technologies and products;
the revenue, if any, received from commercial sales of our antibody candidates to the extent any receive marketing approval;
the effect of competing technological and market developments; and
the extent to which we acquire or invest in businesses, products and technologies, including our existing collaborations and any other future
licensing or collaboration arrangements for any of our antibody candidates.
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We depend heavily on the success of our antibody candidates, and we cannot give any assurance that any of our antibody candidates will receive
regulatory approval, which is necessary before they can be commercialized. If we, any of our collaborators, or any other strategic partners we may
enter into collaboration agreements with for the development and commercialization of our antibody candidates, are unable to commercialize our
antibody candidates, or experience significant delays in doing so, our business, financial condition and results of operations will be materially
adversely affected.
We have invested a significant portion of our efforts and financial resources in the development of bispecific antibody candidates using our
Biclonics® technology platform and in development of multispecific antibody candidates using our TriclonicsTM technology platform. Our ability to
generate royalty and product revenues, which we do not expect will occur for at least the next several years, if ever, will depend heavily on the successful
development and eventual commercialization of these antibody candidates, which may never occur. We currently generate no revenues from sales of any
products, and we may never be able to develop or commercialize a marketable product. Each of our bispecific antibody candidates and any future
trispecific antibody candidates will require additional clinical development, management of clinical, pre-clinical and manufacturing activities, regulatory
approval in multiple jurisdictions, obtaining manufacturing supply, including commercial manufacturing supply, building of a commercial organization,
substantial investment and significant marketing efforts before we generate any revenues from product sales. We are not permitted to market or promote
any of our antibody candidates before we receive regulatory approval from the FDA, the EMA or comparable foreign regulatory authorities, and we may
never receive such regulatory approval for any of our antibody candidates. The success of our antibody candidates will depend on several factors, including
the following:
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for antibody candidates which we may license to others, such as to our collaborators, the successful efforts of those parties in completing
clinical trials of, receipt of regulatory approval for and commercialization of such antibody candidates;
for the antibody candidates to which we retain rights, completion of pre-clinical studies and clinical trials of, receipt of marketing approvals
for, establishment of commercial manufacturing supplies of and successful commercialization of such antibody candidates; and
for all of our antibody candidates, if approved, acceptance of our antibody candidates by patients, the medical community and third-party
payors, effectively competing with other therapies, a continued acceptable safety profile following approval and qualifying for, maintaining,
enforcing and defending our intellectual property rights and claims.
If we or our collaborators, as applicable, do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or
an inability to successfully commercialize our antibody candidates, which would materially adversely affect our business, financial condition and results of
operations.
We have not previously submitted a Biologics License Application (BLA), to the FDA, a Marketing Authorisation Application (MAA) to the EMA, or
similar regulatory approval filings to comparable foreign authorities, for any antibody candidate, and we cannot be certain that any of our antibody
candidates will be successful in clinical trials or receive regulatory approval. Further, our antibody candidates may not receive regulatory approval even if
they are successful in clinical trials. If we do not receive regulatory approvals for our antibody candidates, we may not be able to continue our operations.
Even if we successfully obtain regulatory approvals to market one or more of our antibody candidates, our revenues will be dependent, in part, upon the
size of the markets in the territories for which we gain regulatory approval and have commercial rights. If the markets for patient subsets that we are
targeting are not as significant as we estimate, we may not generate significant revenues from sales of such products, if approved.
We plan to seek regulatory approval to commercialize our antibody candidates both in the United States and the EU, and potentially in additional foreign
countries. While the scope of regulatory approval is similar in other countries, to obtain separate regulatory approval in many other countries we must
comply with the numerous and varying regulatory requirements of such countries regarding safety and efficacy and governing, among other things, clinical
trials and commercial sales, pricing and distribution of our antibody candidates, and we cannot predict success in these jurisdictions.
The Biclonics® technology platform and TriclonicsTM technology platform are unproven, novel approaches to the production of molecules for
therapeutic intervention.
We have not received regulatory approval for a therapeutic based on a full-length human bispecific or trispecific IgG approach. We cannot be certain that
our approach will lead to the development of approvable or marketable products. In addition, our Biclonics® and TriclonicsTM may have different
effectiveness rates in various indications and in different geographical areas. Finally, the FDA, the EMA or other regulatory agencies may lack experience
in evaluating the safety and efficacy of products based on Biclonics® and TriclonicsTM therapeutics, which could result in a longer than expected
regulatory review process, increase our expected development costs and delay or prevent commercialization of our antibody candidates.
Our Biclonics® and TriclonicsTM technology platforms rely on third parties for biological materials. Some biological materials have not always met our
expectations or requirements, and any disruption in the supply of these biological materials could materially adversely affect our business. Although we
have control processes and screening procedures, biological materials are susceptible to
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damage and contamination and may contain active pathogens. Improper storage of these materials, by us or any third-party suppliers, may require us to
destroy some of our biological raw materials or antibody candidates.
Failure to successfully validate, develop and obtain regulatory approval for companion diagnostics could harm our development strategy.
We may seek to identify patient subsets within a disease category that may derive selective and meaningful benefit from the antibody candidates we are
developing. Through collaborations or license agreements, we may develop companion diagnostics to help us to more accurately identify patients within a
particular subset, both during our clinical trials and in connection with the commercialization of our antibody candidates, if approved. Companion
diagnostics are subject to regulation by the FDA, the EU legislative bodies, and comparable foreign regulatory authorities as medical devices and typically
require separate regulatory approval prior to commercialization. If needed, we intend to develop companion diagnostics in collaboration with or via license
agreements with third parties and are dependent on the scientific insights and sustained cooperation and effort of any third-party collaborators in
developing and obtaining approval for companion diagnostics. We and our collaborators may encounter difficulties in developing and obtaining approval
for any companion diagnostics, including issues relating to selectivity/specificity, analytical validation, reproducibility or clinical validation. Any delay or
failure by us or our collaborators to develop or obtain regulatory approval of companion diagnostics could delay or prevent approval of our antibody
candidates. In addition, our collaborators may encounter production difficulties that could constrain the supply of the companion diagnostics, and both they
and we may have difficulties gaining acceptance of the use of the companion diagnostics in the clinical community. If such companion diagnostics fail to
gain market acceptance, it would have an adverse effect on our ability to derive revenues from sales of our products. In addition, the diagnostic company
with whom we contract may decide to discontinue selling or manufacturing the companion diagnostic that we anticipate using in connection with
development and commercialization of our antibody candidates or our relationship with such diagnostic company may otherwise terminate. We may not be
able to enter into arrangements with another diagnostic company to obtain supplies of an alternative companion diagnostic test for use in connection with
the development and commercialization of our antibody candidates or do so on commercially reasonable terms, which could adversely affect and/or delay
the development or commercialization of our antibody candidates.
Our limited operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.
Since our inception in 2003, we have devoted a significant portion of our resources to developing zenocutuzumab, MCLA-117, MCLA-158, MCLA-145
and our other antibody candidates, building our intellectual property portfolio, developing our clinical manufacturing supply chain, generating and
enhancing our Biclonics® technology platform, generating our TriclonicsTM technology platform, planning our business, raising capital and providing
general and administrative support for these operations. While we have ongoing clinical trials for zenocutuzumab, MCLA-117, MCLA-158, and MCLA-
145, we have not completed any clinical trials for any antibody candidate. We have not yet demonstrated our ability to successfully complete any Phase 2
clinical trial or any Phase 3 or other pivotal clinical trials, 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. Additionally, we expect our financial
condition and operating results to continue to fluctuate significantly from quarter to quarter and year to year due to a variety of factors, many of which are
beyond our control. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a
longer operating history.
Raising additional capital may cause dilution to our holders, restrict our operations or require us to relinquish rights to our technologies or antibody
candidates.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through equity or debt financings and upfront
and milestone payments, if any, received under our existing collaborations and any other future licenses or collaborations, together with our existing cash
and cash equivalents. In order to accomplish our business objectives and further develop our product pipeline, we will, however, need to seek additional
funds. If we raise additional capital through the sale of equity or convertible debt securities, our existing shareholders’ ownership interests will be diluted,
and the terms of these securities may include liquidation or other preferences that adversely affect our existing shareholders’ rights as holders of our
common shares. In addition, the possibility of such issuance may cause the market price of our common shares to decline. Debt financing, if available, may
result in increased fixed payment obligations and involve agreements that include covenants limiting or restricting our ability to take specific actions, such
as incurring additional debt, making capital expenditures, declaring dividends, or acquiring, selling or licensing intellectual property rights, which could
adversely impact our ability to conduct our business.
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 intellectual property, technologies, future revenue streams or antibody candidates or grant licenses on terms that may not
be favorable to us. We could also be required to seek funds through arrangements with collaborators or others at an earlier stage than otherwise would be
desirable. Any of these occurrences may have a material adverse effect on our business, operating results and prospects.
Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and
commercialize our antibody candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms
acceptable to us, if at all. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more
of our research or development programs or the commercialization of any of our
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antibody candidates, if approved, or be unable to expand our operations or otherwise capitalize on our business opportunities, as desired, which could
materially affect our business, financial condition and results of operations.
Our business may become subject to economic, political, regulatory and other risks associated with international operations
As a company based in the Netherlands, our business is subject to risks associated with conducting business internationally. Many of our suppliers and
collaborative and clinical trial relationships are located outside the United States. Accordingly, our future results could be harmed by a variety of factors,
including:
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economic weakness, including inflation, or political instability, in particular, in non-U.S. economies and markets;
differing regulatory requirements for drug approvals in non-U.S. countries;
differing jurisdictions could present different issues for securing, maintaining and/or obtaining freedom to operate in such jurisdictions;
potentially reduced protection for intellectual property rights;
difficulties in compliance with non-U.S. laws and regulations;
changes in non-U.S. regulations and customs, tariffs and trade barriers;
changes in non-U.S. currency exchange rates of the euro and currency controls;
changes in a specific country’s or region’s political or economic environment;
trade protection measures, import or export licensing requirements or other restrictive actions by U.S. or non-U.S. governments;
differing reimbursement regimes and price controls in certain non-U.S. markets;
negative consequences from changes in tax laws;
compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
compliance with international privacy regulations, including the General Data Protection Regulation (GDPR);
negative consequences from Brexit, and its potential impact on supply-chain and our personnel;
workforce uncertainty in countries where labor unrest is more common than in the United States;
difficulties associated with staffing and managing international operations, including differing labor relations;
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
business interruptions resulting from geo-political actions, including war, riots and terrorism, or natural disasters including earthquakes,
typhoons, floods, fires, epidemics or public health emergencies and U.S. or non-U.S. governmental actions or restrictions related thereto.
Exchange rate fluctuations or abandonment of the euro currency may materially affect our results of operations and financial condition.
Due to the international scope of our operations, fluctuations in exchange rates, particularly between the euro and the U.S. dollar, may adversely affect us.
Although we are based in the Netherlands, we source research and development, manufacturing, consulting and other services from several countries.
Further, potential future revenue may be derived from abroad, particularly from the United States. Additionally, our funding has mainly come from
investors and collaborators mainly in the United States. As a result, our business and share price may be affected by fluctuations in foreign exchange rates
between the euro and these other currencies, which may also have a significant impact on our reported results of operations and cash flows from period to
period. Currently, we do not have any exchange rate hedging arrangements in place.
In addition, the possible abandonment of the euro by one or more members of the EU could materially affect our business in the future. Despite measures
taken by the EU to provide funding to certain EU member states in financial difficulties and by a number of European countries to stabilize their economies
and reduce their debt burdens, it is possible that the euro could be abandoned in the future as a currency by countries that have adopted its use. This could
lead to the re-introduction of individual currencies in one or more EU member states, or in more extreme circumstances, the dissolution of the EU. The
effects on our business of a potential dissolution of the EU, the exit of one or more EU member states from the EU or the abandonment of the euro as a
currency, are
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impossible to predict with certainty, and any such events could have a material adverse effect on our business, financial condition and results of operations.
Risks from improper conduct by our employees, agents, contractors, or collaborators could adversely affect our reputation, business, prospects,
operating results, and financial condition.
We cannot ensure that our compliance controls, policies, and procedures will in every instance protect us from acts committed by our employees, agents,
contractors, or collaborators that would violate the laws or regulations of the jurisdictions in which we operate, including, without limitation, health care,
employment, foreign corrupt practices, trade restrictions and sanctions, environmental, import and export requirements, competition, and patient privacy
and other privacy laws and regulations. Such improper actions could subject us to civil or criminal investigations, and monetary and injunctive penalties,
and could adversely impact our ability to conduct business, operating results, and reputation.
We are subject to a number of anti-corruption laws, including the Foreign Corrupt Practices Act (FCPA) in the United States, the Bribery Act in the United
Kingdom and the anti-corruption provisions of the Dutch Criminal Code in the Netherlands. Our failure to comply with anti-corruption laws applicable to
us could result in penalties, which could harm our reputation and harm our business, financial condition, results of operations, cash flows or prospects. The
FCPA generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of improperly or
corruptly obtaining or keeping business, obtaining preferential treatment and/or other undue benefits or advantages. The FCPA also requires public
companies to maintain accurate books and records and devise a system of sufficient internal accounting controls. We regularly review and update our
policies and procedures and internal controls designed to provide reasonable assurance that we, our employees, distributors and other intermediaries
comply with the anti-corruption laws to which we are subject. However, there are inherent limitations to the effectiveness of any policies, procedures and
internal controls, including the possibility of human error and the circumvention or overriding of the policies, procedures and internal controls. There can
be no assurance that such policies or procedures or internal controls will work effectively at all times or protect us against liability under these or other laws
for actions taken by our employees, distributors and other intermediaries with respect to our business.
The Securities and Exchange Commission (SEC) and Department of Justice continue to view FCPA enforcement activities as a high priority. There is no
certainty that all of our employees, agents, contractors, or collaborators, or those of our affiliates, will comply with all applicable laws and regulations,
particularly given the high level of complexity of these laws. Violations of these laws and regulations could result in fines, criminal sanctions against us,
our officers, or our employees, requirements to obtain export licenses, cessation of business activities in sanctioned countries, implementation of
compliance programs, and prohibitions on the conduct of our business. Any such violations could materially damage our reputation, our brand, our
international operations, our ability to attract and retain employees, and our business, prospects, operating results, and financial condition.
The United Kingdom’s withdrawal from the European Union may have a negative effect on global economic conditions and financial markets, which
could materially affect our financial condition and results of operations.
Following a national referendum and enactment of legislation by the government of the United Kingdom, the United Kingdom formally withdrew from the
EU on January 31, 2020 and entered into a transition period during which it will continue its ongoing and complex negotiations with the EU relating to the
future relationship between the parties. Significant political and economic uncertainty remains about whether the terms of the relationship will differ
materially from the terms before withdrawal, as well as about the possibility that a so-called “no deal” separation will occur if negotiations are not
completed by the end of the transition period.
These developments have created significant uncertainty about the future relationship between the United Kingdom and the EU. Lack of clarity about
future U.K. laws and regulations as the United Kingdom determines which EU-derived laws and regulations to replace or replicate as part of a withdrawal,
including financial laws and regulations, tax and free trade agreements, intellectual property rights, supply chain logistics, environmental, health and safety
laws and regulations, immigration laws and employment laws, could further decrease foreign direct investment in the United Kingdom, increase costs,
depress economic activity and restrict our access to capital. These developments, or the perception that any of them could occur, have had and may
continue to have a significant adverse effect on global economic conditions and the stability of global financial markets, and could significantly reduce
global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Asset valuations, currency exchange rates
and credit ratings may be especially subject to increased market volatility. Any of these factors could have a significant adverse effect on our business,
financial condition, results of operations and prospects.
Further, the United Kingdom’s withdrawal from the EU has resulted in the relocation of the EMA from the United Kingdom to the Netherlands. This
relocation has caused, and may continue to cause, disruption in the administrative and medical scientific links between the EMA and the U.K. Medicines
and Healthcare products Regulatory Agency, including delays in granting clinical trial authorization or marketing authorization, disruption of importation
and export of active substance and other components of new drug formulations, and disruption of the supply chain for clinical trial product and final
authorized formulations. The cumulative effects of the disruption to the regulatory framework may add considerably to the development lead time to
marketing authorization and commercialization of products in the EU and/or the United Kingdom.
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Risks Related to the Development and Clinical Testing of Our Antibody Candidates
All of our antibody candidates are in pre-clinical or early-stage clinical development. Clinical drug development is a lengthy and expensive process
with uncertain timelines and uncertain outcomes. If clinical trials of our antibody candidates, particularly zenocutuzumab, MCLA-117, MCLA-158, or
MCLA-145, which we are developing with Incyte, are prolonged or delayed, we or any collaborators may be unable to obtain required regulatory
approvals, and therefore be unable to commercialize our antibody candidates on a timely basis or at all.
To obtain the requisite regulatory approvals to market and sell any of our antibody candidates, we or any collaborator for such candidates must demonstrate
through extensive pre-clinical studies and clinical trials that such 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. The results of pre-clinical
studies and early-stage clinical trials of our antibody candidates may not be predictive of the results of later-stage clinical trials. Antibody candidates in
later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through pre-clinical studies and initial clinical
trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or
adverse safety profiles, notwithstanding promising results in earlier trials. Our future clinical trial results may not be successful.
To date, we have not completed any clinical trials required for the approval of any of our antibody candidates. Although we are conducting ongoing clinical
trials for zenocutuzumab, MCLA-117, MCLA-158, and MCLA-145, and are conducting pre-clinical studies for other antibody candidates, we may
experience delays in our ongoing clinical trials and we do not know whether planned clinical trials will begin on time, need to be redesigned, enroll patients
on time or be completed on schedule, if at all. Clinical trials can be delayed, suspended, or terminated for a variety of reasons, including the following:
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delays in or failure to reach agreement on acceptable terms with prospective contract research organizations (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;
delays in or failure to recruit suitable patients to participate in a trial;
delays in establishing the appropriate dose and schedule for antibody candidates in clinical trials;
the difficulty in identifying the sub-populations that we are trying to treat in a particular trial, which may delay enrollment and reduce the
power of a clinical trial to detect statistically significant results;
lower than anticipated retention rates of patients in clinical trials;
failure to have patients complete a trial or return for post-treatment follow-up;
clinical sites deviating from trial protocol or dropping out of a trial;
investigator-sponsored studies of our product candidates, including expanded access protocols, may identify safety or efficacy concerns
associated with our antibody candidates, or otherwise negatively affect patient enrollment in our ongoing and planned clinical trials;
adding new clinical trial sites;
safety or tolerability concerns could cause us or our collaborators or regulatory authorities, as applicable, to suspend or terminate a trial if we or
our collaborators or regulatory authorities, find that the participants are being exposed to unacceptable health risks;
failure to observe a meaningful clinical benefit;
delays in or failure to obtain regulatory approval or authorizations to commence a trial;
delays in or failure to obtain institutional review board (IRB) approval at each site;
our third-party research contractors failing to comply with regulatory requirements or applicable law, or to meet their contractual obligations to
us in a timely manner, or at all;
changes in regulatory requirements, policies and guidelines;
manufacturing sufficient quantities of antibody candidate for use in clinical trials;
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the quality or stability of an antibody candidate falling below acceptable standards;
changes in the treatment landscape for our target indications that may make our antibody candidates no longer relevant;
third party actions claiming infringement by our antibody candidates in clinical trials outside of the United States and obtaining injunctions
interfering with our progress; and
business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters including earthquakes, typhoons,
floods and fires, epidemics or public health emergencies and U.S. or non-U.S. governmental actions or restrictions related thereto.
We could encounter delays if a clinical trial is suspended or terminated by us, by the IRBs or Ethics Committees of the institutions in which such trials are
being conducted, by the Data Review Committee or Data Safety Monitoring Board for such trial or by the FDA, the Competent Authorities of the EEA
Member States (the 27 EU Member States plus Iceland, Liechtenstein and Norway, and the United Kingdom (until the end of the transition period on
December 31, 2020 provided for in the Withdrawal Agreement between the EU and the UK) or other regulatory authorities. Such authorities may impose
such a suspension or termination 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, EEA Competent Authorities 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. If we experience delays in the completion of,
or termination of, any clinical trial of our antibody candidates, the commercial prospects of our antibody candidates will be harmed, and our ability to
generate product revenues from any of these antibody candidates, if approved, will be delayed. In addition, any delays in completing our clinical trials will
increase our costs, slow down our antibody candidate development and approval process and jeopardize our ability to commence product sales and generate
revenues. Significant clinical trial delays could also allow our competitors to bring products to market before we do or shorten any periods during which we
have the exclusive right to commercialize our antibody candidates and impair our ability to commercialize our antibody candidates, if approved, and may
harm our business and results of operations.
Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a
delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our antibody candidates.
Clinical trials must be conducted in accordance with the FDA, the EU and other applicable regulatory authorities’ legal requirements, regulations or
guidelines, and are subject to oversight by these governmental agencies and Ethics Committees or IRBs at the medical institutions where the clinical trials
are conducted. In addition, clinical trials must be conducted with supplies of our antibody candidates produced under current good manufacturing practice
(cGMP) requirements and other regulations. Furthermore, we rely on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical
trials and while we have agreements governing their committed activities, we have limited influence over their actual performance. We depend on our
collaborators and on medical institutions and CROs to conduct our clinical trials in compliance with good clinical practice (GCP) requirements. To the
extent our collaborators or the CROs fail to enroll participants for our clinical trials, fail to conduct the study to GCP standards or are delayed for a
significant time in the execution of trials, including achieving full enrollment, we may be affected by increased costs, program delays or both, which may
harm our business. In addition, clinical trials that are conducted in countries outside the EU and the United States may subject us to further delays and
expenses as a result of increased shipment costs, additional regulatory requirements and the engagement of non-EU and non-U.S. CROs, as well as expose
us to risks associated with clinical investigators who are unknown to the FDA or the EMA, and different standards of diagnosis, screening and medical
care.
Interim and preliminary “top-line” 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 or preliminary “top-line” 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 data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary
data previously published. In addition, we may report interim or preliminary analyses of only certain endpoints rather than all endpoints. Furthermore, the
information we choose to publicly disclose regarding a particular study or clinical trial is based on more extensive information, and others may not agree
with what we determine is the material or otherwise appropriate information to disclose. Any information we determine not to disclose may ultimately be
deemed significant with respect to future decisions, conclusions, views, activities, or otherwise regarding a particular antibody candidate or our business.
Others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions, or analyses or may interpret or
weigh the importance of data differently, which could impact the value of particular programs, the approvability or commercialization of the particular
antibody candidates, and our business in general. As a result, interim and preliminary data and analyses should be viewed with caution. Adverse differences
between preliminary or interim data and final data or changes in what is material information regarding the results from a particular study or clinical trial
could significantly harm our clinical development and business prospects and cause volatility in the price of our common shares.
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Our antibody candidates may have serious adverse, undesirable or unacceptable side effects which may delay or prevent marketing approval. If such
side effects are identified during the development of our antibody candidates or following approval, if any, we may need to abandon our development of
such antibody candidates, the commercial profile of any approved label may be limited, or we may be subject to other significant negative consequences
following marketing approval, if any.
Undesirable side effects that may be caused by our antibody candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and
could result in a more restrictive label or the delay or denial of regulatory approval by the FDA, the EMA or other comparable foreign authorities. In
February 2015, we commenced a Phase 1/2 clinical trial in Europe of our most advanced antibody candidate, zenocutuzumab, for the treatment of various
solid tumors, which was amended to treat patients having solid tumors harboring a NRG1 gene fusion. Additionally, in January 2018 we commenced a
Phase 2 clinical trial in Europe and the United States exploring zenocutuzumab, in combination with other agents, in patients with metastatic breast cancer.
To date, patients treated with zenocutuzumab have experienced adverse reactions that may be related to the treatment, including infusion-related reactions,
diarrhea, vomiting, fatigue, skin rash, sore mouth and shortness of breath. In May 2016, we commenced a Phase 1 clinical trial in Europe of our bispecific
antibody MCLA-117. To date, patients treated with MCLA-117 have experienced adverse reactions that may be related to the treatment, most commonly
infusion-related reactions including fever, cytokine release syndrome and chills. In May 2018 we commenced a Phase 1 clinical trial in Europe of our
bispecific antibody MCLA-158 in patients with solid tumors. To date, patients treated with MCLA-158 have experienced adverse reactions that may be
related to the treatment, most commonly infusion-related reactions and skin rash associated with mAb EGFR inhibitors. In May 2019, we commenced a
Phase 1 clinical trial in the United States of our bispecific antibody MCLA-145 developed in collaboration with Incyte. To date, patients treated with
MCLA-145 have experienced adverse events irrespective of causality including blood alkaline phosphatase increase, anemia, and hypoalbuminemia,
lymphocyte count decrease, and white blood cell count decrease. Febrile neutropenia was the serious treatment emergent adverse event or TEAE that was
assessed as related to MCLA-145 by an investigator.
Results of our trials could reveal a high and unacceptable severity and prevalence of these or other side effects. In such an event, our trials could be
suspended or terminated and the FDA, the EMA, EEA Competent Authorities, or comparable foreign regulatory authorities could order us to cease further
development of or deny approval of our antibody candidates for any or all targeted indications. The drug-related side effects could affect patient
recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. Any of these occurrences may harm our
business, financial condition and prospects significantly. Additionally, if any of our antibody candidates receives marketing approval and we or others later
identify undesirable or unacceptable side effects caused by such products, a number of potentially significant negative consequences could result,
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regulatory authorities may withdraw approvals of such products and require us to take our approved product off the market;
regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication or field alerts to physicians and
pharmacies;
regulatory authorities may require a medication guide outlining the risks of such side effects for distribution to patients, or that we implement a
risk evaluation and mitigation strategy plan to ensure that the benefits of the product outweigh its risks;
we may be required to change the dose or the way the product is administered, conduct additional clinical trials or change the labeling of the
product;
we may be subject to limitations on how we may promote the product;
sales of the product may decrease significantly;
we may be subject to litigation or product liability claims; and
our reputation may suffer.
Any of these events could prevent us, our collaborators or our potential future partners from achieving or maintaining market acceptance of the affected
antibody candidate, if approved, or could substantially increase commercialization costs and expenses, which in turn could delay or prevent us from
generating significant revenue from the sale of our antibody candidates, if approved.
Adverse events in the field of oncology could damage public perception of our antibody candidates and negatively affect our business.
The commercial success of our products, if any, will depend in part on public acceptance of the use of cancer immunotherapies. Adverse events in clinical
trials of our antibody candidates or in clinical trials of others developing similar products and the resulting publicity, as well as any other adverse events in
the field of oncology that may occur in the future, could result in a decrease in demand for any products that we may develop.
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Future adverse events in oncology or the biopharmaceutical industry could also result in greater governmental regulation, stricter labeling requirements and
potential regulatory delays in the testing or approvals of our antibody candidates. Any increased scrutiny could delay or increase the costs of obtaining
regulatory approval for our antibody candidates.
We depend on enrollment of patients in our clinical trials for our antibody candidates. If we are unable to enroll patients in our clinical trials, our
research and development efforts and business, financial condition and results of operations could be materially adversely affected.
Successful and timely completion of clinical trials will require that we enroll a sufficient number of patient candidates. For our Phase 1/2 clinical trial of
zenocutuzumab in solid tumors, we are enrolling up to 90 patients with tumors harboring NRG1 gene fusions. Solid tumors with NRG1 gene fusions occur
infrequently, which could result in slow enrollment of clinical trial participants. In the Phase 1 clinical trial of MCLA-117, we plan to enroll approximately
50 adult patients with AML. In the Phase 1 clinical trial of MCLA-158, we plan to enroll approximately 120 adult patients with solid tumors. In the Phase 1
clinical trial of MCLA-145, we plan to enroll approximately 118 adult patients with solid tumors or B-cell lymphoma. These trials and other trials we
conduct may be subject to delays as a result of patient enrollment taking longer than anticipated or patient withdrawal.
Our clinical trials will also compete with other clinical trials for antibody candidates that are in the same therapeutic areas as our antibody 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. Because the number of qualified clinical investigators and clinical trial sites 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 at such clinical trial sites.
Patient enrollment depends on many factors, including the size and nature of the patient population, eligibility criteria for the trial, the proximity of patients
to clinical sites, the design of the clinical protocol, the availability of competing clinical trials, the availability of new drugs approved for the indication the
clinical trial is investigating, and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available
therapies. These factors may make it difficult for us to enroll enough patients to complete our clinical trials in a timely and cost-effective manner. Delays in
the completion of any clinical trial of our antibody candidates will increase our costs, slow down our antibody candidate development and approval
process, delay or potentially jeopardize our ability to commence product sales and generate revenue and harm our reputation and ability to obtain financing.
In addition, some of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of
regulatory approval of our antibody candidates.
We may become exposed to costly and damaging liability claims, either when testing our antibody candidates in the clinic or at the commercial stage;
and our product liability insurance may not cover all damages from such claims.
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 current and future use of
antibody candidates by us and our collaborators in clinical trials, and the sale of any approved products in the future, may expose us to liability claims.
These claims might be made by patients that use the product, healthcare providers, pharmaceutical companies, our collaborators or others selling such
products. Any claims against us, regardless of their merit, could be difficult and costly to defend and could materially adversely affect the market for our
antibody candidates or any prospects for commercialization of our antibody candidates, if approved.
Although the clinical trial process is designed to identify and assess potential side effects, it is always possible that a drug, even after regulatory approval,
may exhibit unforeseen side effects. If any of our antibody candidates were to cause adverse side effects during clinical trials or after approval of the
antibody candidate, 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 antibody candidates.
Although we maintain adequate product liability insurance for our antibody candidates, it is possible that our liabilities could exceed our insurance
coverage. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for any of our antibody
candidates. However, we may not be able to maintain insurance coverage at a reasonable cost or obtain insurance coverage that will be adequate to satisfy
any liability that may arise. If a successful product liability claim or series of claims is brought against us for uninsured liabilities or in excess of insured
liabilities, our assets may not be sufficient to cover such claims and our business operations could be impaired.
Should any of the events described above occur, this could have a material adverse effect on our business, financial condition and results of operations.
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The regulatory approval processes of the FDA, the EMA and comparable foreign authorities are lengthy, time consuming and inherently
unpredictable, and if we are ultimately unable to obtain regulatory approval for our antibody candidates, our business will be substantially harmed.
The time required to obtain approval by the FDA, the EMA and comparable foreign authorities is unpredictable but typically takes many years following
the commencement of clinical trials and depends upon numerous factors, including the 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 antibody candidate’s
clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any antibody candidate and it is possible that none of
our existing antibody candidates or any antibody candidates we may seek to develop in the future will ever obtain regulatory approval.
Our antibody candidates could fail to receive regulatory approval for many reasons, including the following:
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the FDA, the EMA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;
we may be unable to demonstrate to the satisfaction of the FDA, the EMA or comparable foreign regulatory authorities that an antibody
candidate is safe and effective for its proposed indication;
we may be unable to demonstrate that an antibody candidate’s clinical and other benefits outweigh its safety risks;
the FDA, the EMA or comparable foreign regulatory authorities may disagree with our interpretation of data from pre-clinical studies or
clinical trials;
the data collected from clinical trials of our antibody candidates may not be sufficient to support the submission of a BLA or other submission
or to obtain regulatory approval in the United States, the EU or elsewhere;
the FDA, the EMA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party
manufacturers with which we contract for clinical and commercial supplies;
the FDA, the EMA or comparable foreign regulatory authorities may fail to approve the companion diagnostics we contemplate developing
with collaborators; and
the approval policies or regulations of the FDA, the EMA 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 future clinical trial results may result in our failing to obtain regulatory approval to market
any of our antibody candidates, which would significantly harm our business, results of operations and prospects. The FDA, the EMA and other regulatory
authorities have substantial discretion in the approval process, and determining when or whether regulatory approval will be obtained for any of our
antibody candidates. Even if we believe the data collected from clinical trials of our antibody candidates are promising, such data may not be sufficient to
support approval by the FDA, the EMA or any other regulatory authority.
In addition, even if we were to obtain approval, regulatory authorities may approve any of our antibody 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 an antibody candidate with a label that does not include the labeling claims necessary or desirable for the
successful commercialization of that antibody candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our antibody
candidates.
Even if our antibody candidates obtain regulatory approval, we will be subject to ongoing obligations and continued regulatory review, which may
result in significant additional expense. Additionally, our antibody candidates, if approved, could be subject to labeling and other restrictions and
market withdrawal and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our
products.
If the FDA, the EMA or a comparable foreign regulatory authority approves any of our antibody candidates, the manufacturing processes, labeling,
packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing
regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as
continued compliance with cGMPs and GCPs for any clinical trials that we conduct post-approval, all of which may result in significant expense and limit
our ability to commercialize such products. In addition, any regulatory approvals that we receive for our antibody candidates may also be subject to
limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for potentially
costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor the safety and efficacy of the antibody candidate.
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If there are changes in the application of legislation or regulatory policies, or if problems are discovered with a product or our manufacture of a product, or
if we or one of our distributors, licensees or co-marketers fails to comply with regulatory requirements, the regulators could take various actions. These
include imposing fines on us, imposing restrictions on the product or its manufacture and requiring us to recall or remove the product from the market. The
regulators could also suspend or withdraw our marketing authorizations, requiring us to conduct additional clinical trials, change our product labeling or
submit additional applications for marketing authorization. If any of these events occurs, our ability to sell such product may be impaired, and we may
incur substantial additional expense to comply with regulatory requirements, which could materially adversely affect our business, financial condition and
results of operations.
We may not be successful in our efforts to use and expand our Biclonics® technology platform to build a pipeline of antibody candidates or to use our
TriclonicsTM technology platform to build a pipeline of trispecific antibody candidates.
A key element of our strategy is to use and expand our Biclonics® technology platform to build a pipeline of antibody candidates and progress these
antibody candidates through clinical development for the treatment of a variety of different types of diseases. Although our research and development
efforts to date have resulted in a pipeline of antibody candidates directed at various cancers, we may not be able to develop antibody candidates that are
safe and effective.
Another important element of our strategy is to develop, use and exploit our TriclonicsTM technology platform to build a pipeline of trispecific antibody
candidates and collaborate with third parties in potentially researching and developing these trispecific antibody candidates through pre-clinical and clinical
development for the treatment of a variety of different types of diseases. Although our research and development efforts to date have resulted in proof of
concept pre-clinical candidates, we may not be able to develop or monetize these trispecific antibody candidates or demonstrate in the clinic that they are
safe and effective. Even if we are successful in continuing to build our bispecific and trispecific pipelines, the potential antibody candidates that we identify
may not be suitable for clinical development, including as a result of being shown to have harmful side effects or other characteristics that indicate that they
are unlikely to be products that will receive marketing approval and achieve market acceptance. If we do not continue to successfully develop and begin to
commercialize our bispecific antibody candidates or if we do not successfully develop, collaborate, license or begin to commercialize our trispecific
antibody candidates, we will face difficulty in obtaining product revenues in future periods, which could result in significant harm to our financial position
and adversely affect our share price.
Even if we obtain marketing approval of any of our antibody candidates in a major pharmaceutical market such as the United States or the EU, we may
never obtain approval or commercialize our products in other major markets, which would limit our ability to realize their full market potential.
In order to market any products in a country or territory, we must establish and comply with numerous and varying regulatory requirements of such
countries or territories regarding 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 regulatory approvals in all
major markets could result in significant delays, difficulties and costs for us and may require additional pre-clinical studies or clinical trials which would be
costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our products
in those countries. Satisfying these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. In addition,
our failure to obtain regulatory approval in any country may delay or have negative effects on the process for regulatory approval in other countries. We
currently do not have any antibody candidates approved for sale in any jurisdiction, whether in the Netherlands, the United States or any other international
markets, and we do not have experience in obtaining regulatory approval in international markets. If we fail to comply with regulatory requirements in
international markets or to obtain and maintain required approvals, our target market will be reduced and our ability to realize the full market potential of
our products, if any, will be harmed.
Due to our limited resources and access to capital, we must, and have in the past decided to, prioritize development of certain antibody candidates over
other potential candidates. These decisions may prove to have been wrong and may adversely affect our revenues.
Because we have limited resources and access to capital to fund our operations, we must decide which antibody candidates to pursue and the amount of
resources to allocate to each. Our decisions concerning the allocation of research, collaboration, management and financial resources toward particular
compounds, antibody candidates or therapeutic areas may not lead to the development of viable commercial products and may divert resources away from
better opportunities. Similarly, our decisions to delay, terminate or collaborate with third parties in respect of certain antibody development programs may
also prove not to be optimal and could cause us to miss valuable opportunities. If we make incorrect determinations regarding the market potential of our
antibody candidates or misread trends in the biopharmaceutical industry, in particular for our lead antibody candidates, our business, financial condition
and results of operations could be materially adversely affected.
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Because we are subject to environmental, health and safety laws and regulations, we may become exposed to liability and substantial expenses in
connection with environmental compliance or remediation activities which may adversely affect our business and financial condition.
Our operations, including our research, development, testing and manufacturing activities, are subject to numerous environmental, health and safety laws
and regulations. These laws and regulations govern, among other things, the importation, storage, controlled use, handling, release and disposal of, and the
maintenance of a registry for, hazardous materials and biological materials, such as chemical solvents, human cells, carcinogenic compounds, mutagenic
compounds and compounds that have a toxic effect on reproduction, laboratory procedures and exposure to blood-borne pathogens. If we fail to comply
with such laws and regulations, we could be subject to fines or other sanctions.
As with other companies engaged in activities similar to ours, we face a risk of environmental liability inherent in our current and historical activities,
including liability relating to releases of or exposure to hazardous or biological materials. Environmental, health and safety laws and regulations are
becoming more stringent. We may be required to incur substantial expenses in connection with future environmental compliance or remediation activities,
in which case, our production and development efforts may be interrupted or delayed and our financial condition and results of operations may be
materially adversely affected.
Our employees, independent contractors, principal investigators, CROs, consultants, vendors and collaborators may engage in misconduct or other
improper activities, including noncompliance with applicable law, regulatory standards and requirements, which could have a material adverse effect
on our business.
We are exposed to the risk that our employees, independent contractors, principal investigators, CROs, consultants, vendors and collaborators may engage
in fraudulent conduct or other illegal activities. Misconduct by these parties could include intentional, reckless and/or negligent conduct or unauthorized
activities that violate: (i) the regulations of the FDA, the EMA and other regulatory authorities, including those laws that require the reporting of true,
complete and accurate information to such authorities; (ii) manufacturing standards; (iii) federal and state data privacy, security, fraud and abuse and other
healthcare laws and regulations in the United States and abroad; or (iv) laws that require the reporting of true, complete and accurate financial information
and data. Specifically, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to
prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing,
discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Activities subject to these laws
could also involve the improper use or misrepresentation of information obtained in the course of clinical trials or creating fraudulent data in our pre-
clinical studies or clinical trials, which could result in regulatory sanctions and cause serious harm to our reputation. It is not always possible to identify and
deter misconduct by employees and other third parties, 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 comply
with such laws 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 significant civil, criminal and administrative penalties, damages,
monetary fines, disgorgements, possible exclusion from participation in Medicare, Medicaid and other U.S. federal healthcare programs, individual
imprisonment, other sanctions, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of
which could adversely affect our ability to operate our business and our results of operations.
Our research and development activities could be affected or delayed as a result of possible restrictions on animal testing.
Certain laws and regulations require us to test our antibody candidates on animals before initiating clinical trials involving humans. Animal testing
activities have been the subject of controversy and adverse publicity. Animal rights groups and other organizations and individuals have attempted to stop
animal testing activities by pressing for legislation and regulation in these areas and by disrupting these activities through protests and other means. To the
extent the activities of these groups are successful, our research and development activities may be interrupted, delayed or become more expensive.
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Risks Related to Regulatory Approval of Our Antibody Candidates
Enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our antibody candidates
and may affect the prices we may set. The successful commercialization of our antibody candidates will depend in part on the extent to which
governmental authorities and health insurers establish adequate coverage and reimbursement levels and pricing policies.
In the United States, the EU, and other foreign jurisdictions, there have been, and we expect there will continue to be, a number of legislative and
regulatory changes and proposed changes to the healthcare system that could affect our future results of operations. In particular, there have been and
continue to be a number of initiatives at the United States federal and state levels that seek to reduce healthcare costs and improve the quality of healthcare.
For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act
(collectively the ACA) was enacted, which substantially changed the way healthcare is financed by both governmental and private insurers. Among the
provisions of the ACA, those of greatest importance to the pharmaceutical and biotechnology industries include the following:
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an annual, non-deductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, which is
apportioned among these entities according to their market share in certain government healthcare programs;
a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer point-of-sale discounts off negotiated
prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient
drugs to be covered under Medicare Part D;
an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13.0% of the
average manufacturer price for branded and generic drugs, respectively;
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;
extension of a manufacturer’s Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care
organizations;
expansion of 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;
expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research,
along with funding for such research; and
establishment of a Center for Medicare Innovation at the Centers for Medicare & Medicaid Services (CMS) to test innovative payment and
service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending.
Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA, as well as efforts by the current presidential
administration to modify, repeal, or otherwise invalidate all, or certain provisions of, the ACA. For example, the Tax Cuts and Jobs Act of 2017 (TCJA),
includes a provision repealing, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying
health coverage for all or part of a year that is commonly referred to as the “individual mandate.” On December 14, 2018, a U.S. District Court Judge in the
Northern District of Texas, ruled that the individual mandate is a critical and inseverable feature of the ACA, and therefore, because it was repealed as part
of the TCJA, the remaining provisions of the ACA are invalid as well. On December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the
District Court's decision that the individual mandate was unconstitutional but remanded the case back to the District Court to determine whether the
remaining provisions of the ACA are invalid as well. It is unclear how these decisions, subsequent appeals, and other efforts to challenge, repeal, or replace
the ACA will impact the ACA or our business.
In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. For example, the Budget Control
Act of 2011 resulted in 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 2029 unless additional Congressional action is taken. On
January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several
types of providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to
recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other health care funding,
which could have a material adverse effect on our future customers and accordingly, our financial operations.
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Moreover, payment methodologies, including payment for companion diagnostics, may be subject to changes in healthcare legislation and regulatory
initiatives. For example, CMS began bundling the Medicare payments for certain laboratory tests ordered while a patient received services in a hospital
outpatient setting and, beginning in 2018, CMS began paying for clinical laboratory services based on a weighted average of reported prices that private
payors, Medicare Advantage plans, and Medicaid Managed Care plans pay for laboratory services. In addition, recently there has been heightened
governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries
and proposed and enacted legislation designed 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. For example, the 21st Century Cures
Act changed the reimbursement methodology for infusion drugs and biologics furnished through durable medical equipment in an attempt to remedy over-
and underpayment of certain products. We expect that additional U.S. federal healthcare reform measures will be adopted in the future, any of which could
limit the amounts that the U.S. federal government will pay for healthcare products and services, which could result in reduced demand for our antibody
candidates or additional pricing pressures.
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 product access and
marketing cost disclosure and transparency measures, and, in some cases, 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, results of operations, financial
condition and prospects. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what
pharmaceutical products and which suppliers will be included in their prescription drug and other healthcare programs. This could reduce the ultimate
demand for any future products or put pressure on our product pricing, which could negatively affect our business, results of operations, financial condition
and prospects.
In the EU, similar political, economic and regulatory developments may affect our ability to profitably commercialize any future products. In addition to
continuing pressure on prices and cost containment measures, legislative developments at the EU or member state level may result in significant additional
requirements or obstacles that may increase our operating costs. The delivery of healthcare in the EU, including the establishment and operation of health
services and the pricing and reimbursement of medicines, is almost exclusively a matter for national, rather than EU, law and policy. National governments
and health service providers have different priorities and approaches to the delivery of health care and the pricing and reimbursement of products in that
context. In general, however, the healthcare budgetary constraints in most EU member states have resulted in restrictions on the pricing and reimbursement
of medicines by relevant health service providers. Coupled with ever-increasing EU and national regulatory burdens on those wishing to develop and
market products, this could prevent or delay marketing approval of our antibody candidates, restrict or regulate post-approval activities and affect our
ability to commercialize any products for which we obtain marketing approval. In international markets, reimbursement and healthcare payment systems
vary significantly by country, and many countries have instituted price ceilings on specific products and therapies.
We cannot predict how the policies of changing political administrations could impact, impose significant burdens on, or otherwise materially delay, the
FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review
and approval of marketing applications. For example, certain policies of the current presidential administration may impact our business and industry.
Namely, the current presidential administration has taken several executive actions, including the issuance of a number of Executive Orders. It is difficult to
predict how these requirements will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these
executive actions impose constraints on the FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be
negatively impacted.
Finally, policies of the individual government agencies, including the FDA or similar regulatory authorities, may change and additional government
regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. If we or our collaborators are slow or unable to
adapt to changes in existing requirements or the adoption of new requirements or policies, or if we or our collaborators are not able to maintain regulatory
compliance, our antibody candidates may lose any regulatory approval that may have been obtained and we may not achieve or sustain profitability, which
would adversely affect our business.
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Changes in funding for the FDA and other government agencies could hinder their ability to hire and retain key leadership and other personnel, or
otherwise prevent new products and services from being developed or commercialized in a timely manner, which could negatively impact our business.
The ability of the FDA to review and approve or clear new products can be affected by a variety of factors, including government budget and funding
levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. Average review times at
the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development
activities is subject to the political process, which is inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for new drugs, biologics and medical devices to be reviewed and/or approved
or cleared 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. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to
timely review and process our regulatory submissions, which could have a material adverse effect on our business.
We may be subject to healthcare laws, regulation and enforcement; our failure to comply with these laws could harm our results of operations and
financial conditions.
Although we do not currently have any products on the market, if we obtain FDA approval for any of our antibody candidates and begin commercializing
those products in the United States, our operations may be directly, or indirectly through our customers and third-party payors, subject to various U.S.
federal and state healthcare laws and regulations, including, without limitation, the U.S. federal Anti-Kickback Statute. Healthcare providers, physicians
and others play a primary role in the recommendation and prescription of any products for which we obtain marketing approval. These laws may impact,
among other things, our proposed sales, marketing and education programs and constrain our financial arrangements and relationships with healthcare
providers, physicians and other parties through which we market, sell and distribute our products for which we obtain marketing approval. In addition, we
may be subject to patient data privacy and security regulation by both the U.S. federal government and the states in which we conduct our business. Finally,
we may be subject to additional healthcare, statutory and regulatory requirements and enforcement by foreign regulatory authorities in jurisdictions in
which we conduct our business. The laws that may affect our ability to operate include:
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the U.S. federal Anti-Kickback Statute, which prohibits, among other things, persons or entities from knowingly and willfully soliciting,
offering, receiving or paying any remuneration (including any kickback, bribe, or certain rebate), directly or indirectly, overtly or covertly, in
cash or in kind, to induce or reward either the referral of an individual for, or the purchase, lease, order or recommendation of, any good,
facility, item or service, for which payment may be made, in whole or in part, under U.S. federal and state healthcare programs such as
Medicare and Medicaid; a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have
committed a violation;
the U.S. federal false claims and civil monetary penalties laws, including the civil False Claims Act, which, among other things, impose
criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for, among other things,
knowingly presenting, or causing to be presented, to the U.S. federal government, claims for payment or approval that are false or fraudulent,
knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim, or from knowingly
making a false statement to avoid, decrease or conceal an obligation to pay money to the U.S. federal government. In addition, the government
may assert that a claim including items and services resulting from a violation of the U.S. federal Anti-Kickback Statute constitutes a false or
fraudulent claim for purposes of the False Claims Act;
the U.S. federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) which imposes criminal and civil liability for, among
other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, or knowingly
and willfully falsifying, concealing or covering up a material fact or making any materially false statement, in connection with the delivery of,
or payment for, healthcare benefits, items or services; similar to the U.S. federal Anti-Kickback Statute, a person or entity does not need to
have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;
the U.S. federal Food, Drug and Cosmetic Act (FDCA) which prohibits, among other things, the adulteration or misbranding of drugs,
biologics and medical devices;
the U.S. federal legislation commonly referred to as Physician Payments Sunshine Act, enacted as part of the ACA, and its implementing
regulations, which requires certain manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare,
Medicaid, or the Children’s Health Insurance Program to report annually to the CMS information related to certain payments and other
transfers of value to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain other health care
professionals beginning in 2022, and teaching hospitals, as well as ownership and investment interests held by the physicians described above
and their immediate family members;
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analogous state laws and regulations, including: state anti-kickback and false claims laws, which may apply to our business practices, including
but not limited to, research, distribution, sales and marketing arrangements and claims involving healthcare items or services reimbursed by
any third-party payor, including private insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical
industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the U.S. federal government, or otherwise
restrict payments that may be made to healthcare providers and other potential referral sources; and state laws and regulations that require drug
manufacturers to file reports relating to pricing and marketing information, and that require the tracking and reporting of gifts and other
remuneration and items of value provided to healthcare professionals and entities; and
European and other foreign law equivalents of each of the laws, including reporting requirements detailing interactions with and payments to
healthcare providers.
Ensuring that our internal operations and future business arrangements with third parties comply with applicable healthcare laws and regulations could
involve substantial costs. It is possible that governmental authorities will conclude that our business practices do 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 the laws described above or any other governmental laws and regulations that may apply to us, we may be subject to significant
penalties, including civil, criminal and administrative penalties, damages, fines, exclusion from U.S. government funded healthcare programs, such as
Medicare and Medicaid, disgorgement, individual imprisonment, contractual damages, reputational harm, diminished profits, reporting obligations and
oversight if we become subject to a corporate integrity agreement or other agreement, and the curtailment or restructuring of our operations. If any of the
physicians or other providers or entities with whom we expect to do business is found not to be in compliance with applicable laws, they may be subject to
criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs and imprisonment. If any of the above occur,
it could adversely affect our ability to operate our business and our results of operations. Further, defending against any such actions can be costly, time-
consuming and may require significant 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.
We face potential liability related to the privacy of health information we obtain from clinical trials sponsored by us or our collaborators, from research
institutions, and directly from individuals.
Most health care providers, including research institutions from which we or our collaborators obtain patient health information, are subject to privacy and
security regulations promulgated under HIPAA, as amended by HITECH. Any person may be prosecuted under HIPAA’s criminal provisions either directly
or under aiding-and-abetting or conspiracy principles. Consequently, depending on the facts and circumstances, we could face substantial criminal penalties
if we knowingly receive individually identifiable health information from a HIPAA-covered health care provider or research institution that has not
satisfied HIPAA’s requirements for disclosure of individually identifiable health information.
In addition, we may maintain sensitive personally identifiable information, including health information, that we receive throughout the clinical trial
process, in the course of our research collaborations, and directly from individuals (or their healthcare providers) who enroll in our patient assistance
programs. Even when HIPAA does not apply, according to the Federal Trade Commission (FTC), failing to take appropriate steps to keep consumers’
personal information secure constitutes unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act.
The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it
holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities. Individually identifiable health
information is considered sensitive data that merits stronger safeguards. The FTC’s guidance for appropriately securing consumers’ personal information is
similar to what is required by the HIPAA Security Rule. As such, we, our collaborators, research institutions, health care providers and other entities that
provide personally identifiable information to us may be subject to state information security laws, and state laws requiring notification of affected
individuals and state regulators in the event of a breach of personal information, which is a broader class of information than the health information
protected by HIPAA.
The United States and global data protection landscape is rapidly evolving, and we may be affected by or subject to new or amended laws and regulations
in the future. For example, California recently enacted legislation, the California Consumer Privacy Act (CCPA) which went into effect January 1, 2020.
The CCPA, among other things, creates new data privacy obligations for covered companies and provides new privacy rights to California residents,
including the right to opt out of certain disclosures of their information. The CCPA also creates a private right of action with statutory damages for certain
data breaches, thereby potentially increasing risks associated with a data breach. Although the law includes limited exceptions, including for “protected
health information” maintained by a covered entity or business associate, it may regulate or impact our processing of personal information depending on
the context.
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Our and our collaborators’ clinical trial programs and research collaborations outside the U.S. may implicate international data protection laws, including,
in Europe, the GDPR and local laws further implementing or supplementing the GDPR. The GDPR implements more stringent operational requirements
for processors and controllers of personal data including requirements for such companies to be able to ensure and be able to demonstrate compliance with
the GDPR. If our or our collaborators’ privacy or data security measures fail to comply with the GDPR requirements, we may be subject to litigation,
regulatory investigations, enforcement notices requiring us to change the way we use personal data and/or fines of up to €20 million or up to 4% of the total
worldwide annual turnover of the preceding financial year, whichever is higher. In addition to statutory enforcement, a non-compliance can lead to
compensation claims by affected individuals, negative publicity and a potential loss of business.
We are also subject to EU laws on personal data export, as we may transfer personal data from the EU to other jurisdictions which are not considered by the
European Commission to offer “adequate” protection of personal data. Such transfers need to be legitimized by a valid transfer mechanism under the
GDPR. In addition, the U.S. Privacy Shield is under periodic review by the European Commission. As such, there remains ongoing uncertainty that the
Privacy Shield framework and/or model clauses may be invalidated in the future. Further, the United Kingdom’s decision to leave the EU has created
uncertainty with regard to the status of the UK as an “adequate country” for the purposes of data transfers outside the European Economic Area. In
particular, it is unclear how data transfers to and from the UK will be regulated. These changes could require us to make operational changes and could
increase costs and may lead to governmental enforcement actions, litigation, fines and penalties or adverse publicity that could have an adverse effect on
our business. See Item 1, “Business—Government Regulation—Privacy and Data Protection Laws in Europe.”
Although we work to comply with applicable laws, regulations and standards, our contractual obligations and other legal obligations, these requirements
are evolving and may be modified, interpreted and applied in an inconsistent manner among jurisdictions in which we operate. We are likely to be required
to expend significant capital and other resources to ensure ongoing compliance with applicable privacy and data security laws both inside and outside the
United States. Claims that we have violated individuals’ privacy rights or breached our contractual obligations regardless of merit and even if we are not
found liable, could be expensive and time-consuming to defend and could result in adverse publicity that could harm our business.
Claims that we or any collaborators fail to comply with applicable federal, state, or local, legal or regulatory requirements, could subject us to a range of
regulatory actions that could affect our or any collaborators’ ability to seek to commercialize our antibody candidates, if approved. Any threatened or actual
government enforcement action could also generate adverse publicity and require that we devote substantial resources that could otherwise be used in other
aspects of our business.
Risks Related to Commercialization of Our Antibody Candidates
We operate in highly competitive and rapidly changing industries, which may result in others discovering, developing or commercializing competing
products before or more successfully than we do.
The biopharmaceutical and pharmaceutical industries are highly competitive and subject to significant and rapid technological change. Our success is
highly dependent on our ability to discover, develop and obtain marketing approval for new and innovative products on a cost-effective basis and to market
them successfully. In doing so, we face and will continue to face intense competition from a variety of businesses, including large, fully integrated
pharmaceutical companies, specialty pharmaceutical companies and biopharmaceutical companies, academic institutions, government agencies and other
private and public research institutions in Europe, the United States and other jurisdictions. These organizations may have significantly greater resources
than we do and conduct similar research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and
marketing of products that compete with our antibody candidates.
With the proliferation of new drugs and therapies into oncology, we expect to face increasingly intense competition as new technologies become available.
If we fail to stay at the forefront of technological change, we may be unable to compete effectively. Any antibody candidates that we successfully develop
and commercialize will compete with existing therapies and new therapies that may become available in the future. The highly competitive nature of and
rapid technological changes in the biotechnology and pharmaceutical industries could render our antibody candidates or our technology obsolete, less
competitive or uneconomical. Our competitors may, among other things:
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have significantly greater financial, manufacturing, marketing, drug development, technical and human resources than we do;
develop and commercialize products that are safer, more effective, less expensive, more convenient or easier to administer, or have fewer or
less severe side effects;
obtain quicker regulatory approval;
establish superior proprietary positions covering our products and technologies;
implement more effective approaches to sales and marketing; or
form more advantageous strategic alliances.
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Should any of these factors occur, our business, financial condition and results of operations could be materially adversely affected.
In addition, existing and future collaborators may decide to market and sell products that compete with the antibody candidates that we have agreed to
license to them. While we have agreements governing their committed activities, we have limited influence over their actual performance, and any
competition by our collaborators could also have a material adverse effect on our future business, financial condition and results of operations.
Smaller and other early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and
established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical
trial sites and patient registration for clinical trials, retaining manufacturers to produce clinical trial materials, as well as in acquiring technologies
complementary to, or necessary for, our programs.
If we fail to obtain orphan drug designation or obtain or maintain orphan drug exclusivity for our products, our competitors may sell products to treat
the same conditions and our revenue will be reduced.
Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is intended to treat a rare disease or condition, defined as a patient
population of fewer than 200,000 in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable
expectation that the cost of developing the drug will be recovered from sales in the United States. In the EU, the EMA’s Committee for Orphan Medicinal
Products grants orphan drug designation to promote the development of products that are intended for the diagnosis, prevention or treatment of a life-
threatening or chronically debilitating condition affecting not more than five in 10,000 persons in the EU. Additionally, designation is granted for products
intended for the diagnosis, prevention or treatment of a life-threatening, seriously debilitating or serious and chronic condition when, without incentives, it
is unlikely that sales of the drug in the EU would be sufficient to justify the necessary investment in developing the drug or biological product or where
there is no satisfactory method of diagnosis, prevention or treatment, or, if such a method exists, the medicine must be of significant benefit to those
affected by the condition.
In the United States, orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax
advantages and user-fee waivers. In addition, if a product receives the first FDA approval for the indication for which it has orphan designation, the product
is entitled to orphan drug exclusivity, which means the FDA may not approve any other application to market the same drug for the same indication for a
period of seven years, except in limited circumstances, such as a showing of clinical superiority over the product with orphan exclusivity or where the
manufacturer is unable to assure sufficient product quantity. In the EU, orphan drug designation entitles a party to financial incentives such as reduction of
fees or fee waivers and ten years of market exclusivity following drug or biological product approval. This period may be reduced to six years if the orphan
drug designation criteria are no longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market
exclusivity.
We plan to potentially seek orphan drug designation from the FDA and the EMA for our assets in clinical development, including zenocutuzumab, MCLA-
117 and other clinical assets, where supported by data in the appropriate indications that meet the criteria for orphan status. Even if we are able to obtain
orphan designation in the United States and/or the EU, we may not be the first to obtain marketing approval for any particular orphan indication due to the
uncertainties associated with developing pharmaceutical products. In addition, exclusive marketing rights in the United States may be limited if we seek
approval for an indication broader than the orphan-designated indication or may be lost if the FDA later determines that the request for designation was
materially defective or if the manufacturer is unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or
condition. Further, even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition
because different drugs with different active moieties can be approved for the same condition. Even after an orphan drug is approved, the FDA or the EMA
can subsequently approve the same drug with the same active moiety for the same condition if the FDA or the EMA concludes that the later drug is safer,
more effective, or makes a major contribution to patient care. Orphan drug designation neither shortens the development time or regulatory review time of
a drug nor gives the drug any advantage in the regulatory review or approval process. In addition, while we intend to seek orphan drug designation, when
appropriate, we may not receive such designation.
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The successful commercialization of our antibody candidates will depend in part on the extent to which governmental authorities and health insurers
establish adequate coverage, reimbursement levels and pricing policies. Failure to obtain or maintain adequate coverage and reimbursement for our
antibody candidates, if approved, could limit our ability to market those products and decrease our ability to generate revenue.
The availability and adequacy of coverage and reimbursement by governmental healthcare programs such as Medicare and Medicaid, private health
insurers and other third-party payors are essential for most patients to be able to afford products such as our antibody candidates, assuming approval. Our
ability to achieve acceptable levels of coverage and reimbursement for products by governmental authorities, private health insurers and other organizations
will have an effect on our ability to successfully commercialize and attract additional collaborators to invest in the development of our antibody candidates.
Assuming we obtain coverage for a given product by a third-party payor, the resulting reimbursement payment rates may not be adequate or may require
co-payments that patients find unacceptably high. We cannot be sure that coverage and reimbursement in the United States, the EU or elsewhere will be
available for any product that we may develop, and any reimbursement that may become available may be decreased or eliminated in the future. Third-
party payors increasingly are challenging prices charged for pharmaceutical products and services, and many third-party payors may refuse to provide
coverage and reimbursement for particular drugs when an equivalent generic drug or a less expensive therapy is available. It is possible that a third-party
payor may consider our antibody candidate and other therapies as substitutable and only offer to reimburse patients for the less expensive product. Even if
we show improved efficacy or improved convenience of administration with our antibody candidate, pricing of existing drugs may limit the amount we will
be able to charge for our antibody candidate. These payors may deny or revoke the reimbursement status of a given drug product or establish prices for new
or existing marketed products at levels that are too low to enable us to realize an appropriate return on our investment in product development. If
reimbursement is not available or is available only at limited levels, we may not be able to successfully commercialize our antibody candidates and may not
be able to obtain a satisfactory financial return on products that we may develop.
There is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. In the United States, third-party payors,
including private and governmental payors, such as the Medicare and Medicaid programs, play an important role in determining the extent to which new
drugs and biologics will be covered. The Medicare and Medicaid programs increasingly are used as models for how private payors and other governmental
payors develop their coverage and reimbursement policies for drugs and biologics. Some third-party payors may require pre-approval of coverage for new
or innovative devices or drug therapies before they will reimburse health care providers who use such therapies. It is difficult to predict at this time what
third-party payors will decide with respect to the coverage and reimbursement for our antibody candidates.
Obtaining and maintaining reimbursement status is time-consuming and costly. No uniform policy for coverage and reimbursement for drug products exists
among third-party payors in the United States. Therefore, coverage and reimbursement for drug products can differ significantly from payor to payor. As a
result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the
use of any future products to each payor separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained in
the first instance. Furthermore, rules and regulations regarding reimbursement change frequently, in some cases at short notice, and we believe that changes
in these rules and regulations are likely.
Outside the United States, international operations are 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 our antibody candidates, if approved. In many countries, the prices of medical products are subject to varying price control mechanisms as
part of national health systems. Other countries allow companies to fix their own prices for medical 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 antibody candidates, if
approved. Accordingly, in markets outside the United States, the reimbursement for our products may be reduced compared with the United States and may
be insufficient to generate commercially reasonable revenue and profits.
Moreover, increasing efforts by governmental and third-party payors in the United States and abroad to cap or reduce healthcare costs may cause such
organizations to limit both coverage and the level of reimbursement for newly approved products and, as a result, they may not cover or provide adequate
payment for our antibody candidates, if approved. We expect to experience pricing pressures in connection with the sale of any of our antibody candidates
that are approved due to the trend toward managed healthcare, the increasing influence of health maintenance organizations, and additional legislative
changes. The downward pressure on healthcare costs in general, particularly prescription drugs and surgical procedures and other treatments, has become
very intense. As a result, increasingly high barriers are being erected to the entry of new products.
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Our products may not gain market acceptance, in which case we may not be able to generate product revenues, which will materially adversely affect
our business, financial condition and results of operations.
Even if the FDA, the EMA or any other regulatory authority approves the marketing of any antibody candidates that we develop on our own or with a
collaborator, physicians, healthcare providers, patients or the medical community may not accept or use them. If these products do not achieve an adequate
level of acceptance, we may not generate significant product revenues or any profits from operations. The degree of market acceptance of any of our
antibody candidates that are approved will depend on a variety of factors, including:
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the timing of market introduction;
the number and clinical profile of competing products;
our ability to provide acceptable evidence of safety and efficacy;
the prevalence and severity of any side effects;
relative convenience and ease of administration;
cost-effectiveness;
patient diagnostics and screening infrastructure in each market;
marketing and distribution support;
availability of adequate coverage, reimbursement and adequate payment from health maintenance organizations and other insurers, both public
and private; and
other potential advantages over alternative treatment methods.
Failure of our antibody candidates, if approved, to gain market acceptance will have a material adverse impact on our ability to generate revenues to
provide a satisfactory, or any, return on our investments. Even if some products achieve market acceptance, the market may prove not to be large enough to
allow us to generate significant revenues.
We currently have no marketing, sales or distribution infrastructure. If we are unable to develop sales, marketing and distribution capabilities on our
own or through collaborations, we will not be successful in commercializing our antibody candidates.
We currently have no marketing, sales and distribution capabilities because all of our antibody candidates are still in clinical or pre-clinical development. If
any of our antibody candidates are approved, we intend either to establish a sales and marketing organization with technical expertise and supporting
distribution capabilities to commercialize our antibody candidates, or to outsource this function to a third party. Either of these options would be expensive
and time consuming. These costs may be incurred in advance of any approval of our antibody candidates. In addition, we may not be able to hire a sales
force that is sufficient in size or has adequate expertise in the medical markets that we intend to target. Any failure or delay in the development of our
internal sales, marketing and distribution capabilities would adversely impact the commercialization of any approved products.
To the extent that we enter into collaboration agreements with respect to marketing, sales or distribution, our product revenue may be lower than if we
directly marketed or sold any approved products. In addition, any revenue we receive will depend in whole or in part upon the efforts of these third-party
collaborators, which may not be successful and are generally not within our control. If we are unable to enter into these arrangements on acceptable terms
or at all, we may not be able to successfully commercialize any approved products. If we are not successful in commercializing any approved products,
either on our own or through collaborations with one or more third parties, our future product revenue will suffer and we may incur significant additional
losses.
We have never commercialized an antibody candidate before and may lack the necessary expertise, personnel and resources to successfully
commercialize our products on our own or together with suitable collaborators.
We have never commercialized an antibody candidate, and we currently have no sales force, marketing or distribution capabilities. To achieve commercial
success for our antibody candidates, if approved, which we may license to others, we will rely on the assistance and guidance of those collaborators. For
antibody candidates for which we retain commercialization rights, we will have to develop our own sales, marketing and supply organization or outsource
these activities to a third party. We may rely on outside consultants to provide advice on commercialization strategies, which may fail to deliver or provide
effective guidance to maximize any commercial opportunity, if any, that may arise from our antibody candidates.
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Factors that may affect our ability to commercialize our antibody candidates on our own include obtaining effective advice from consultants on
commercialization strategy, recruiting and retaining adequate numbers of effective sales and marketing personnel, obtaining access to or persuading
adequate numbers of physicians to prescribe our antibody candidates and other unforeseen costs associated with creating an independent sales and
marketing organization. Developing a sales and marketing organization will be expensive and time-consuming and could delay the launch of our antibody
candidates, if approved. We may not be able to build an effective sales and marketing organization. If we are unable to build our own distribution and
marketing capabilities or to find suitable partners for the commercialization of our antibody candidates, we may not generate revenues from them or be able
to reach or sustain profitability.
Our antibody candidates for which we intend to seek approval as biologic products may face competition sooner than anticipated.
The ACA includes a subtitle called the Biologics Price Competition and Innovation Act of 2009 (BPCIA) which created an abbreviated approval pathway
for biological products that are biosimilar to or interchangeable with an FDA-licensed reference biological product. Under the BPCIA, an application for a
biosimilar product may not be submitted to the FDA until four years following the date that the reference product was first approved by the FDA. In
addition, the approval of a biosimilar product may not be made effective by the FDA until 12 years from the date on which the reference product was first
approved. During this 12-year period of exclusivity, another company may still market a competing version of the reference product if the FDA approves a
full BLA for the competing product containing the sponsor’s own pre-clinical data and data from adequate and well-controlled clinical trials to demonstrate
the safety, purity and potency of their product. The law is complex and is still being interpreted and implemented by the FDA. As a result, its ultimate
impact, implementation, and meaning are subject to uncertainty.
We believe that any of our antibody candidates approved as a biological product under a BLA should qualify for the 12-year period of exclusivity.
However, there is a risk that this exclusivity could be shortened due to congressional action or otherwise. Other aspects of the BPCIA, some of which may
impact the BPCIA exclusivity provisions, have also been the subject of recent litigation. Moreover, the extent to which a biosimilar, once approved, will be
substituted for any one of our reference products in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and
will depend on a number of marketplace and regulatory factors that are still developing.
Jurisdictions in addition to the United States have established abbreviated pathways for regulatory approval of biological products that are biosimilar to
earlier approved reference products. For example, the EU has had an established regulatory pathway for biosimilars since 2005.
The increased likelihood of biosimilar competition has increased the risk of loss of innovators’ market exclusivity. Due to this risk, and uncertainties
regarding patent protection, if our antibody candidates are approved for marketing, it is not possible to predict the length of market exclusivity for any
particular product with certainty based solely on the expiration of the relevant patent(s) or the current forms of regulatory exclusivity. It is also not possible
to predict changes in United States regulatory law that might reduce biological product regulatory exclusivity. The loss of market exclusivity for a product
would likely materially and negatively affect revenues and we may not generate adequate or sufficient revenues from them or be able to reach or sustain
profitability.
Risks Related to Our Dependence on Third Parties
We rely, and expect to continue to rely, on third parties, including independent clinical investigators and CROs, to conduct our pre-clinical studies and
clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain
regulatory approval for or commercialize our antibody candidates and our business could be substantially harmed.
We have relied upon and plan to continue to rely upon third parties, including independent clinical investigators and third-party CROs, to conduct our pre-
clinical studies and clinical trials and to monitor and manage data for our ongoing pre-clinical and clinical programs. We rely on these parties for execution
of our pre-clinical studies and clinical trials, and control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of
our studies and trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on these third
parties does not relieve us of our regulatory responsibilities. We and our third-party contractors and CROs are required to comply with GCP requirements,
which are regulations and guidelines enforced by the FDA, the Competent Authorities of the Member States of the EEA, and comparable foreign regulatory
authorities for all of our antibody candidates in clinical development. Regulatory authorities enforce these GCPs through periodic inspections of trial
sponsors, principal investigators and trial sites. If we or any of our CROs fail to comply with applicable GCPs, the clinical data generated in our clinical
trials may be deemed unreliable and the FDA, the EMA or comparable foreign regulatory authorities may require us to perform additional clinical trials
before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will
determine that any of our clinical trials comply with GCP regulations. In addition, our clinical trials must be conducted with the antibody candidate
produced under cGMP regulations. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory
approval process.
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Further, these investigators and CROs are not our employees and we will not be able to control, other than by contract, the amount of resources, including
time, which they devote to our antibody candidates and clinical trials. If independent investigators or CROs fail to devote sufficient resources to the
development of our antibody candidates, or if their performance is substandard, it may delay or compromise the prospects for approval and
commercialization of any antibody candidates that we develop. In addition, the use of third-party service providers may require us to disclose our
proprietary information to these parties, which could increase the risk that this information will be misappropriated.
Our CROs have the right to terminate their agreements with us in the event of an uncured material breach. In addition, some of our CROs have an ability to
terminate their respective agreements with us if it can be reasonably demonstrated that the safety of the subjects participating in our clinical trials warrants
such termination, if we make a general assignment for the benefit of our creditors or if we are liquidated.
If any of our relationships with these third-party CROs terminate, we may not be able to enter into arrangements with alternative CROs or to do so on
commercially reasonable terms. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be
replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory
requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or
successfully commercialize our antibody candidates. As a result, our results of operations and the commercial prospects for our antibody candidates would
be harmed, our costs could increase and our ability to generate revenues could be delayed.
Switching or adding additional CROs involves additional cost and requires management time and focus. In addition, there is a natural transition period
when a new CRO commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines.
Additionally, CROs may lack the capacity to absorb higher workloads or take on additional capacity to support our needs. Though we carefully manage our
relationships with our CROs, there can be no assurance that we will not encounter similar challenges or delays in the future or that these delays or
challenges will not have a material adverse impact on our business, financial condition and prospects.
The novel coronavirus or COVID-19 outbreak could adversely impact our business, financial condition and results of operations.
In December 2019, a strain of novel coronavirus or COVID-19 surfaced in Wuhan, China. In January 2020, the World Health Organization (WHO)
declared the novel coronavirus outbreak a “Public Health Emergency of International Concern” and the U.S. Department of State instructed travelers to
avoid all nonessential travel to China. In March 2020, the coronavirus outbreak has been labelled a pandemic by the WHO. The virus has been reported to
have infected people in over 100 countries worldwide, including the U.S. and throughout Europe. As a result of the outbreak, certain of our CROs and
third-party suppliers, as well as collaborators in China that are developing certain of our pre-clinical antibody candidates have been affected and have
experienced cessation of activity and may experience closures and labor shortages, which may disrupt our development of our pre-clinical antibody
candidates, including MCLA-129. As a result of such closures, we may face difficulties with and delays in performance of certain chemistry manufacturing
and controls and testing of our pre-clinical antibody candidates, including MCLA-129, which may delay or prevent their potential clinical development.
Moreover, because of the current restrictions on travel in China, we may have labor shortages associated with these pre-clinical development activities,
even though our collaborators based in China have re-opened, which may force us to reduce related workflows until such travel restrictions are lifted. Also,
there can be no assurances that the Chinese government will not renew or extend these closures.
To date, COVID-19 infections have begun further interfering with the normal function of businesses worldwide, including in the form of travel restrictions,
such as those imposed by the U.S. related to European countries into the U.S. and imposed by Italy either in or out of the country, quarantines, office and
school closures and employees being encouraged or required to work from home pursuant to guidance provided by the Center for Disease Control and
European local health agencies, including the Dutch National Institute for Health and Environment or Het Rijksinstituut voor Volksgezondheid en
Milieu. For example, most of our employees located in the Netherlands will not be able to travel to the U.S., where certain of our collaborators and
employees are located, which could have an adverse impact on our ability to conduct our business. Should COVID-19 infections and related disruptions
continue further, including to our offices and facilities, our third party manufacturers, CROs, clinical trial sites or collaborators, our workforce and
operations, pre-clinical and clinical activity, chemistry, manufacturing and controls for our clinical candidates, clinical trial enrollment, patient monitoring,
progress of our trials and collaborations, including with Incyte, Betta Pharma, Simcere and our license agreements with Ono and our academic
collaborators, may be adversely impacted. Such occurrences could negatively impair our operations, ability to meet milestones and guidance, financial
position, ability to raise capital, and ability to maintain adequate insurance, among other risks and uncertainties. While we currently have business
continuity plans and risk mitigation strategies in place for certain of our operations, we cannot give any assurance that such plans or procedures will work
effectively or protect us against risks arising from this novel coronavirus outbreak.
At this point in time, there is significant uncertainty relating to the potential effect of the novel coronavirus on our business. Infections may become more
widespread, worsening in countries where we have operations or do business and travel and workforce restrictions may remain or worsen, all of which
would have a negative impact on our business, financial condition and results of operations.
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The collaboration and license agreement, or the Collaboration Agreement, with Incyte Corporation (Incyte) is important to our business. If suitable
monospecific or bispecific antibody candidates are not identified for further development and commercialization activities under the Collaboration
Agreement, or if we or Incyte fail to adequately perform under the Collaboration Agreement, or if we or Incyte terminate the Collaboration Agreement,
the development and commercialization of our antibody candidates would be delayed or terminated and our business would be adversely affected.
The Collaboration Agreement may be terminated:
•
•
•
in its entirety or on a program-by-program basis by Incyte for convenience;
in its entirety or on a program-by-program basis by either party due to a material breach of the Collaboration Agreement, or any one or more
programs under the Collaboration Agreement, as applicable; and
on a program-by-program basis (but not in its entirety), by either party if the other party challenges the terminating party’s patents for such
program, and such challenge is not withdrawn within 30 days.
If the Collaboration Agreement is terminated with respect to one or more programs, all rights in the terminated programs revert to us, subject to payment to
Incyte of a reverse royalty of up to 4% on sales of future products, depending on the stage of development as of the date of termination, if we elect to
pursue development and commercialization of monospecific or bispecific antibody candidates arising from the terminated programs.
Termination of the Collaboration Agreement could cause significant delays in our antibody candidate development and commercialization efforts, which
could prevent us from commercializing our antibody candidates without first expanding our internal capabilities or entering into another agreement with a
third party. Any suitable alternative collaboration or license agreement would take considerable time to negotiate and could also be on less favorable terms
to us. In addition, under the Collaboration Agreement, Incyte agreed to conduct certain clinical development activities. If the Collaboration Agreement
were to be terminated, and whether or not we identify another suitable collaborator, we may need to seek additional financing to support the research and
development of any terminated antibody candidates so that we may continue development activities, or we may be forced to discontinue development of
terminated antibody candidates, each of which could have a material adverse effect on our business.
Under the Collaboration Agreement, with the exception of MCLA-145 where we retain full U.S. rights, we are dependent upon Incyte to successfully
develop and commercialize any antibody candidates that are identified for further development under the Collaboration Agreement. With the exception of
those programs where we retain certain co-development rights, we have limited ability to influence or control Incyte’s development and commercialization
activities or the resources it allocates to development of product candidates identified under the Collaboration Agreement. Our interests and Incyte’s
interests may differ or conflict from time to time, or we may disagree with Incyte’s level of effort or resource allocation. Incyte may internally prioritize
programs under development within the collaboration differently than we would, or it may not allocate sufficient resources to effectively or optimally
develop or commercialize antibody candidates arising from such programs. If these events were to occur, our ability to receive revenue from the
commercialization of products arising from such programs would be reduced, and our business would be adversely affected.
The collaboration and license agreements with Simcere, and Betta Pharma, and the research and license agreement with Ono are important to our
business. If our Biclonics® antibodies licensed in these collaboration and license agreements fail to advance or experience unacceptable safety or
efficacy results if clinically developed, this could adversely impact the reputation of our platform and our ability to engage in future collaborations.
If our collaboration agreements with Simcere or Betta Pharma or our research and license agreements with Ono are terminated with respect to one or more
programs, or the pre-clinical assets associated with these agreements fail to advance into the clinic, or experience negative results with respect to safety,
efficacy, manufacturability, or other features of research and development, this could adversely affect the reputation of our Biclonics® technology platform
and our ability to engage in future collaborations or licensing agreements. While we have certain contractual provisions in place in our collaboration
agreements with Simcere and Betta Pharma that permit us to supervise development efforts associated with our pre-clinical assets out-licensed to these
entities, which have product rights in China, we cannot guarantee that these assets will be developed in China in accordance with our standards as applied
to our wholly owned programs. Ono is currently pursuing two antibodies generated by us through use of our proprietary Biclonics® platform in an area
outside oncology. To the extent these assets do not successfully advance through clinical development, this may impair our ability to leverage our platform
in areas outside oncology or to engage in future license agreements to further expand the use of our platform and generate future revenue. Should any of
these collaborations or license agreements fail or be terminated, any suitable alternative collaboration or license agreement would take considerable time to
negotiate, if at all, and could also be on less favorable terms to us. If these agreements were to be terminated, and whether or not we identify a suitable
alternative collaborator, we may need to seek additional financing to support the research and development of any terminated antibody candidates so that
we may continue development activities, or we may be forced to discontinue development of terminated antibody candidates, each of which could have a
material adverse effect on our business.
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If we fail to enter into new strategic relationships our business, financial condition, commercialization prospects and results of operations may be
materially adversely affected.
Our product development programs and the potential commercialization of our antibody candidates will require substantial additional cash to fund
expenses. Therefore, for some of our antibody candidates and with respect to our recently developed TriclonicsTM technology platform, we may decide to
enter into new collaborations with pharmaceutical or biopharmaceutical companies for the development and potential commercialization of those bispecific
and trispecific antibody candidates. For instance, we have license and collaboration agreements with Ono, Incyte, Simcere and Betta, under which we have
licensed the development and commercialization of certain of our monospecific or bispecific antibody candidates.
We face significant competition in seeking appropriate collaborators. Collaborations are complex and time-consuming to negotiate and document. We may
also be restricted under existing and future collaboration agreements from entering into agreements on certain terms with other potential collaborators. We
may not be able to negotiate collaborations on acceptable terms, or at all. If that were to occur, we may have to curtail the development of a particular
bispecific or trispecific antibody candidate, reduce or delay its development program or one or more of our other development programs, delay its potential
commercialization or reduce the scope of our sales or marketing activities, or increase our expenditures and undertake development or commercialization
activities at our own expense. 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 will not be able to bring our
antibody candidates to market, further research and develop new trispecific antibody candidates, enhance our Biclonics® and TriclonicsTM technology
platforms and generate product revenue. If we do enter into a new collaboration agreement, we could be subject to the following risks, each of which may
materially harm our business, commercialization prospects and financial condition:
•
•
•
•
•
•
we may not be able to control the amount and timing of resources that the collaborator devotes to the product development program;
the collaborator may experience financial difficulties;
we may be required to relinquish important rights such as marketing, distribution and intellectual property rights;
a collaborator may experience technical, clinical, intellectual property, manufacturing or other setbacks in the research or development of a
product program arising from our collaboration adversely affecting the financial return of our collaboration or the reputation of our technology
platform;
a collaborator could move forward with a competing product developed either independently or in collaboration with third parties, including
our competitors; or
business combinations or significant changes in a collaborator’s business strategy may adversely affect our willingness to complete our
obligations under any arrangement.
We currently rely on third-party suppliers and other third parties for production of our antibody candidates and our dependence on these third parties
may impair the advancement of our research and development programs and the development of our antibody candidates. Moreover, we intend to rely
on third parties to produce commercial supplies of any approved antibody candidate and our commercialization of any of our antibody candidates
could be stopped, delayed or made less profitable if those third parties fail to obtain approval of the FDA or comparable foreign regulatory authorities
following inspection of their facilities and procedures to manufacture our antibody candidates and products, fail to provide us with sufficient quantities
of antibody product or fail to do so at acceptable quality levels or prices or fail to otherwise complete their duties in compliance with their obligations to
us or other parties.
We rely on and expect to continue to rely on third-party contract manufacturing organizations (CMOs) for the supply of cGMP-grade clinical trial materials
and commercial quantities of our antibody candidates and products, if approved. Reliance on third-party providers may expose us to more risk than if we
were to manufacture antibody candidates ourselves. The facilities used by our CMOs to manufacture our antibody candidates must be approved by the
FDA pursuant to inspections that will be conducted after we submit our BLA to the FDA. We have limited control over the manufacturing process of, and
beyond contractual terms, we are completely dependent on our CMOs for compliance with cGMP for the manufacture of our antibody candidates. If our
CMOs cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or comparable
foreign regulatory authorities, or are unable to do so in a timely manner, they will not be able to secure and/or maintain regulatory approval for their
manufacturing facilities or may result in delay of our ability to obtain marketing authorization, if any, of our antibody candidates. In addition, we have
limited control over the ability of our CMOs to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable
foreign regulatory authority does not approve these facilities for the manufacture of our antibody 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 antibody candidates, if approved. In addition, any failure to achieve and maintain compliance with these laws, regulations and standards could
subject us to the risk that we may have to suspend the manufacturing of our antibody candidates or that obtained approvals could be revoked, which
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would adversely affect our business and reputation. Furthermore, third-party providers may breach existing agreements they have with us because of
factors beyond our control. They may also terminate or refuse to renew their agreement because of their own financial difficulties or business priorities, at a
time that is costly or otherwise inconvenient for us. If we were unable to find an adequate replacement or another acceptable solution in time, our clinical
trials could be delayed or our commercial activities could be harmed. In addition, the fact that we are dependent on our collaborators, our CMOs and other
third parties for the manufacture, filling, storage and distribution of our antibody candidates means that we are subject to the risk that the products may
have manufacturing defects that we have limited ability to prevent or control. The sale of products containing such defects could adversely affect our
business, financial condition and results of operations.
Growth in the costs and expenses of components or raw materials may also adversely influence our business, financial condition and results of operations.
Supply sources could be interrupted from time to time and, if interrupted, there is no guarantee that supplies could be resumed (whether in part or in whole)
within a reasonable timeframe and at an acceptable cost or at all.
We rely on our CMOs to purchase from third-party suppliers the materials necessary to produce our antibody candidates for our clinical trials, and will rely
on our existing and future collaborators to purchase from third-party suppliers the materials necessary to develop and produce our antibody candidates for
future clinical trials and, upon approval, our products for commercialization. There are a limited number of suppliers for raw materials that we use to
manufacture our antibody candidates and there may be a need to assess alternate suppliers to prevent a possible disruption of the manufacture of the
materials necessary to produce our antibody candidates for our clinical trials, and if approved, ultimately for commercial sale. Apart from contractual
measures, we do not have any control over the process or timing of the acquisition of these raw materials by our manufacturers or manufacturers paid by
our collaborators. Moreover, we currently do not have any agreements for the commercial production of these raw materials. Although we generally do not
begin a clinical trial unless we believe we have a sufficient supply of an antibody candidate to complete the clinical trial or have secured resupply capacity,
any significant delay in the supply of an antibody candidate, or the raw material components thereof, for a planned or an ongoing clinical trial due to the
need to replace a third-party manufacturer could considerably delay completion of our clinical trials, product testing and potential regulatory approval of
our antibody candidates. If our manufacturers, collaborators or we are unable to purchase these raw materials after regulatory approval has been obtained
for our antibody candidates, the commercial launch of our antibody candidates would be delayed or there would be a shortage in supply, which would
impair our ability to generate revenues from the sale of our antibody candidates.
We rely on our manufacturers and other subcontractors to comply with and respect the proprietary rights of others in conducting their contractual
obligations for us. If our manufacturers or other subcontractors fail to acquire the proper licenses or otherwise infringe third party proprietary rights in the
course of completing their contractual obligations to us, we may have to find alternative manufacturers or defend against claims of infringement, either of
which would significantly impact our ability to develop, obtain regulatory approval for or market our antibody candidates, if approved.
Risks Related to Intellectual Property and Information Technology
We rely on patents and other intellectual property rights to protect our technology, including antibody candidates and our Biclonics® technology
platform and TriclonicsTM technology platform, the enforcement, defense and maintenance of which may be challenging and costly. Failure to enforce
or protect these rights adequately could harm our ability to compete and impair our business.
Our commercial success depends in part on obtaining and maintaining patents and other forms of intellectual property rights for our Biclonics® technology
platform, TriclonicsTM technology platform, our heavy chain variable regions and binding domains that bind particular antigens, our monospecific
antibodies, bispecific antibody, trispecific antibody and antibody clinical candidates, products, their format and methods and host cells used to produce,
screen, manufacture and purify those antibody and antibody clinical candidates, the methods for treating patients using those candidates, among other
aspects of our technology or on licensing-in such rights. Failure to protect or to obtain, maintain or extend adequate patent and other intellectual property
rights could materially adversely affect our ability to develop and market our platform technologies, and antibody candidates.
The patent prosecution process is expensive and time-consuming, and we and our current or future licensors, licensees or collaborators may not be able to
prepare, file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we or our
licensors, licensees or collaborators will 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. Further, the issuance, scope, validity, enforceability and commercial value of our and our
current or future licensors’, licensees’ or collaborators’ patent rights are highly uncertain. Our and our licensors’ pending and future patent applications
may not result in patents being issued which protect our technology or products, in whole or in part, or which effectively prevent others from
commercializing competitive technologies and products. The patent examination process may require us or our licensors, licensees or collaborators to
narrow the scope of the claims of our or our licensors’, licensees’ or collaborators’ pending and future patent applications, which may limit the scope of
patent protection that may be obtained. We cannot assure you that all of the potentially relevant prior art relating to our patents and patent applications has
been found. If such prior art exists, it can invalidate a patent or prevent a patent from issuing from a pending patent application. Even if patents do
successfully issue and even if such patents cover our Biclonics® technology platform, TriclonicsTM technology platform, our heavy chain variable regions
and binding domains that bind particular antigens, our
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monospecific antibodies, antibody, trispecific antibody and antibody clinical candidates, products, their format and methods and host cells used to produce,
screen, manufacture and purify those antibody and antibody clinical candidates, the methods for treating patients using those candidates, and other
technologies, third parties may initiate opposition, interference, re-examination, post-grant review, inter partes review, nullification or derivation action in
court or before patent offices, or similar proceedings challenging the validity, enforceability or scope of such patents, which may result in the patent claims
being narrowed or invalidated. Our and our licensors’, licensees’ or collaborators’ patent applications cannot be enforced against third parties practicing the
technology claimed in such applications unless and until a patent issues from such applications, and then only to the extent the issued claims cover the
technology.
Because patent applications are confidential for a period of time after filing, and some remain so until issued, we cannot be certain that we or our licensors
were the first to file any patent application related to our technology, including our antibody candidates. Furthermore, if third parties have filed such patent
applications on or before March 15, 2013, an interference proceeding 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 applications after March 15, 2013, a derivation
proceeding can be initiated by such third parties to determine whether our invention was derived from theirs.
Issued patents covering one or more of our products or the Biclonics® technology or TriclonicsTM technology platforms could be found invalid or
unenforceable if challenged in court.
To protect our competitive position, we may from time to time need to resort to litigation to enforce or defend any patents or other intellectual property
rights owned by or licensed to us, or to determine or challenge the scope or validity of patents or other intellectual property rights of third parties. As
enforcement of intellectual property rights is difficult, unpredictable and expensive, we may fail in enforcing our rights—in which case our competitors
may be permitted to use our technology without being enjoined, required to pay us any license fees, or compensate us for lost profits or reasonable royalty.
In addition, litigation involving our patents carries the risk that one or more of our patents will be held invalid (in whole or in part, on a claim-by-claim
basis) or held unenforceable. Such an adverse court ruling could allow third parties to commercialize technology covered by our patents we seek to enforce,
such as those covering our antibody candidates or methods, or our Biclonics® technology and TriclonicsTM technology platforms among other
technologies, and then compete directly with us, without payment to us.
If we were to initiate legal proceedings against a third party to enforce a patent covering our technology, one of our products or methods, the defendant
could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in the United States or in certain jurisdictions in Europe, defendant
counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of
several statutory requirements, for example, lack of utility, novelty, obviousness, non-enablement or lack of written description or as constituting
unpatentable subject matter. Grounds for an unenforceability assertion could be an allegation that someone substantively involved in prosecution of the
patent withheld but-for material information from the U.S. Patent and Trademark Office (USPTO) or engaged in affirmatively egregious misconduct,
during prosecution, with a specific intent to deceive the USPTO. The outcome following legal assertions of invalidity and unenforceability during patent
litigation is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and
the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we could
lose at least part, and perhaps all, of the patent protection on one or more of our technologies, products, methods or certain aspects of our
Biclonics® technology and TriclonicsTM technology platforms. Such a loss of patent protection could have a material adverse impact on our business.
Patents and other intellectual property rights also will not protect our technology if competitors design around our protected technology without infringing
our patents or other intellectual property rights.
Intellectual property rights of third parties could adversely affect our ability to commercialize our antibody candidates, such that we could be required
to litigate or obtain licenses from third parties in order to develop or market our antibody candidates. Such litigation or licenses could be costly or not
available on commercially reasonable terms.
Our competitive position may suffer if patents issued to third parties or other third-party intellectual property rights cover our technology platforms,
methods or candidates or elements thereof, our manufacture or uses relevant to our development plans, or other attributes of our antibody candidates or our
Biclonics® technology platform or TriclonicsTM technology platform. In such cases, we may not be in a position to develop or commercialize products or
bispecific or trispecific antibody candidates unless we successfully pursue litigation, opposition, inter partes, or related post-grant proceedings to nullify or
invalidate the third-party intellectual property right concerned, or enter into a license agreement with the intellectual property right holder, if available on
commercially reasonable terms. In addition, we are aware of issued patents and/or pending patent applications held by third parties that may be alleged as
covering some of our antibody candidates. We believe that if such patents or patent applications (if issued as currently pending) were asserted against us,
we would have counterclaims and defenses against such claims, including non-infringement, the affirmative defense of safe harbor designed to protect
activity undertaken to obtain federal regulatory approval of a drug, including under 35 U.S.C. § 271(e) and similar foreign exceptions to infringement,
patent invalidity and/or unenforceability. However, if such counterclaims and defenses were not successful and such patents were successfully asserted
against us such that they are found to be valid and enforceable, and infringed by our antibody candidates, unless we obtain a license to such patents, which
may not be
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available on commercially reasonable terms or at all, we could be prevented from continuing to develop or commercialize our antibody candidates. We
could also be required to pay substantial damages. Similarly, the targets of certain of our antibody candidates have also been the subject of research by
many companies, which have filed patent applications or have patents related to such targets and their uses. There can be no assurance any such patents
will not be asserted against us or that we will not need to seek licenses from such third parties. We may not be able to secure such licenses on acceptable
terms, if at all, and any such litigation would be costly and time-consuming.
It is also possible that we failed to identify relevant patents or applications. For example, U.S. applications filed before November 29, 2000 and certain U.S.
applications filed after that date that will not be filed outside the United States remain confidential until patents issue. Patent applications in the United
States and elsewhere are published approximately 18 months after the earliest filing for which priority is claimed, with such earliest filing date being
commonly referred to as the priority date. Therefore, patent applications covering our products or platform technologies could have been filed by others
without our knowledge. Furthermore, we operate in a highly competitive field, and given our limited resources, it is unreasonable to monitor all patent
applications purporting to claim broad coverage in the areas in which we are active. Additionally, pending patent applications which have been published
can, subject to certain limitations, be later amended in a manner that could cover our platform technologies, our methods, antibody candidates or the use of
our bispecific and trispecific antibody candidates.
Third party intellectual property right holders, including our competitors, may actively bring infringement claims against us. The granting of orphan drug
status in respect of any of our antibody candidates does not guarantee our freedom to operate and is separate from our risk of possible infringement of third
parties’ intellectual property rights. We may not be able to successfully settle or otherwise resolve such potential infringement claims. If we are unable to
successfully settle future claims on terms acceptable to us, we may be required to engage or continue costly, unpredictable and time-consuming litigation
and may be prevented from or experience substantial delays in marketing any approved products.
If we fail in any such dispute, in addition to being forced to pay damages, we or our licensees may be temporarily or permanently prohibited from
commercializing any of our antibody candidates that are held to be infringing. We might, if possible, also be forced to redesign antibody candidates so that
we no longer infringe the third-party intellectual property rights. Any of these events, even if we were ultimately to prevail, could require us to divert
substantial financial and management resources that we would otherwise be able to devote to our business.
In addition, if the breadth or strength of protection provided by our or our present or future licensors’, collaborators’ or partners’ patents and patent
applications is threatened, it could dissuade companies from collaborating with us to license, develop or commercialize current or future antibody
candidates. 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 this type of litigation.
Our ability to compete may be adversely affected if we are unsuccessful in defending against any claims by competitors or others that we are infringing
upon their intellectual property rights.
The various markets in which we plan to operate are subject to frequent and extensive litigation regarding patents and other intellectual property rights. In
addition, many companies in intellectual property-dependent industries, including those producing therapeutics to treat and potentially cure cancer, have
employed intellectual property litigation as a means to gain an advantage over their competitors. As a result, we may be required to defend against claims
of intellectual property infringement that may be asserted by our competitors against us and, if the outcome of any such litigation is adverse to us, it may
affect our ability to compete effectively.
Our involvement in litigation, and in any interferences, opposition, pre and post-grant administrative proceedings or other intellectual property proceedings
inside and outside of the United States may divert management from focusing on business operations, could cause us to spend significant amounts of
money and may have no guarantee of success. Any potential intellectual property litigation also could force us to do one or more of the following:
•
•
•
•
stop selling, incorporating, manufacturing or using our products in the United States and/or other jurisdictions that are covered by the subject
intellectual property;
obtain from a third party asserting its intellectual property rights, a license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all, or may be non-exclusive thereby giving our competitors access to the same technologies licensed to us;
redesign those technologies, products or processes that use any allegedly infringing or misappropriated technology, which may result in
significant cost or delay to us, or which redesign could be technically infeasible; or
pay damages, including the possibility of treble damages in a patent case if a court finds us to have willfully infringed certain intellectual
property rights.
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We are aware that significant number of patents and patent applications may exist relating to aspects of therapeutic antibody technologies filed by, and
issued to, third parties.
We cannot assure you that we will ultimately prevail if any of this third-party intellectual property is asserted against us.
Intellectual property litigation could cause us to spend substantial resources and distract our personnel from their normal responsibilities.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and
could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results
of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, this could
have a substantial adverse effect on the price of our common shares. Such litigation or proceedings and the legal costs associated with them, could
substantially increase our operating losses and reduce our resources available for development activities. We may not have sufficient financial or other
resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings
more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent
litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.
We may not be successful in obtaining or maintaining necessary rights to our antibody candidates through acquisitions and in-licenses.
We currently have rights and own our intellectual property, including issued patents and pending patent applications, relating to and covering our antibody
candidates and Biclonics® technology and TriclonicsTM technology platforms. Because our programs may require the use of proprietary rights held by
third parties, the growth of our business may depend in part on our ability to acquire, in-license, maintain or use these proprietary rights. In addition, our
antibody candidates may require specific formulations to work effectively and efficiently or companion diagnostics for safely and effective administration
of our therapeutic candidates and the rights to these formulations and companion diagnostics may be held by others. We may be unable to acquire or in-
license any compositions, methods of use, processes, or other third-party intellectual property rights from third parties that we identify as necessary for our
antibody candidates. The licensing and acquisition of third-party intellectual property rights is a competitive area, and a number of more established
companies are also pursuing strategies to license or acquire third-party intellectual property rights that we may consider attractive. These established
companies may have a competitive advantage over us due to their size, cash resources, and greater clinical development and commercialization
capabilities.
In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may be unable to license or acquire
third-party intellectual property rights on terms that would allow us to make an appropriate return on our investment. If we are unable to successfully obtain
a license to third-party intellectual property rights necessary for the development of an antibody candidate or program, we may have to abandon
development of that antibody candidate or program and our business and financial condition could suffer.
If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our
business may be adversely affected.
Our registered or unregistered trademarks, trade names or service marks may be challenged, infringed, circumvented or declared generic or determined to
be infringing on other marks. We may not be able to protect our rights to these trademarks, trade names, and service marks, which we need to build name
recognition by potential collaborators, partners or customers in our markets of interest. Over the long term, if we are unable to establish name recognition
based on our trademarks, trade names and service marks then we may not be able to compete effectively and our business may be adversely affected. If
other entities use trademarks, trade names or service marks similar to ours in different jurisdictions, or have senior rights to ours, it could interfere with our
use of our current trademarks, trade names or service marks throughout the world.
If we do not obtain protection under the Hatch-Waxman Amendments and similar non-U.S. legislation for extending the term of patents covering each
of our antibody candidates, our business may be materially harmed.
Patents typically 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 U.S. non-provisional filing date. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. Even
if patents covering our antibody candidates are obtained, once the patent life has expired for a candidate, we may be open to competition from competitive
medications, including biosimilar or generic medications. Given the amount of time required for the development, testing and regulatory review of new
antibody candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our owned and
licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours, causing our
revenue from applicable products to be reduced, possibly materially, and potentially harming our ability to recover our investment in such product or obtain
a reasonable return on that investment.
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Depending upon the timing, duration and conditions of FDA marketing approval of our antibody candidates, one or more of our U.S. patents may be
eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman
Amendments, and similar legislation in the EU. The Hatch-Waxman Amendments permit a patent term extension of up to five years for a patent covering
an approved product as compensation for effective patent term lost during product development and the FDA regulatory review process. However, we may
not receive an extension if we fail to apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy
applicable requirements. Moreover, the length of the extension could be less than we request. If we are unable to obtain patent term extension or the term of
any such extension is less than we request, the period during which we can enforce our patent rights for that product will be shortened and our competitors
may obtain approval to market competing products sooner. As a result, our revenue from applicable products could be reduced, possibly materially.
We enjoy only limited geographical protection with respect to certain patents and may face difficulties in certain jurisdictions, which may diminish the
value of intellectual property rights in those jurisdictions.
We generally file our first patent application (i.e., priority filing) at the European Patent Office (EPO) or the USPTO. International applications under the
Patent Cooperation Treaty (PCT) are usually filed within 12 months after the priority filing. Based on the PCT filing, national and regional patent
applications may be filed in additional jurisdictions where we believe our antibody candidates may be marketed or manufactured or our platform
technologies may be utilized. We have so far not filed for patent protection in all national and regional jurisdictions where such protection may be
available. In addition, we may decide to abandon national and regional patent applications before grant. Finally, the grant proceeding of each
national/regional patent is an independent proceeding which may lead to situations in which applications might in some jurisdictions be refused by the
relevant patent offices, while granted by others. It is also quite common that depending on the country, the scope of patent protection may vary for the same
antibody candidate and/or technology.
Competitors may use our and our existing or future licensors’, collaborators’ or partners’ technologies in jurisdictions where we have not obtained patent
protection to develop their own products and, further, may export otherwise infringing products to territories where we and our existing or future licensors,
collaborators or partners have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our
antibody candidates or our platform technologies, and our and our existing or future licensors’, collaborators’ or partners’ patents or other intellectual
property rights may not be effective or sufficient to prevent them from competing.
The laws of some jurisdictions do not protect intellectual property rights to the same extent as the laws in the United States and the EU, and many
companies have encountered significant difficulties in protecting and defending such rights in such jurisdictions. If we or our licensors encounter
difficulties in protecting, or are otherwise precluded from effectively protecting, the intellectual property rights important for our business in such
jurisdictions, the value of these rights may be diminished and we may face additional competition from others in those jurisdictions.
Some countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, some countries
limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies,
which could materially diminish the value of such patent. If we or any of our licensors is forced to grant a license to third parties with respect to any patents
relevant to our business, our competitive position may be impaired and our business and results of operations may be adversely affected.
Intellectual property rights do not necessarily address all potential threats to our competitive advantage.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not
adequately protect our business, or permit us to maintain our competitive advantage. The following examples are illustrative:
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others may be able to make compounds that are the same as or similar to our antibody candidates but that are not covered by the claims of the
patents that we own or have exclusively licensed;
the patents of third parties may have an adverse effect on our business;
we or our licensors or any future strategic partners might not have been the first to conceive or reduce to practice the inventions covered by the
issued patent or pending patent application that we own or have exclusively licensed;
we or our licensors or any future strategic partners might not have been the first to file patent applications covering certain of our inventions;
others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual
property rights;
it is possible that our pending patent applications will not lead to issued patents;
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issued patents that we own or have exclusively licensed may not provide us with any competitive advantage, or may be held invalid or
unenforceable, as a result of legal challenges by our competitors;
our competitors might conduct research and development activities in countries where we do not have patent rights and then use the
information learned from such activities to develop competitive products for sale in our major commercial markets;
third parties performing manufacturing or testing for us using our antibody candidates or technologies could use the intellectual property of
others without obtaining a proper license; and
we may not develop additional technologies that are patentable.
Changes in patent laws or patent jurisprudence could diminish the value of patents in general, thereby impairing our ability to protect our antibody
candidates and technology platforms.
As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and
enforcing patents in the biopharmaceutical industry involve both technological complexity and legal complexity. Therefore, obtaining and enforcing
biopharmaceutical patents is costly, time-consuming and inherently uncertain.
In September 2011, the America Invents Act (AIA) was enacted in the United States, resulting in significant changes to the U.S. patent system. An
important change introduced by the AIA was a transition to a “first-to-file” system for deciding which party should be granted a patent when two or more
patent applications are filed by different parties claiming the same invention, which went into effect on March 16, 2013. Therefore, a third party that now
files a patent application in the USPTO before we do could be awarded a patent covering an invention of ours even if we created the invention before it was
created by the third party. While we are cognizant of the time from invention to filing of a patent application, circumstances could prevent us from
promptly filing patent applications for our inventions.
Among some of the other changes introduced by the AIA were changes that limit where a patentee may file a patent infringement suit and providing
opportunities for third parties to challenge any issued patent in the USPTO. This applies to all of our U.S. patents, even those issued before March 16,
2013. Because of a lower burden of proof in USPTO proceedings compared to the burden of proof in U.S. federal courts necessary to invalidate a patent
claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same
evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO
procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action.
The AIA and its continued implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications, and the patent
applications of our existing and future collaborators or licensors and the enforcement or defense of our issued patents.
Depending on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in
unpredictable ways that could weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.
Similarly, there is complexity and uncertainty related to European patent laws. For example, the European Patent Convention was amended in April
2010 to limit the time permitted for filing divisional applications. In addition, the EPO patent system is relatively stringent in the type of amendments that
are allowed during prosecution. These limitations and requirements could adversely affect our ability to obtain new patents in the future that may be
important for our business.
Confidentiality agreements with employees, contractors, agents, consultants, collaborators and others may not adequately prevent disclosure of trade
secrets and protect other proprietary information.
We consider proprietary trade secrets and/or confidential know-how and unpatented know-how to be important to our business. We may rely on trade
secrets and/or confidential know-how to protect our technology, especially where patent protection is believed to be of limited value. However, trade
secrets and/or confidential know-how are difficult to maintain as confidential.
To protect this type of information against disclosure or appropriation by competitors, our policy is to require our employees, consultants, contractors,
collaborators and advisors to enter into confidentiality agreements with us. However, current or former employees, consultants, contractors, collaborators
and advisers may unintentionally or willfully disclose our confidential information to competitors, and confidentiality agreements may not provide an
adequate remedy in the event of unauthorized disclosure of confidential information or we may be unaware of such disclosure to enforce our confidentiality
agreements. Enforcing a claim that a third party obtained illegally and is using trade secrets and/or confidential know-how is expensive, time consuming
and unpredictable. The enforceability of confidentiality agreements may vary from jurisdiction to jurisdiction. Furthermore, if a competitor lawfully
obtained or independently developed any of our trade secrets, 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. Additionally, if the steps taken to maintain our trade secrets are deemed inadequate, we
may have insufficient recourse against third parties for misappropriating the trade secret.
Failure to obtain or maintain trade secrets and/or confidential know-how trade protection could adversely affect our competitive position. Moreover, our
competitors may independently develop substantially equivalent proprietary information and may even apply for patent protection in respect of the same. If
successful in obtaining such patent protection, our competitors could limit our use of our trade secrets and/or confidential know-how.
Under certain circumstances and to guarantee our freedom to operate, we may also decide to publish some know-how to prevent others from obtaining
patent rights covering such know-how.
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We may be subject to claims by third parties asserting that our employees or we have misappropriated their intellectual property, or claiming ownership
of what we regard as our own intellectual property.
Many of our employees, including our senior management, were previously employed at universities or at other biopharmaceutical companies, including
our competitors or potential competitors. Some of these employees executed proprietary rights, non-disclosure and non-competition 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 confidential information or intellectual property,
including trade secrets or other proprietary information, of any such employee’s former employer. Litigation may be necessary to defend against these
claims.
If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or
personnel or sustain damages. 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
successfully prosecute or defend against such claims, litigation could result in substantial costs and distract management.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other
requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these
requirements.
Periodic maintenance and annuity fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime
of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment
and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by
other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent
application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or
lapse of a patent or patent application include failure to respond to official actions within prescribed time limits, non-payment of fees and failure to
properly legalize and submit formal documents. If we or our existing or future licensors or collaborators fail to maintain the patents and patent applications
covering our antibody candidates, our competitors might be able to enter the market, which would have an adverse effect on our business.
Use of social media could give rise to liability, breaches of data security, or reputational harm.
We and our employees use social media to communicate internally and externally. While we have policies and procedures in place governing employee use
of social media, there is risk that the use of social media by us or our employees to communicate about our antibody candidates, technologies or business
may give rise to liability, lead to the loss of trade secrets or other intellectual property, or result in public exposure of personal information of our
employees, clinical trial patients, customers, and others. Furthermore, negative posts or comments about us or our antibody candidates, our technologies,
and company generally in social media could seriously damage our reputation, brand image, and goodwill. Any of these events could have a material
adverse effect on our business, prospects, operating results, and financial condition and could adversely affect the price of our common shares.
Our computer systems, or those used by our CROs or other contractors or consultants, may fail or suffer security breaches, which could adversely
affect our business.
Despite the implementation of security measures, our computer systems and data and those of our current or future CROs or other contractors and
consultants are vulnerable to compromise or damage from computer hacking, malicious software, fraudulent activity, employee misconduct, human error,
telecommunication and electrical failures, natural disasters, or other cybersecurity attacks or accidents. Future acquisitions could expose us to additional
cybersecurity risks and vulnerabilities from any newly acquired information technology infrastructure. Cybersecurity attacks are constantly increasing in
sophistication and are made by groups and individuals with a wide range of motives (including industrial espionage) and expertise, including by organized
criminal groups, “hacktivists,” nation states, and others. As a company with an increasingly global presence, our systems are subject to frequent attacks,
which are becoming more commonplace in the industry, including attempted hacking, phishing attempts, such as cyber-related threats involving spoofed or
manipulated electronic communications, which increasingly represent considerable risk. Due to the nature of some of these attacks, there is a risk that an
attack may remain undetected for a period of time. While we continue to make investments to improve the protection of data and information technology,
including in the hiring of IT personnel, and improvements to IT infrastructure and controls, there can be no assurance that our efforts will prevent service
interruptions or security breaches.
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Any cybersecurity incident could adversely affect our business, by leading to, for example, the loss of trade secrets or other intellectual property, demands
for ransom or other forms of blackmail, or the unauthorized disclosure of personal or other sensitive information of our employees, clinical trial patients,
customers, and others. Although to our knowledge we have not experienced any material cybersecurity incident to date, if such an event were to occur, it
could seriously harm our development programs and our business operations. We could be subject to breach notification requirements, regulatory actions
taken by governmental authorities, litigation under laws that protect the privacy of personal information, or other forms of legal proceedings, which could
result in significant liabilities or penalties. Further, a cybersecurity incident may disrupt our business or damage our reputation, which could have a material
adverse effect on our business, prospects, operating results, share price and shareholder value, and financial condition. We could also incur substantial
remediation costs, including the costs of investigating the incident, repairing or replacing damaged systems, restoring normal business operations,
implementing increased cybersecurity protections, and paying increased insurance premiums.
For example, the loss of clinical trial data from completed, ongoing or future clinical trials could result in delays in our regulatory approval efforts and
significantly increase our costs to recover or reproduce the data. If a security breach or other incident were to result in the unauthorized access to or
unauthorized use, disclosure, release or other processing of clinical trial data or personal data, it may be necessary to notify individuals, governmental
authorities, supervisory bodies, the media, and other parties pursuant to privacy and security laws. Likewise, we rely on our third-party research institution
collaborators for research and development of our product candidates and other third parties for the manufacture of our product candidates and to conduct
clinical trials, and similar events relating to their information technology systems could also seriously harm our business. Any security compromise
affecting us, our collaborators or our industry, whether real or perceived, could harm our reputation, erode confidence in the effectiveness of our security
measures, and lead to regulatory scrutiny. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or systems,
or inappropriate disclosure of confidential or proprietary or personal information, we could incur liability, our competitive position could be harmed, and
the further development and commercialization of our product candidates could be delayed.
Risks Related to Employee Matters and Managing Growth
Our future growth and ability to compete depends on retaining our key personnel, recruiting additional qualified personnel and managing transitions
among these personnel, such as the recent transition of our President and Chief Executive Officer.
Our success depends upon the contributions of our senior management, including our board of directors, our senior management, and other key scientific
and technical personnel, many of whom have been instrumental for us and have substantial experience with our therapies and related technologies. The loss
of key senior management, managers and senior scientists could delay our research and development activities or impair our ability operate the company
effectively. In addition, the competition for qualified personnel in the biopharmaceutical and pharmaceutical field is intense, and our future success
depends upon our ability to attract, retain and motivate highly-skilled scientific, technical and managerial employees. We face competition for personnel
from other companies, universities, public and private research institutions and other organizations. If our recruitment and retention efforts are
unsuccessful, it may be difficult for us to implement our business strategy, which could have a material adverse effect on our business. Our success also
depends on our ability to manage transitions among our senior management and other key personnel. In December 2019, Ton Logtenberg, Ph.D., stepped
down as an executive director, a position he held since co-founding our company in 2003, and as President, Chief Executive Officer and Principal Financial
Officer, and Sven “Bill” Lundberg, M.D. was appointed as an executive director and as President, Chief Executive Officer and Principal Financial Officer.
This recent change in our senior management may be disruptive to our business, and if we are unable to manage an orderly transition in this case or for
other key personnel in the future, our business may be adversely affected.
We expect to expand our development, regulatory and sales and marketing capabilities, and as a result, we may encounter difficulties in managing our
growth, which could disrupt our operations.
We expect to continue to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of drug
development, regulatory affairs and sales and marketing. To manage our growth, we must continue to implement and improve our managerial, operational
and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources and the
limited experience of our management team in managing a company with such growth, we may not be able to effectively manage the expansion of our
operations or recruit and train additional qualified personnel. The expansion of our operations may lead to significant costs and may divert our management
and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.
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Risks Related to Our Common Shares
The price of our common shares may be volatile and may fluctuate due to factors beyond our control.
The share price of publicly traded emerging biopharmaceutical and drug discovery and development companies has been highly volatile and is likely to
remain highly volatile in the future. The market price of our common shares may fluctuate significantly due to a variety of factors, including:
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positive or negative results of testing and clinical trials by us, strategic partners or competitors;
delays in entering into strategic relationships with respect to development and/or commercialization of our antibody candidates or entry into
strategic relationships on terms that are not deemed to be favorable to us;
technological innovations or commercial product introductions by us or competitors;
changes in government regulations;
developments concerning proprietary rights, including patents and litigation matters;
public concern relating to the commercial value or safety of any of our antibody candidates;
financing or other corporate transactions;
publication of research reports or comments by securities or industry analysts;
general market conditions in the pharmaceutical industry or in the economy as a whole; or
other events and factors, many of which are beyond our control.
These and other market and industry factors may cause the market price and demand for our common shares to fluctuate substantially, regardless of our
actual operating performance, which may limit or prevent investors from readily selling their common shares and may otherwise negatively affect the
liquidity of our common shares. In addition, the stock market in general, and biopharmaceutical companies in particular, have experienced extreme price
and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies.
We will continue to incur increased costs as a result of operating as a public company with limited liability (naamloze vennootschap), and our
management team will be required to devote substantial time to new compliance initiatives and corporate governance practices.
As a public company, and particularly after we no longer qualify as an emerging growth company or a smaller reporting company, we will continue to incur
significant legal, accounting and other expenses related to our operation as a public company. The Sarbanes-Oxley Act of 2002 (SOX), the Dodd-Frank
Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq Global Market, or Nasdaq, and other applicable securities rules
and regulations impose various requirements on reporting public companies, including the establishment and maintenance of effective disclosure and
financial controls and corporate governance practices. Our board of directors and other personnel will need to continue to devote a substantial amount of
time to these compliance initiatives. Moreover, these rules and regulations have and will continue to increase our legal and financial compliance costs and
will make some activities more time-consuming and costly.
These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in
practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding
compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
Pursuant to Section 404 of SOX (Section 404) we are required to furnish a report by our management on our internal control over financial reporting with
our Annual Report on Form 10-K. While we remain an emerging growth company, we will not be required to include an attestation report on internal
control over financial reporting issued by our independent registered public accounting firm. To maintain compliance with Section 404, we engage in a
process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we continue to dedicate
internal resources and have engaged outside consultants and adopted a detailed work plan to assess and document the adequacy of our internal control over
financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and
implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not
be able to maintain effective internal control over financial reporting as required by Section 404. Material weaknesses in our internal control over financial
reporting could also reduce our ability to obtain financing or could increase the cost of any financing we obtain. 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 financial statements.
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Members of our senior management, members of our board of directors, and certain shareholders affiliated with members of our board of directors
may be able to exercise significant control over us, and the interests of our other shareholders may conflict with the interests of our existing
shareholders.
As of December 31, 2019, members of our senior management, our board of directors and shareholders affiliated with members of our board of directors,
in the aggregate, beneficially owned approximately 12% of our common shares. Depending on the level of attendance at our general meetings of
shareholders, these shareholders may be in a position to determine the outcome of decisions taken at any such general meeting. Any shareholder or group
of shareholders controlling more than 50% of the share capital present and voting at our general meetings of shareholders may control any shareholder
resolution requiring a simple majority, including the appointment of board members, certain decisions relating to our capital structure, the approval of
certain significant corporate transactions and amendments to our articles of association. Among other consequences, this concentration of ownership may
have the effect of delaying or preventing a change in control and might therefore negatively affect the market price of our common shares.
Future sales, or the possibility of future sales, of a substantial number of our common shares could adversely affect the price of the shares.
We have entered into a registration rights agreement pursuant to which we agreed, under certain circumstances, to file a registration statement to register
the resale of the shares held by certain of our existing shareholders, as well as to cooperate in certain public offerings of such shares. In addition, we have
registered and intend to continue to register all common shares that we may issue under our equity compensation plans. Once registered, these common
shares can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates who hold such shares. In addition, in
connection with entering into the Collaboration Agreement, we entered into a Share Subscription Agreement with Incyte, pursuant to which we issued and
sold to Incyte 3,200,000 of our common shares. Incyte’s ability to sell these common shares is subject to certain limitations, including limitations on the
volume of shares that may be sold during a given time period. In addition, in connection with entering into a settlement agreement with Regeneron
Pharmaceuticals, we entered into a Share Subscription Agreement with Regeneron, pursuant to which we issued and sold to Regeneron 600,000 of our
common shares. Regeneron’s ability to sell these common shares is subject to certain limitations, including limitations on the volume of shares that may be
sold during a given time period. However, future sales of a substantial number of our common shares, or the perception that such sales will occur, could
cause a decline in the market price of our common shares.
Provisions of our articles of association or Dutch corporate law might deter acquisition bids for us that might be considered favorable and prevent or
frustrate any attempt to replace or remove the then board of directors.
Provisions of our articles of association may make it more difficult for a third party to acquire control of us or effect a change in our board of directors.
These provisions include:
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the authorization of a class of preferred shares that may be issued to a friendly party;
the possibility to appoint our board members for staggered terms;
a provision that our board members may only be removed by the general meeting of shareholders by a two-thirds majority of votes cast
representing more than 50% of our outstanding share capital (unless the removal was proposed by the board of directors); and
a requirement that certain matters, including an amendment of our articles of association, may only be brought to our shareholders for a vote
upon a proposal by our board of directors.
Our anti-takeover provision may prevent a beneficial change of control.
We adopted an anti-takeover measure pursuant to which our board of directors may, without shareholder approval, issue (or grant the right to acquire)
preferred shares. Pursuant to a call option agreement entered into with an independent special purpose foundation, we may issue an amount of preferred
shares up to 100% of our issued capital held by third parties immediately prior to the issuance of such preferred shares.
The preferred shares will be issued to the foundation for their nominal value, of which only 25% will be due upon issuance. The voting rights of our shares
are based on nominal value and as we expect our shares to continue to trade substantially in excess of nominal value, preferred shares issued at nominal
value can obtain significant voting power for a substantially reduced price and thus be used as a defensive measure. These preferred shares will have both a
liquidation and dividend preference over our common shares and will accrue cash dividends at a fixed rate. Subject to the foundation exercising its call
option under the call option agreement, the board may issue these preferred shares to protect us from influences that do not serve our best interests and
threaten to undermine our continuity, independence and identity. These influences may include a third-party acquiring a significant percentage of our
common shares, the announcement of a public offer for our common shares, other concentration of control over our common shares or any other form of
pressure on us to alter our strategic policies. The foundation’s articles of association provide that it will act to serve the best interests of us, our associated
business and all parties connected to us, by opposing any influences that conflict with these interests and threaten to undermine our continuity,
independence and identity. This foundation is structured to operate independently of us.
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Because we do not expect to pay cash dividends for the foreseeable future, any returns on an investment in our common shares will likely depend
entirely upon any future appreciation in the price of our common shares, which is uncertain.
We have not paid any cash dividends since our incorporation. Even if future operations lead to significant levels of distributable profits, we currently intend
that any earnings will be reinvested in our business and that cash dividends will not be paid until we have an established revenue stream to support
continuing cash dividends. Payment of any future dividends to shareholders will in addition effectively be at the discretion of the general meeting, upon
proposal of the board of directors, after taking into account various factors including our business prospects, cash requirements, financial performance and
new product development. In addition, payment of future cash dividends may be made only if our shareholders’ equity exceeds the sum of our paid-in and
called-up share capital plus the reserves required to be maintained by Dutch law or by our articles of association. Accordingly, investors cannot rely on cash
dividend income from our common shares and any returns on an investment in our common shares will likely depend entirely upon any future appreciation
in the price of our common shares. In addition, the low trading volume of our common shares may adversely affect the trading price of our common shares,
and our shareholders may not be able to sell their common shares for a price higher than the price they paid for our common shares.
Holders of our common shares outside the Netherlands may not be able to exercise preemptive rights.
In the event of an increase in our share capital, holders of our common shares are generally entitled under Dutch law to full preemptive rights, unless these
rights are excluded either by a resolution of the general meeting of shareholders, or by a resolution of the board (if the board has been designated by the
general meeting of shareholders for this purpose). Certain holders of our common shares outside the Netherlands, in particular U.S. holders of our common
shares, may not be able to exercise preemptive rights unless a registration statement under the Securities Act is declared effective with respect to our
common shares issuable upon exercise of such rights or an exemption from the registration requirements is available.
The rights of our shareholders may be different from the rights of shareholders in companies governed by the laws of U.S. jurisdictions.
We are a Dutch public company with limited liability (naamloze vennootschap). Our corporate affairs are governed by our articles of association and by the
laws governing companies incorporated in the Netherlands. The rights of shareholders and the responsibilities of members of our board may be different
from the rights and obligations of shareholders in companies governed by the laws of U.S. jurisdictions. In the performance of its duties, our board is
required by Dutch law to consider the interests of our company, its shareholders, its employees and other stakeholders, in all cases with due observation of
the principles of reasonableness and fairness. It is possible that some of these parties will have interests that are different from, or in addition to, the
interests of our shareholders.
We are not obligated to and do not comply with all the best practice provisions of the Dutch Corporate Governance Code. This may affect the rights of
our shareholders.
We are subject to the Dutch Corporate Governance Code (DCGC). The DCGC contains both principles and best practice provisions for board of directors,
shareholders and general meetings of shareholders, financial reporting, auditors, disclosure, compliance and enforcement standards. The DCGC applies to
all Dutch companies listed on a government-recognized stock exchange, whether in the Netherlands or elsewhere, including Nasdaq. The principles and
best practice provisions apply to our board (in relation to role and composition, conflicts of interest and independence requirements, board committees and
remuneration), shareholders and the general meeting of shareholders (for example, regarding anti-takeover protection and our obligations to provide
information to our shareholders) and financial reporting (such as external auditor and internal audit requirements). We do not comply with all the best
practice provisions of the DCGC. As a result, the rights of our shareholders may be affected and our shareholders may not have the same level of protection
as a shareholder in another Dutch public company with limited liability (naamloze vennootschap) listed in the Netherlands that fully complies with the
DCGC.
Claims of U.S. civil liabilities may not be enforceable against us.
We are incorporated under the laws of the Netherlands. Most of our assets are located outside the United States. The United States and the Netherlands
currently do not have a treaty providing for the reciprocal recognition and enforcement of judgments, other than arbitration awards, in civil and commercial
matters. With respect to choice of court agreements in civil or commercial matters, we note that the Hague Convention on Choice of Court Agreements
entered into force for the Netherlands, but has not entered into force for the United States. Consequently, a final judgment for payment given by a court in
the United States, whether or not predicated solely upon U.S. securities laws, would not automatically be recognized or enforceable in the Netherlands. In
order to obtain a judgment which is enforceable in the Netherlands, the party in whose favor a final and conclusive judgment of the U.S. court has been
rendered will be required to file its claim with a court of competent jurisdiction in the Netherlands. Such party may submit to the Dutch court the final
judgment rendered by the U.S. court. If and to the extent that the Dutch court finds that the jurisdiction of the U.S. court has been based on grounds which
are internationally acceptable and that proper legal procedures have been observed, the court of the Netherlands will, in principle, give binding effect to the
judgment of the U.S. court, unless such judgment contravenes principles of public policy of the Netherlands or is irreconcilable with a judgement of a
Dutch court or foreign court that is
68
acknowledged in the Netherlands. Dutch courts may deny the recognition and enforcement of punitive damages or other awards. Moreover, a Dutch court
may reduce the amount of damages granted by a U.S. court and recognize damages only to the extent that they are necessary to compensate actual losses or
damages. Enforcement and recognition of judgments of U.S. courts in the Netherlands are solely governed by the provisions of the Dutch Code of Civil
Procedure (Wetboek van Burgerlijke Rechtsvordering). As a result of the above, it may not be possible for investors to effect service of process within the
United States upon us or members of our board or certain experts named herein who are residents of the Netherlands or countries other than the United
States or to enforce any judgments against the same obtained in U.S. courts in civil and commercial matters, including judgments under the U.S. federal
securities laws.
As of January 1, 2020, we were no longer a foreign private issuer, and we are required to comply with the provisions of the Securities Exchange Act of
1934, as amended, or the Exchange Act, and the rules of Nasdaq applicable to U.S. domestic issuers, which will continue to require us to incur
significant expenses and expend time and resources.
As of January 1, 2020, we were no longer a foreign private issuer, and we are required to comply with all of the provisions applicable to a U.S. domestic
issuer under the Exchange Act, including filing an annual report on Form 10-K, quarterly periodic reports and current reports for certain events, complying
with the sections of the Exchange Act regulating the solicitation of proxies, requiring insiders to file public reports of their share ownership and trading
activities and insiders being liable for profit from trades made in a short period of time. We are also no longer exempt from the requirements of Regulation
FD promulgated under the Exchange Act related to selective disclosures. We are also no longer permitted to follow our home country’s rules in lieu of the
corporate governance obligations imposed by Nasdaq, and are required to comply with the governance practices required by U.S. domestic issuers listed on
Nasdaq. We are also required to comply with all other rules of Nasdaq applicable to U.S. domestic issuers, including that our articles of association specify
a quorum of no less than one-third of our outstanding voting common shares for meetings of our common shareholders, the solicitation of proxies and the
approval by our shareholders in connection with certain events such as the acquisition of stock or assets of another company, the establishment of or
amendments to equity-based compensation plans for employees, a change of control and certain private placements. In addition, we are required to report
our financial results under U.S. Generally Accepted Accounting Principles, including our historical financial results, which have previously been prepared
in accordance with International Financial Reporting Standards. We expect to continue to incur significant legal, accounting, insurance and other expenses
and to expend greater time and resources to comply with these requirements. In addition, we may need to develop our reporting and compliance
infrastructure and may face challenges in complying with the new requirements applicable to us.
We are an “emerging growth company” and a “smaller reporting company,” and we cannot be certain if the reduced reporting requirements applicable
to emerging growth companies and smaller reporting companies will make our common shares less attractive to investors.
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act and a smaller reporting company under the rules promulgated
under the Exchange Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting
requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the
auditor attestation requirements of Section 404, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and
shareholder approval of any golden parachute payments not previously approved, and reduced executive compensation disclosure. We may take advantage
of these exemptions until we are no longer an emerging growth company. We could be an emerging growth company for up to five years following the
initial public offering of our common shares, although circumstances could cause us to lose that status earlier, including if the aggregate market value of
our common shares held by non-affiliates exceeds $700 million as of the end of our second fiscal quarter, in which case we would no longer be an
emerging growth company as of the fiscal year-end.
We are also a smaller reporting company, and we will remain a smaller reporting company until the fiscal year following the determination that our voting
and non-voting common shares held by non-affiliates is more than $250 million measured on the last business day of our second fiscal quarter, or our
annual revenues are more than $100 million during the most recently completed fiscal year and our voting and non-voting common shares held by non-
affiliates is more than $700 million measured on the last business day of our second fiscal quarter. Similar to emerging growth companies, smaller reporting
companies are able to provide simplified executive compensation disclosure, and have certain other reduced disclosure obligations, including, among other
things, being required to provide only two years of audited financial statements and not being required to provide selected financial data or supplemental
financial information.
We cannot predict if investors will find our common shares less attractive because we may rely on these exemptions. If some investors find our common
shares less attractive as a result, there may be a less active trading market for our common shares and the price of our common shares may be more volatile.
69
If securities or industry analysts publish inaccurate or unfavorable research about our business, the price of our common shares and our trading
volume could decline.
The trading market for our common shares depends in part on the research and reports that securities or industry analysts publish about us or our business.
If one or more of the analysts who cover us downgrade our common shares or publish inaccurate or unfavorable research about our business, the price of
our common shares would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our
common shares could decrease, which might cause the price of our common shares and trading volume to decline.
We may be classified as a passive foreign investment company (PFIC) for U.S. federal income tax purposes, which could result in adverse U.S. federal
income tax consequences to U.S. investors in our common shares.
Based on the current and anticipated value of our assets, including goodwill, and the current and anticipated composition of our income, assets and
operations, we do not believe we will be a PFIC for U.S. federal income tax purposes for our current taxable year. A non-U.S. company generally will be
considered a PFIC for any taxable year if (i) at least 75% of its gross income is passive income (including interest income), or (ii) at least 50% of the value
of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the
production of passive income. The value of our assets generally is determined by reference to the market price of our common shares, which may fluctuate
considerably. In addition, the composition of our income and assets is affected by how, and how quickly, we spend the cash we raise. It is possible the
Internal Revenue Service could determine that we were a PFIC for our current taxable year. If we were to be treated as a PFIC for any taxable year during
which a U.S. Holder holds a common share, certain adverse U.S. federal income tax consequences could apply to such U.S. Holder. Once treated as a
PFIC, for any taxable year in which a U.S. Holder owns equity in such foreign corporation, a foreign corporation will generally continue to be treated as a
PFIC for all subsequent taxable years with respect to such U.S. Holder. If we were to be a PFIC, and a U.S. Holder does not make an election to treat us as
a qualified electing fund (QEF) or a mark-to-market election, excess distributions to a U.S. Holder, and any gain recognized by a U.S. Holder on a
disposition of our ordinary shares, would be taxed in an unfavorable way. Among other consequences, our dividends would be taxed at the regular rates
applicable to ordinary income, rather than the 20% maximum rate applicable to certain dividends received by an individual from a qualified foreign
corporation, and, to the extent that they constituted excess distributions, certain interest charges may apply. In addition, gains on the sale of our shares
would be treated in the same way as excess distributions. The tests for determining PFIC status are applied annually and it is difficult to make accurate
predictions of future income and assets, which are relevant to the determination of any future PFIC status. As such, we cannot provide any assurances
regarding our PFIC status for any past, current or future taxable years. U.S. Holders should consult their tax advisors regarding the potential application of
these rules to their investment in our common shares. A “U.S. Holder” is a holder who, for U.S. federal income tax purposes, is a beneficial owner of our
common shares and is:
(1)
a citizen or individual resident of the United States;
(2)
a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the
District of Columbia;
(3)
an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
(4)
a trust that (a) is subject to the primary supervision of a U.S. court and the control of one or more “United States persons” (within the meaning
of Section 7701(a)(30) of the United States Internal Revenue Code of 1986, as amended (Tax Code)) or (b) has a valid election in effect to be
treated as a United States person for U.S. federal income tax purposes.
If a U.S. Holder is treated as owning at least 10% of our common shares, such holder may be subject to adverse U.S. federal income tax consequences.
If a U.S. Holder is treated as owning (directly, indirectly or constructively) at least 10% of the value or voting power of our common shares, such U.S.
Holder may be treated as a “United States shareholder” with respect to each “controlled foreign corporation” in our group (if any) as such term is defined in
the Tax Code. A United States shareholder of a controlled foreign corporation may be required to report annually and include in its U.S. taxable income, as
ordinary income, its pro rata share of “Subpart F income,” “global intangible low-taxed income” and investments in U.S. property by controlled foreign
corporations, regardless of whether we make any distributions. An individual that is a United States shareholder with respect to a controlled foreign
corporation generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a United States shareholder that is a
corporation. Failure to comply with these reporting obligations may subject a United States shareholder to significant monetary penalties and may extend
the statute of limitations with respect to such United States shareholder’s U.S. federal income tax return for the year for which reporting was due. We
cannot provide any assurances that we will assist investors in determining whether we or any of our future non-U.S. subsidiaries is treated as a controlled
foreign corporation or whether such investor is treated as a United States shareholder with respect to any such controlled foreign corporations. Further, we
cannot provide any assurances that we will furnish to any United States shareholders information that may be necessary to comply with the aforementioned
reporting and tax payment obligations. U.S. Holders should consult their tax advisors regarding the potential application of these rules to their investment
in our common shares. The risk of being subject to increased taxation may deter our current shareholders from increasing their investment in us and others
from investing in us, which could impact the demand for, and value of, our common shares.
70
Comprehensive tax reform legislation could adversely affect our business and financial condition.
On December 22, 2017, the U.S. government enacted the TCJA, a comprehensive tax legislation that includes significant changes to the taxation of
business entities. The TCJA remains unclear in many respects and has been, and may continue to be, the subject of amendments and technical corrections,
as well as interpretations and implementing regulations by the Treasury and Internal Revenue Service, which have lessened or increased certain adverse
impacts of the TCJA and may do so in the future. We continue to examine the impact the TCJA may have on our business. The effect of the TCJA on our
business, whether adverse or favorable, is uncertain, and may not become evident for some period of time. Holders of our common shares should consult
their legal and tax advisors regarding the TCJA and the potential tax consequences of investing in our common shares.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We lease approximately 12,320 square meters of office and laboratory space in Utrecht, the Netherlands. This facility serves as our corporate headquarters
and central laboratory facility. The leases for this space expire on October 31, 2021. We also entered into a lease for 7,583 square feet of additional office
space in Cambridge, Massachusetts, which commenced on April 1, 2019 and has a term of seven years.
Item 3. Legal Proceedings.
On April 5, 2018, an unnamed third party and Regeneron Pharmaceuticals Inc. (Regeneron) filed notices of opposition against our EP 2604625 patent,
entitled “Generation of Binding Molecules,” in the European Opposition Division of the European Patent Office (the “EPO”). The notices asserted, as
applicable, added subject matter, lack of novelty, lack of inventive step, and insufficiency. Regeneron withdrew its opposition pursuant to a global
December 20, 2018 settlement with Merus. On August 20, 2018, we timely responded to the submissions with respect to the unnamed third party. An
opposition hearing was held in June 2019, wherein the EPO revoked the EP 2604625 patent in its entirety under Art. 123(2) EPC. We timely appealed that
decision in December 2019 before the Technical Board of Appeals for the EPO seeking reinstatement of the patent and proposing auxiliary requests for
certain amended claims, with further proceedings to be scheduled in the future. As this opposition proceeding continues, we cannot be certain that we will
ultimately prevail.
From time to time, we may be involved in various other claims and legal proceedings relating to claims arising out of our operations. We are not currently a
party to any other legal proceedings, which could be deemed to be material.
Item 4. Mine Safety Disclosures.
Not Applicable.
71
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Sven Ante (Bill) Lundberg, Ph.D. has served as our Chief Executive Officer and Principal Financial Officer since January 2020. Prior to his appointment
as an executive officer of Merus, Dr. Lundberg served as a board member of Merus since June 2019. Dr. Lundberg has more than 15 years of experience in
the pharmaceutical and biotechnology industries. Prior to joining Merus, he was Chief Scientific Officer and the first US employee of CRISPR
Therapeutics. He was responsible for establishing and growing R&D in the US and overseeing the first company CRISPR-based product from inception to
regulatory filing for clinical trials. He was also Vice President and Head of Translational Medicine at Alexion, overseeing R&D from discovery through
early development, as well as Director and Chief Medical Officer of Taligen Therapeutics. He has previously held roles of increasing responsibility in
clinical drug development and medical affairs at Xanthus/Antisoma, Wyeth (now Pfizer), and Genzyme. Dr. Lundberg received an MD from Stanford and
MBA from the University of Massachusetts. He completed post-doctoral training at the Whitehead Institute/MIT, and clinical training in Medicine and
Medical Oncology from Harvard and the Dana-Farber Cancer Institute.
Alexander ("Lex") Berthold Hendrik Bakker, Ph.D. has served as our Chief Development Officer since October 2010. His responsibilities include
strategic scientific leadership, management of pre-clinical and clinical development and manufacturing, business development support, external
collaboration and partnership management. Prior to joining Merus, Dr. Bakker directed pre-clinical and clinical development at Crucell N.V., a
biotechnology company. Mr. Bakker holds a Ph.D. in Tumor Immunology from the University of Nijmegen and was a postdoctoral fellow at the DNAX
Research Institute.
Cornelis Adriaan ("John") de Kruif, Ph.D. has served as our Chief Technology Officer since January 2013 and previously served as our Chief Scientific
Officer from April 2007 to January 2013. His responsibilities include management of antibody discovery, antibody engineering, external collaborations,
partnerships management and operational activities. Before joining Merus, from October 2000 to October 2006, he served as a director of antibody
discovery for Crucell N.V., a biotechnology company specializing in vaccines and biopharmaceutical technology. Dr. de Kruif holds a PhD in Antibody
Engineering from Utrecht University.
Hui Liu, Ph.D. has served as our Chief Business Officer since December 2015 and Head of Merus U.S. since October 2018. His responsibilities include all
aspects of business development, including in- and out- licensing, acquisitions and alliance management, and expansion of Merus in the U.S. Prior to
joining Merus, Dr. Liu served as Vice President and Global Head, Business Development & Licensing, Oncology at Novartis AG, a pharmaceutical
company, from 2013 to 2015, and as Vice President and Global Head, Business Development & Licensing, Vaccines & Diagnostics, from 2009 to 2012.
Prior to Novartis, Dr. Liu held various management positions at Pfizer, Inc., a pharmaceutical company, from 2004 to 2009 and at Pfizer, Inc. and its
predecessor company Warner-Lambert from 1997 to 2001. From 2001 to 2004, Dr. Liu was an investment banker at Goldman Sachs and Citigroup. Dr. Liu
holds a Ph.D. in molecular biology and an M.B.A. in finance from the University of Michigan and a B.S. in biology from Peking University.
Peter B. Silverman, J.D. has served as our General Counsel since February 2018 and our Chief Intellectual Property Officer since February 2017. His
responsibilities include management of the company’s legal strategy and overseeing all aspects of the company’s legal operations. Prior to joining Merus,
Mr. Silverman was a Partner at Kirkland & Ellis LLP, where he represented numerous life sciences companies concerning an array of legal matters. Mr.
Silverman also served as judicial law clerk to U.S. District Court Judge Anne E. Thompson of the District of New Jersey. He holds a J.D. from Fordham
University School of Law. He is admitted to practice law in New York. Mr. Silverman also holds a B.A. in biology from the University of Rochester.
Andres Sirulnik, M.D., Ph.D. has served as our Chief Medical Officer since October 2016. His responsibilities include clinical strategy and development.
Prior to joining Merus, Dr. Sirulnik was at Novartis Pharmaceuticals from 2008 to 2016, most recently serving as Vice President – Senior Global Clinical
Program Head and Research Physician in Oncology Clinical Development. From 2003 to 2008, Dr. Sirulnik was an attending physician in the leukemia
program at Dana Farber Cancer Institute and Instructor in Medicine at Harvard Medical School where he focused his research and clinical work in rare
hematologic malignancies. Dr. Sirulnik received his medical degree from the University of Buenos Aires, Argentina, and his Ph.D. in medicine and
molecular biology at the University of Cambridge, England.
Mark Throsby, Ph.D. has served as our Chief Scientific Officer since January 2013 and previously served as our Chief Operating Officer from October
2008 to January 2013. His responsibilities include strategic scientific leadership, management of discovery, pre-clinical research and translational research,
business development support, external collaborations and partnerships management. Before joining Merus, from October 2000 to October 2008, he served
as a senior scientist and then as director of antibody discovery for Crucell N.V., a biotechnology company specializing in vaccines and biopharmaceutical
technology. Dr. Throsby holds a Ph.D. in neuro-immunology from Monash University.
72
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information and Holders
Our common stock is traded on The Nasdaq Global Market under the symbol “MRUS.” Trading of our common stock commenced on May 24, 2016,
following the completion of our initial public offering.
As of February 28, 2020, the number of holders of record of our common shares was 16. This number does not include beneficial owners whose shares are
held in street name.
Dividends
We have never declared or paid cash dividends on our capital stock. We intend to retain all of our future earnings, if any, to finance the growth and
development of our business. We do not intend to pay cash dividends to our stockholders in the foreseeable future.
Purchases of Equity Securities by the Issuer or Affiliated Purchasers
We did not repurchase any of our equity securities during the quarter ended December 31, 2019.
Recent Sales of Unregistered Securities
None.
Item 6. Selected Financial Data.
Not applicable as a Smaller Reporting Company.
73
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements
included in this Annual Report on Form 10-K, which have been prepared by us in accordance with accounting principles generally accepted in the United
States (U.S. GAAP) and with Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. This discussion and analysis should be
read in conjunction with these consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. Some of the
information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our
plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many important factors,
including those factors set forth in Part I, Item 1A. Risk Factors 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 oncology company developing innovative antibody therapeutics. Our pipeline of full-length human multispecific antibody
candidates are generated from our proprietary technology platforms, which are able to generate a diverse array of antibody binding domains, or Fabs,
against virtually any target. Each antibody binding domain consists of a target-specific heavy chain paired with a common light chain. Multiple binding
domains can be combined to produce novel bispecific and trispecific antibodies that bind to a wide range of targets and display novel and innovative
biology. These platforms referred to as Biclonics® and TriclonicsTM allows us to generate large numbers of diverse panels of bispecific and trispecific
antibodies, respectively, which can then be functionally screened in large-scale cell-based assays to identify those unique molecules that possess novel
biology, which we believe are best suited for a given therapeutic application. Further, by binding to multiple targets, Biclonics® and TriclonicsTM may be
designed to provide a variety of mechanisms of action, including simultaneously blocking receptors that drive tumor cell growth and survival and
mobilizing the patient’s immune response by engaging T cells, and/or activating various killer cells to eradicate tumors.
Our technology platforms employ an assortment of patented technologies and techniques to generate human antibodies. We utilize our patented MeMo®
mouse to produce a host of antibodies with diverse heavy chains and a common light chain that are capable of binding to virtually any antigen target. We
use our patented heavy chain dimerization technology to generate substantially pure bispecific and trispecific antibodies. We also employ our patented
Spleen to Screen® technology to efficiently screen panels of diverse heavy chains, designed to allow us to rapidly identify Biclonics® and TriclonicsTM
therapeutic candidates with differentiated modes of action for pre-clinical and clinical testing.
Using our Biclonics® platform we have produced, and are currently developing, the following candidates: MCLA-128, or zenocutuzumab, for the potential
treatment of solid tumors that harbor Neuregulin 1(NRG1) gene fusions; MCLA-117 for the potential treatment of acute myeloid leukemia; MCLA-158 for
the potential treatment of solid tumors; and MCLA-145, developed in collaboration with Incyte Corporation, for the potential treatment of solid tumors and
a hematological malignancy, B-cell lymphoma. We are also developing a late-stage pre-clinical candidate, MCLA-129 in collaboration with Betta
Pharmaceuticals, for the potential treatment of solid tumors. Furthermore, we have a pipeline of proprietary antibody candidates in pre-clinical
development and intend to further leverage our Biclonics® technology platform to identify multiple additional antibody candidates and advance them to
clinical development. Further, Merus is developing its next generation TriclonicsTM technology, and has pre-clinical trispecific antibody candidates
capable of simultaneously binding three targets at once.
Funding Our Operations
We are a clinical-stage company and have not generated any revenue from product sales. We expect to incur significant expenses and operating losses for
the foreseeable future as we advance our antibody candidates from discovery through pre-clinical development and into clinical trials, and seek regulatory
approval and pursue commercialization of any approved antibody candidate. In addition, if we obtain regulatory approval for any of our antibody
candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. We expect to
incur expenses in connection with the in-license or acquisition of additional antibody candidates.
We anticipate that we will require additional financing to support our continuing operations. Until such time as we can generate significant revenue from
product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may
include collaborations and business development opportunities with third parties. Adequate additional financing may not be available to us on acceptable
terms, or at all. Our inability to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our
business strategy. We will need to generate significant revenue to achieve profitability, and we may never do so.
Based on our current operating plan, we expect that our existing cash, cash equivalents and marketable securities of $241.8 million as of December 31,
2019 will be sufficient to fund our operations into 2022.
74
Collaborations and Other Revenue Generating Agreements
Refer to Item 1, “Business—Our Collaborations” and Note 12, “Collaborations,” of the notes to our consolidated financial statements included elsewhere
in this Annual Report on Form 10-K for a description of the key terms of our arrangements.
Results of Operations for the Years Ended December 31, 2019 and 2018
In prior periods, we prepared our financial information in accordance with IFRS. As a consequence of becoming a domestic issuer as of January 1, 2020,
we are required to present our financial information in accordance with U.S. GAAP and expressed in U.S. dollars from that date. The below financial
information has been prepared in accordance with U.S. GAAP. The financial information should not be expected to correspond to figures we have
previously presented under IFRS.
Revenue
The following is a comparison of collaboration revenue for the years ended December 31, 2019 and 2018:
Incyte
Ono
Other
Total collaboration revenue
Grant revenue
Total revenue
Year Ended December 31,
2018
2019
(In thousands)
$
$
$
25,831 $
4,437
1,080
31,348 $
(215)
$
31,133
29,969 $
6,101
2,075
38,145 $
233
38,378
$
Change
%
(4,138)
(1,664)
(995)
(6,797)
(448)
(7,245)
-13.8%
-27.3%
-48.0%
-17.8%
-192.3%
-18.9%
Our revenue from each collaboration partner consists of revenue recognized from the amortization of deferred revenue related to upfront payments for
licenses or options to obtain licenses in the future, research and development services reimbursement revenue earned and milestone payments earned under
collaboration and license agreements with our collaboration partners.
Collaboration revenue for the year ended December 31, 2019 decreased $6.8 million as compared to the year ended December 31, 2018, primarily as a
result of a decrease in Incyte reimbursement revenue of $3.2 million, $1.0 million upfront payment from Betta recognized in 2018 that is non-recurring in
2019, decrease in Ono reimbursement revenue of $0.9 million, and $0.6 million lower Ono milestone revenue. The decrease in exchange rates through
2019 negatively impacted collaboration revenue by $1.3 million.
As of December 31, 2019, we have total deferred revenue of $110.3 million, which primarily relates to the upfront payment received under our Incyte
collaboration agreement and is expected to be recognized over the next six years.
Operating Expenses
The following is a comparison of operating expenses for the years ended December 31, 2019 and 2018:
Research and development
General and administrative
Total operating expenses
Year Ended December 31,
2018
2019
(In thousands)
Change
%
55,680 $
34,110
89,790 $
54,767 $
29,354
84,121 $
913
4,756
5,669
1.7%
16.2%
6.7%
$
$
75
Research and Development Expense
Research and development costs consist principally of the costs associated with our research and development activities, conducting pre-clinical studies and
clinical trials, and activities related to our regulatory filings. Our research and development expenses consist of:
•
•
•
•
salaries for research and development staff and related expenses, including share-based compensation expenses;
expenses incurred under agreements with contract research organizations (CROs) contract manufacturing organizations, and consultants that
conduct and support clinical trials and pre-clinical studies;
costs to develop product candidates, including raw materials and supplies, product testing, and facility related expenses; and
amortization and depreciation of tangible and intangible fixed assets used to develop our product candidates.
Note that we do not allocate employee-related costs, depreciation, rental and other indirect costs to specific research and development programs because
these costs are deployed across multiple programs under research and development and, as such, are separately classified as unallocated research and
development expenses.
Research and development expense for the year ended December 31, 2019 increased $0.9 million as compared to the year ended December 31, 2018,
primarily as a result of an increase in headcount and higher pre-clinical research and development-related costs related to our programs, particularly
increases in costs for MCLA-117 offset by decreases in costs for zenocutuzumab and MCLA 145.
Research and development activities are central to our business model. We expect research and development costs to increase significantly for the
foreseeable future as our development programs progress, as we continue to support the clinical trials of our bispecific antibody candidates as treatments
for various cancers and as we move these candidates into additional clinical trials. There are numerous factors associated with the successful
commercialization of any of our antibody 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 Expense
General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive,
finance, intellectual property, business development and support functions. Other general and administrative expenses include allocated facility-related
costs not otherwise included in research and development expenses, travel expenses and professional fees for auditing, tax and legal services, including
intellectual property and general legal services.
General and administrative expense for the year ended December 31, 2019 increased $4.8 million as compared to the year ended December 31, 2018,
primarily as a result of an increase in headcount, consulting, accounting and professional fees as well as higher facilities-related expenses.
We expect general and administrative expenses to increase as we grow as a company, driven by the need to support a growing workforce, engaging in
financing transactions, establishing and maintaining our intellectual property rights, fulfilling our compliance requirements as a public company and related
legal costs.
Other Income, Net
The following is a comparison of other income, net, for the years ended December 31, 2019 and 2018:
Interest income, net
Foreign exchange gains
Miscellaneous income and gains
Total other income, net
Year Ended December 31,
2018
2019
Change
%
$
$
(In thousands)
1,889 $
1,615
196
3,700 $
2,132 $
7,126
8,380
17,638 $
(243)
(5,511)
(8,184)
(13,938)
-11.4%
-77.3%
-97.7%
-79.0%
Other income, net consists of interest earned on our cash and cash equivalents held on account, accretion of investment earnings and net foreign exchange
gains on our foreign denominated cash, cash equivalents and marketable securities. For the year ended December 31, 2018, other income included a gain
recognized upon the settlement of litigation with Regeneron of $8.1 million.
76
Income Tax Expense
The following is a comparison of income tax expense for the years ended December 31, 2019 and 2018:
Current
Deferred
Income tax expense
Year Ended December 31,
2018
2019
Change
%
$
$
(In thousands)
283 $
(89)
194 $
417 $
(212)
205 $
(134)
123
(11)
-32.1%
-58.0%
-5.4%
We are subject to income taxes in the Netherlands and the U.S. Our current and deferred tax provision represents taxable income attributed to our U.S.
operations as a consequence of allocating income to that jurisdiction. No current or deferred provision for income taxes has been made for income taxes in
the Netherlands due to losses for tax purposes. Further, given a history of losses in the Netherlands, no deferred tax assets in excess of deferred tax
liabilities are recognized as it is not more likely than not that they will be recovered.
Net Loss
Net loss for the year ended December 31, 2019 was $55.2 million, compared to $28.3 million for the year ended December 31, 2018. The increase in net
loss was primarily due to the decrease in collaboration revenue and increases in research and development and general and administrative expenses
discussed above.
Liquidity and Capital Resources
Since inception, we have raised an aggregate of $527.5 million to fund our operations, of which $125.4 million was non-equity funding through our
collaboration agreements, $291.4 million was from the sale of common stock in our public offerings and $110.7 million was from private funding sources
prior to the Company’s initial public offering. In November 2019, we completed an underwritten follow-on public offering in which we sold 5,462,500
common shares, including 715,500 common shares pursuant to the underwriters’ option to purchase additional shares, at a public offering price of $14.50
per share and received net proceeds of $74.0 million, after deducting underwriting discounts and commissions and offering expenses. As of December 31,
2019, we had $241.8 million in cash, cash equivalents and marketable securities that are available to fund our current operations.
In addition to our existing cash, cash equivalents and marketable securities, we may receive research and development co-funding and are eligible to earn a
significant amount of milestone payments under our collaboration agreements. Our ability to earn these payments and the timing of earning these payments
is dependent upon the outcome of our research and development activities and is uncertain at this time.
Funding Requirements
Our primary uses of capital are, clinical trial costs, third-party research and development services, laboratory and related supplies, legal and other
regulatory expenses and general overhead costs.
Because our product candidates are in various stages of clinical and pre-clinical development and the outcome of these efforts is uncertain, we cannot
estimate the actual amounts necessary to successfully complete the development and commercialization of our product candidates or whether, or when, we
may achieve profitability. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a
combination of equity or debt financings, collaboration arrangements and government grants. Except for any obligations of our collaborators to make
license, milestone or royalty payments under our agreements with them, and government grants, we do not have any committed external sources of
liquidity. To the extent that we raise additional capital through the future sale of equity or debt, the ownership interest of our stockholders may be diluted,
and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing 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 capital expenditures or declaring dividends. If we raise additional funds through collaboration
arrangements in the future, 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 any additional funds that may be needed through equity or debt financings 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.
Outlook
Based on our research and development plans and our timing expectations related to the progress of our programs, we expect that our existing cash, cash
equivalents and marketable securities as of December 31, 2019, will be sufficient to fund our planned operating expenses and capital expenditure
requirements into 2022, without giving effect to any potential milestone payments we may receive under our collaboration agreements. We have based this
estimate on assumptions that may prove to be wrong, particularly as the
77
process of testing product candidates in clinical trials is costly and the timing of progress in these trials is uncertain. As a result, we could use our capital
resources sooner than we expect.
Cash Flows
The following is a summary of cash flows for the years ended December 31, 2019 and 2018:
Net cash used in operating activities
Net cash provided by (used in) investing activities
Net cash provided by financing activities
Operating Activities
Year Ended December 31,
2018
2019
(In thousands)
Change
%
$
(63,048) $
24,172
74,232
(46,096) $
(25,165)
63,043
(16,952)
49,337
11,189
37%
-196%
18%
Net cash used in operating activities for the year ended December 31, 2019 increased $17.2 million as compared to the year ended December 31, 2018,
primarily as a result of the increase in net loss of $26.8 million, and decrease in non-cash stock-based compensation of $1.9 million, offset by an increase in
depreciation changes of $0.3 million, a net decrease in foreign exchange gains of $5.1 million, and changes in working capital of $6.2 million. The increase
in operating cash outflows for the year ended December 31, 2019 may also be viewed as a result of operating cash receipts related to revenue arrangements
decreasing $6.2 million, operating cash out flows related to operating expenses increasing $2.5 million and a non-recurring litigation settlement of $8.1
million that was received in 2018.
Investing Activities
Net cash provided by investing activities for the year ended December 31, 2019 increased $49.7 million as compared to the year ended December 31, 2018,
primarily as a result of the change in net cash inflows from the maturity of debt securities used to fund current operations of $47.6 million offset by the
change in purchases of property, equipment and intangibles of $2.1 million.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2019 increased $11.2 million as compared to the year ended December 31, 2018,
primarily as a result of the increase in receipt of proceeds from our equity issuances of $12.2 million offset by decreases in proceeds received from option
exercises of $1.0 million.
Contractual Obligations and Contingent Liabilities
We enter into contracts in the normal course of business with CROs for clinical and pre-clinical research studies, external manufacturers for product for use
in our clinical trials, and other research supplies and other services as part of our operations. These contracts generally provide for termination on notice,
and therefore are cancelable contracts and are not contractual obligations.
Critical Accounting Policies and Use of Estimates
Our accounting policies are more fully described in Note 2 to our Consolidated Financial Statements included elsewhere in the Annual Report on Form 10-
K. As disclosed in Note 2, the preparation of financial statements in conformity with generally accepted accounting principles requires management to
make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results
could differ significantly from those estimates. We believe that the following discussion addresses our most critical accounting policies, which are those
that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and
complex judgments on material matters.
Revenue Recognition
Significant judgement is required in applying our accounting policies concerning revenue recognition. Our collaboration arrangements may be subject to
the scope of many accounting standards in addition to the standards applicable to revenue from contracts with customers, including whether all or part of
the arrangement may be a collaboration arrangement as defined in the accounting standards or whether financial instruments exchanged in the same
arrangement may be subject to other guidance. Such matters may impact the initial recognition, subsequent accounting and disclosures concerning the
arrangement.
Our collaboration arrangements typically include a license to our intellectual property and significant judgement is applied in determining whether the
particular license is distinct from other performance obligations in the arrangement. We consider whether the counterparty may be able to utilize the
license in the absence of the provision of other performance obligations by us. Each
78
collaboration features unique terms to a license and the provision of other performance obligations also varies. Such considerations impact the timing of
recognition of consideration allocated to performance obligations.
A key estimate in the application of our revenue recognition policy concerns the method of recognition of revenue over time as performance obligations are
completed. Methods may include an input-based, output-based or other rational allocation method. Such estimates are often derived from expectations on
the outcome of research and development activities which are subject to uncertainty. Changes in these estimates impact the timing of revenue recognition.
Stock-Based Compensation
The expense for stock-based compensation for options granted to employees is typically determined based on the grant-date fair value of those
options. The grant date fair value is derived from the use of valuation models which are commonly used. These valuation models use inputs which require
estimates that are reflective of future expectations including the forward expected risk-free interest rate, volatility of our shares, and the expected exercise
behavior of employees. While historical averages may be indicative of future expectations, such assumptions may or may not be accurate. Significant
judgement must be employed to derive reasonable estimates in determining the grant-date fair value.
Going Concern
Our evaluation of our ability to continue as a going concern requires us to evaluate our future sources and uses of cash sufficient to fund our currently
expected operations in conducting research and development activities one year from the date our financial statements are issued. We evaluate the
probability associated with each source and use of cash resources in making our going concern determination. The research and development of
pharmaceutical products is inherently subject to uncertainty.
Recent Accounting Pronouncements
For a discussion of pending and recently adopted accounting pronouncements, see Note 2 to our Consolidated Financial Statements included elsewhere in
this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable as a Smaller Reporting Company.
Item 8. Financial Statements and Supplementary Data.
The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K. An index of those financial
statements is found in Item 15 of Part IV of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Limitations on Effectiveness of Controls and Procedures
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 the desired control objectives. In addition, the design of disclosure controls and
procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible
controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive and financial officer, has evaluated, as of the end of the period covered by this Annual
Report on Form 10-K, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act).
Based on such evaluation, our principal executive and principal financial officer concluded that our disclosure controls and procedures were effective at the
reasonable assurance level as of December 31, 2019.
79
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rule 13a-
15(f) under the Exchange Act. Our management conducted an assessment of the effectiveness of our internal control over financial reporting based on the
criteria set forth in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, our management concluded that, as of December 31, 2019, our internal control over financial reporting was effective.
Attestation Report of the Independent Registered Public Accounting Firm
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm due to an exemption
established by the JOBS Act for "emerging growth companies."
Changes in Internal Control Over Financial Reporting
Our consolidated financial statements for the year ending December 31, 2019 were prepared in compliance with generally accepted accounting principles
in the U.S. which represents a change in the generally accepted accounting principles previously applied in financial statements prepared by us for prior
periods that were prepared in accordance with International Financial Reporting Standards. We have added to or updated the functioning of our existing
internal controls over financial reporting to accommodate the necessary changes to continue to provide reasonable assurance to prevent or detect
misstatements in the preparation and presentation of our financial statements. Except as described herein, there was no change in our internal control over
financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) that occurred during the fiscal quarter ended December 31, 2019 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
80
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information concerning our executive officers required by this Item 10 is contained under the caption “Information about our Executive Officers” at
the end of Part I of this Annual Report on Form 10-K. The remainder of the response to this Item 10 will be included in our definitive Proxy Statement for
the 2020 Annual Meeting of Stockholders.
We have adopted a Code of Business Conduct and Ethics for all of our directors, officers and employees, including our principal executive officer, principal
financial officer, principal accounting officer or controller, or persons performing similar functions. We have posted a current copy of our Code of Business
Conduct and Ethics on our website at www.merus.nl in the “Investors & Media” section under “Corporate Governance.” We intend to satisfy the disclosure
requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our Code of Business Conduct and Ethics, as well as
Nasdaq’s requirement to disclose waivers with respect to directors and executive officers, by posting such information on our website at the address and
location specified above. The information contained on our website is not incorporated by reference into this Annual Report on Form 10-K.
Item 11. Executive Compensation.
The information required by this Item 11 will be included in our definitive Proxy Statement for the 2020 Annual Meeting of Stockholders.
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 for the 2020 Annual Meeting of Stockholders.
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 for the 2020 Annual Meeting of Stockholders.
Item 14. Principal Accounting Fees and Services.
The information required by this Item 14 will be included in our definitive Proxy Statement for the 2020 Annual Meeting of Stockholders.
81
Item 15. Exhibits, Financial Statement Schedules.
(a)
1.
Financial Statements.
PART IV
The following Report and Consolidated Financial Statements of the Company are included in this Annual Report:
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders’ Equity
Notes to Consolidated Financial Statements
2.
Financial Statements and Schedules.
Page
F-2
F-3
F-4
F-5
F-6
F-7
All financial statement schedules have been omitted because the required information is either presented in the consolidated financial
statements or the notes thereto or is not applicable or required.
3.
Exhibits.
The following is a list of exhibits filed as part of this Annual Report on Form 10-K.
82
Exhibit
Number
Exhibit Description
Form
File No.
Exhibit
No.
Filing
Date
Filed/
Furnished
Incorporated by Reference to
Filings Indicated
3.1
4.1
4.2
4.3
4.4
10.1.1
10.1.2
10.1.3
10.1.4
10.1.5
10.1.6
10.1.7
10.1.8
10.1.9
Articles of Association and By-Laws
Articles of Association of Merus N.V., as amended on June 12,
2019
Instruments Defining the Rights of Security Holders
Description of Securities
Registration Rights Agreement, dated May 24, 2016, by and
among the Registrant and the shareholders party thereto
Registration Rights Agreement, dated February 13, 2018, by
and among the registrant and the Investors identified on
Exhibit A attached thereto
Securities Purchase Agreement, dated February 13, 2018, by
an among the registrant and the Investors identified on Exhibit
A attached thereto
Material Contracts – Management Contracts and
Compensation Plans
Merus N.V. 2010 Employee Option Plan, as amended
Merus N.V. 2016 Incentive Award Plan and forms of award
agreements thereunder, as amended
Non-Executive Director Compensation Program
Form of Board of Directors Indemnification Agreement
Employment Contract between the Registrant and Ton
Logtenberg, dated January 21, 2010.
Employment Agreement, dated December 16, 2015, by and
among Merus US, Inc., the Registrant and Hui Liu, as amended
on March 2, 2016
Employment Agreement, dated November 1, 2016, by and
among Merus US, Inc., the Registrant and L. Andres Sirulnik
English language translation of Employment Agreement, dated
as of July 19, 2008, by and between the Registrant and Mark
Throsby, as amended on March 10, 2010
English language translation of Employment Agreement, dated
as of August 5, 2010, by and between the Registrant and
Alexander Bakker
83
6-K
001-37773
3
6/14/19
6-K
6-K
001-37773
4.1
5/27/16
0001-37773
99.2
2/15/18
*
6-K
0001-37773
99.1
2/15/18
20-F
20-F
001-37773
001-37773
4.1
4.2
4/30/18
4/30/18
F-1
F-1/A
F-1
333-229044
333-207490
333-207490
10.3
10.4
10.5
12/27/18
5/9/16
10/19/15
20-F
001-37773
4.7
4/30/18
20-F
20-F
001-37773
001-37773
4.8
4.9
4/30/18
4/30/18
20-F
001-37773
4.10
4/30/18
Exhibit
Number
10.1.10
10.1.11
10.1.12
10.1.13
10.2.1
10.2.2
10.2.3
10.2.4
10.3.1
10.3.2
10.3.3
10.4.1†
10.4.2†
Exhibit Description
Form
File No.
Exhibit
No.
Filing
Date
Filed/
Furnished
Incorporated by Reference to
Filings Indicated
English language translation of Employment Agreement, dated
as of April 2, 2007, by and between the Registrant and John de
Kruif, as amended on March 10, 2010
Employment Agreement, dated as of December 24, 2016, by
and between the Registrant and Peter Silverman, as amended
February 1, 2017
Settlement Agreement, dated December 11, 2019, by and
between the Registrant and Ton Logtenberg
Employment Agreement, dated January 1, 2019, by and
between the Registrant and Sven A. Lundberg
Material Contracts – Banking and Financing
English language translation of Loan Agreement between the
Registrant and Coöperatieve Rabobank Utrechtse Heuvelrug
U.A., dated December 29, 2005.
English language translation of letter amendment, dated
October 21, 2015, to Loan Agreement between the Registrant
and Coöperatieve Rabobank Utrechtse Heuvelrug U.A.
English language translation of letter amendment, dated
March 15, 2016, to Loan Agreement between the Registrant
and Coöperatieve Rabobank Utrechtse Heuvelrug U.A.
English language translation of letter amendment, dated
March 15, 2016, to Loan Agreement between the Registrant
and Coöperatieve Rabobank Utrechtse Heuvelrug U.A.
Material Contracts – Leases
English language translation of Lease Agreement between the
Registrant and Stichting Incubator Utrecht, dated April 22,
2016.
English language translation of Amendment to Lease
Agreement, dated as of November 1, 2016 by and between the
Registrant and Stichting Incubator Utrecht
English language translation of the Lease, dated May 1, 2018,
by and between the Registrant and Stichting Incubator Utrecht
Material Contracts – Collaboration and License Agreements
Collaboration and License Agreement, dated December 20,
2016, by and between the Registrant and Incyte Corporation
Share Subscription Agreement, dated December 20, 2016, by
and between the Registrant and Incyte Corporation
84
20-F
001-37773
4.11
4/30/18
20-F
001-37773
4.12
4/30/18
*
*
F-1
333-207490
10.8
10/19/15
F-1/A
333-207490
10.9
1/21/16
F-1/A
333-207490
10.9.1
5/9/16
F-1/A
333-207490
10.9.2
5/9/16
F-1/A
333-207490
10.12
5/9/16
20-F
001-37773
4.15.1
4/30/18
6-K
001-37773
99.3
8/10/18
20-F
20-F
001-37773
001-37773
4.12
4.13
4/28/17
4/28/17
Exhibit Description
Form
File No.
Exhibit
No.
Filing
Date
Filed/
Furnished
Incorporated by Reference to
Filings Indicated
Exhibit
Number
10.4.3†
10.4.4†
21.1
23.1
31.1
32.1
F-1
333-207490
10.9
10/19/15
20-F
001-37773
4.19
4/30/18
F-1/A
333-207490
21.1
4/8/16
Contract Research and License Agreement and Addendum
between the Registrant and ONO Pharmaceutical Co., Ltd.,
dated April 8, 2014.
Contract Research and License Agreement by and between the
Registrant and Ono Pharmaceuticals Co., Ltd., dated
March 14, 2018
Other Exhibits
List of Subsidiaries
Consent of Independent Registered Public Accounting firm
Certification of Principal Executive Officer and Principal
Financial Officer pursuant to rules 13a-14(a) and 15d-14(a)
under the Securities and 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. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Instance Document.
XBRL Taxonomy Extension Schema Document.
XBRL Taxonomy Calculation Linkbase Document.
XBRL Taxonomy Extension Definition Linkbase Document.
XBRL Taxonomy Label Linkbase Document.
XBRL Taxonomy Presentation Linkbase Document.
*
**
†
Filed herewith.
Furnished herewith.
Confidential treatment granted as to portions of the exhibit. Confidential materials omitted and filed separately with the Securities and Exchange
Commission.
Item 16. Form 10-K Summary.
None.
85
*
*
**
*
*
*
*
*
*
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 16, 2020
MERUS N.V.
By: /s/ Sven A. Lundberg
Sven (Bill) Ante Lundberg
President, Chief Executive Officer and
Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of
the Registrant in the capacities and on the dates indicated.
Name
Title
Date
/s/ Sven A. Lundberg
Sven (Bill) Ante Lundberg
/s/ Harry Shuman
Harry Shuman
/s/ Russell G. Greig
Russell G. Greig
/s/ Mark T. Iwicki
Mark T. Iwicki
/s/ John P. de Koning
John P. de Koning
/s/ Greg D. Perry
Greg D. Perry
/s/ Anand Mehra
Anand Mehra
/s/ Len Kanavy
Len Kanavy
/s/ Victor Sandor
Name
President, Chief Executive Officer,
Principal Financial Officer and Director
Principal Accounting Officer
Chairman of the Board of Directors
Director
Director
Director
Director
Director
Director
86
March 16, 2020
March 16, 2020
March 16, 2020
March 16, 2020
March 16, 2020
March 16, 2020
March 16, 2020
March 16, 2020
March 16, 2020
MERUS N.V.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders’ Equity
Notes to Consolidated Financial Statements
F-1
F-2
F-3
F-4
F-5
F-6
F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Merus N.V.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Merus N.V. and subsidiary (together, ‘the Company’) as of December 31, 2019 and
2018, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the years in the two-year
period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations
and its cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain
an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ KPMG Accountants N.V.
We have served as the Company’s auditor since 2009.
Amstelveen, The Netherlands
March 16, 2020
F-2
MERUS N.V.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except per share data)
ASSETS
2019
2018
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable
Accounts receivable (related party)
Prepaid expenses and other current assets
Total current assets
Marketable securities
Property and equipment, net
Operating lease right-of-use assets
Intangible assets, net
Deferred tax assets
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Current portion of lease obligation
Current portion of deferred revenue
Current portion of deferred revenue (related party)
Total current liabilities
Lease obligation
Deferred revenue, net of current portion
Deferred revenue, net of current portion (related party)
Total liabilities
Commitments and contingencies (Note 10)
Stockholders’ equity:
Common shares, €0.09 par value; 45,000,000 shares authorized; 28,882,217 and 23,358,977 shares
issued and outstanding as at December 31, 2019 and 2018, respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to consolidated financial statements.
F-3
$
$
$
$
$
197,612 $
42,153
941
1,711
4,951
247,368
2,009
3,715
5,215
2,876
288
1,905
263,376 $
3,029 $
13,536
1,380
941
17,901
36,787
3,872
780
90,637
132,076
2,918 $
441,395
1,586
(314,599)
131,300
263,376 $
164,590
70,761
369
2,982
4,733
243,435
—
2,706
2,538
2,864
199
1,231
252,973
3,239
10,386
840
1,248
18,246
33,959
1,849
683
110,625
147,116
2,366
360,045
2,894
(259,448)
105,857
252,973
MERUS N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Amounts in thousands except per share data)
Collaboration revenue
Collaboration revenue (related party)
Grant revenue
Total revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Operating loss
Other income, net:
Interest income, net
Foreign exchange gains
Miscellaneous income and gains
Other income, net
Loss before income taxes
Tax expense
Net loss
Other comprehensive loss:
Currency translation adjustment
Comprehensive loss
Loss per share allocable to common stockholders:
Basic and diluted
Weighted average shares outstanding:
Basic and diluted
$
$
$
$
Year Ended December 31,
2019
2018
5,517 $
25,831
(215)
31,133
55,680
34,110
89,790
8,176
29,969
233
38,378
54,767
29,354
84,121
(58,657)
(45,743)
1,889
1,615
196
3,700
(54,957)
194
(55,151) $
(1,308)
(56,459) $
2,132
7,126
8,380
17,638
(28,105)
205
(28,310)
(6,498)
(34,808)
(2.28) $
(1.27)
24,218,083
22,286,720
See notes to consolidated financial statements.
F-4
MERUS N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment
Amortization of intangible assets
Foreign exchange gain
Stock-based compensation expense
Amortization of discount on investments
Deferred tax benefit
Changes in operating assets and liabilities:
Accounts receivable
Operating lease right-of-use assets and lease obligations
Prepaid expenses and other current assets
Accounts payable
Accrued expenses
Deferred revenue
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities
Proceeds from maturities of marketable securities
Purchases of intangible assets
Purchases of property and equipment
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of issuance costs
Proceeds from stock options exercised
Net cash provided by financing activities
Foreign exchange impact on cash, cash equivalents and restricted cash
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents, and restricted cash, beginning of period
Cash, cash equivalents, and restricted cash, end of period
SUPPLEMENTAL DISCLOSURES:
Non-cash lease obligations acquired from operating lease right-of-use assets
Non-cash purchases of property, equipment and intangibles
Non-cash financing costs
Income taxes paid
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
Cash and cash equivalents
Restricted cash included in other assets
Year Ended December 31,
2019
2018
$
(55,151) $
(28,310)
902
236
(1,068)
7,834
(531)
(89)
633
(112)
(1,029)
22
3,317
(18,012)
(63,048)
(60,413)
87,183
(375)
(2,223)
24,172
74,184
48
74,232
(2,273)
33,083
164,730
197,813 $
3,875 $
187 $
164 $
$
(320)
197,612 $
201
197,813 $
645
109
(6,139)
9,754
(559)
(212)
(1,573)
78
(2,830)
(133)
(25)
(16,901)
(46,096)
(89,735)
68,914
(2,510)
(1,834)
(25,165)
62,008
1,035
63,043
(6,557)
(14,775)
179,505
164,730
1,663
553
—
(737)
164,590
140
164,730
$
$
$
$
$
$
$
See notes to consolidated financial statements.
F-5
MERUS N.V.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts in thousands except share data)
Common Shares
Shares
Amount
Balance at December 31, 2017
Issuance of common stock, net
Exercise of stock options and vesting of restricted stock units
Stock-based compensation
Currency translation adjustment
Net loss
Balance at December 31, 2018
Issuance of common stock, net
Exercise of stock options and vesting of restricted stock units
Stock-based compensation
Currency translation adjustment
Net loss
Balance at December 31, 2019
19,429,848 $
3,699,997
229,132
—
—
—
23,358,977 $
5,462,500
60,740
—
—
—
28,882,217 $
1,935 $
407
24
—
—
—
2,366 $
546
6
—
—
—
2,918 $
Accumulated
Deficit
61,601
1,011
9,754
—
—
Additional
Paid-In
Capital
287,679 $ (231,138) $
—
—
—
—
(28,310)
360,045 $ (259,448) $
—
—
—
—
(55,151)
441,395 $ (314,599) $
73,474
42
7,834
—
—
Accumulated
Other
Comprehensive
Income
Total
Stockholders’
Equity
9,392 $
—
—
—
(6,498)
—
2,894 $
—
—
—
(1,308)
—
1,586 $
67,868
62,008
1,035
9,754
(6,498)
(28,310)
105,857
74,020
48
7,834
(1,308)
(55,151)
131,300
See notes to consolidated financial statements.
F-6
MERUS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
Merus N.V. is a clinical-stage immuno-oncology company developing innovative bispecific antibody therapeutics, headquartered in Utrecht, the
Netherlands. Merus US, Inc. is a wholly-owned subsidiary of Merus N.V. located at 139 Main Street, Cambridge, Massachusetts, United States
(collectively, the “Company”).
Since inception, the Company has generated an accumulated loss of $314.6 million as of December 31, 2019. The Company expects to continue to incur
significant expenses and operating losses for the foreseeable future as its bispecific antibody candidates advance through discovery, pre-clinical
development and clinical trials and as it seeks regulatory approval and pursues commercialization of any approved bispecific antibody candidate.
As a result, the Company may need additional financing to support its continuing operations. Until the Company can generate significant revenue from
product sales, if ever, the Company expects to finance its operations through public equity offerings, debt financings, or other sources, which may include
collaborations with third parties and business development opportunities. Adequate additional financing may not be available to the Company on
acceptable terms, or at all. The Company’s inability to raise capital as and when needed would have a negative impact on its financial condition and ability
to pursue its business strategy. The Company will need to generate significant revenues to achieve profitability and may never do so.
Based on the Company’s current operating plan, the Company expects that its existing cash and cash equivalents and marketable securities of $241.8
million as of December 31, 2019 will be sufficient to fund its operations into 2022.
2. Summary of Significant Accounting Policies
Basis of Preparation
The Company prepared its consolidated financial statements in compliance with generally accepted accounting principles in the U.S. ("U.S. GAAP"). Any
reference in these notes to applicable guidance is meant to refer to authoritative U.S. GAAP as found in the Accounting Standards Codification ("ASC")
and Accounting Standards Update ("ASU") of the Financial Accounting Standards Board ("FASB").
Principles of Consolidation
Subsidiaries are entities controlled by the Company, consisting of Merus N.V.’s wholly owned subsidiary Merus US, Inc. The Company controls an entity
when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over
the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the
date on which control ceases. All significant intercompany balances and transactions have been eliminated in consolidation.
Functional and Presentation Currency
Items recorded in each of the Company’s entities are measured using the currency of the primary economic environment in which the entity operates (the
"functional currency"). Merus US, Inc.’s functional currency is the U.S. dollar. The functional currency of Merus N.V. is the euro. After measuring foreign
currency denominated transactions into an entity’s functional currency, to the extent that a subsidiary’s functional currency differs from its parent, a
subsidiary’s financial position and results of operations are translated into its parent’s functional currency. The Company’s consolidated financial position
and results of operations are translated into the U.S. dollar as the Company’s reporting currency.
Use of Estimates
The preparation of these consolidated financial statements in accordance with U.S. GAAP requires management to make estimates, judgments and
assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities, as of the date of the consolidated
financial statements, and the reported amounts of collaboration revenue and expenses during the reporting period. Actual results and outcomes may differ
materially from management’s estimates, judgments and assumptions.
F-7
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk include cash, cash equivalents, marketable securities and
accounts receivable. The Company attempts to minimize the risks related to cash, cash equivalents and marketable securities by working with highly rated
financial institutions that invest in a broad and diverse range of financial instruments as defined by the Company. The Company has established guidelines
relative to credit ratings and maturities intended to safeguard principal balances and maintain liquidity. The Company maintains its funds in accordance
with its investment policy, which defines allowable investments, specifies credit quality standards and is designed to limit the Company’s credit exposure to
any single issuer.
Accounts receivable represent amounts due from collaboration partners. The Company monitors economic conditions to identify facts or circumstances that
may indicate that any of its accounts receivable are at risk of collection.
Subsequent Events
The Company considers events or transactions that occur after the balance sheet date but before the consolidated financial statements are issued to provide
additional evidence relative to certain estimates or to identify matters that require additional disclosure. The Company evaluated all events and transactions
through the date these financial statements were filed with the Securities and Exchange Commission.
Fair Value Measurements
Fair value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer a liability in an
orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market
participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
•
•
•
Level 1 – Quoted market 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 – Quoted market prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in
markets that are not active, or other inputs that are observable, either directly or indirectly. Fair value determined through the use of models or
other valuation methodologies.
Level 3 – Significant unobservable inputs for assets or liabilities that cannot be corroborated by market data. Fair value is determined by the
reporting entity’s own assumptions utilizing the best information available and includes situations where there is little market activity for the
asset or liability.
The asset’s or liability’s fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair
value measurement. Our policy is to recognize transfers between levels of the fair value hierarchy in the period the event or change in circumstances that
caused the transfer. There were no transfers into or out of Level 1, 2, or 3 during the periods presented.
The Company considers its cash, cash equivalents, accounts receivable, marketable securities due with maturities 12 months or less, and accounts payable
financial instruments to reflect their fair value given their short maturity and risk profile of the counterparty.
Going Concern
At each reporting period, the Company evaluates whether there are conditions or events that raise substantial doubt about the Company’s ability to continue
as a going concern within one year after the date that the financial statements are issued. The Company is required to make certain additional disclosures if
it concludes substantial doubt exists and it is not alleviated by the Company’s plans or when its plans alleviate substantial doubt about the Company’s
ability to continue as a going concern.
The Company’s evaluation entails analyzing prospective operating budgets and forecasts for expectations of the Company’s cash needs, and comparing
those needs to the current cash, cash equivalent and marketable security balances. After considering the Company’s current research and development plans
and the timing expectations related to the progress of its programs, and after considering its existing cash, cash equivalents and marketable securities as of
December 31, 2019, the Company did not identify conditions or events that raise substantial doubt about the Company’s ability to continue as a going
concern within one year from the date these financial statements were issued.
Cash and Cash Equivalents
The Company considers all highly liquid debt securities with original final maturities of three months or less from the date of purchase to be cash
equivalents. Instruments subject to restrictions are not included in cash and cash equivalents.
F-8
Marketable Securities
The Company classifies marketable securities that are debt securities with a remaining maturity when purchased of greater than three months as held-to-
maturity as the Company has the positive intent and ability to hold such debt securities through maturity.
Debt securities that are classified as held-to-maturity are initially recognized and measured at fair value. Subsequent to initial recognition, they are
measured at amortized cost using the effective interest rate method. Interest income from these debt securities is included in interest income. Marketable
securities are classified as current if their expected maturity is within one year or less of the balance sheet date and non-current if their maturity is beyond
one year of the balance sheet date.
Accounts Receivable
Accounts receivable are amounts due from collaboration partners as a result of research and development services provided or milestones achieved but not
yet paid.
Allowance for Credit Losses
The Company evaluates its cash equivalents, accounts receivable and held-to-maturity marketable securities financial assets for expected credit losses.
Expected credit losses represent the portion of the amortized cost basis of a financial asset that an entity does not expect to collect. An allowance for
expected credit losses is meant to reflect a risk of loss even if remote, irrespective of the expectation of collection from a particular issuer or debt security.
The Company has not historically experienced any credit losses on any of its financial assets.
With respect to cash equivalents and accounts receivable, given consideration of their short maturity, historical losses and the current environment, the
Company concluded there is generally no expected credit losses for these financial assets. With respect to held-to-maturity marketable securities which are
comprised of debt securities, the Company evaluates expected credit losses on a pooled basis based on issuer-type which have similar credit risk
characteristics. The allowance for credit losses is immaterial for all periods presented.
Property and Equipment
The Company records property and equipment at cost. The Company calculates depreciation and amortization using the straight-line method over the
following estimated useful lives:
Asset Category
Laboratory equipment
Office furniture and equipment
Leasehold improvements
Useful Lives
5 years
5 years
Shorter of useful life or term of lease
The Company capitalizes expenditures for new property and equipment and improvements to existing facilities and charges the cost of maintenance to
expense. The Company eliminates the cost of property retired or otherwise disposed of, along with the corresponding accumulated depreciation or
amortization, from the related accounts, and the resulting gain or loss is reflected in the results of operations.
Intangible Assets
Intangible assets are identifiable non-monetary assets without physical substance. An asset is a resource that is controlled by the enterprise as a result of
past events (for example, purchase or self-creation) and from which future economic benefits (inflows of cash or other assets) are expected. The useful
lives of intangible assets are assessed to be definite-lived and amortized over the useful economic life. The Company’s intangible assets are comprised of
purchased licenses to intellectual property and software licenses.
Impairment of Long-Lived Assets
The Company reviews long-lived assets to be held and used, including property and equipment, operating lease right-of-use assets and definite-lived
intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be
recoverable.
Evaluation of recoverability is first based on an estimate of undiscounted future cash flows resulting from the use of the asset or asset group and its
eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the asset or asset group, the assets
are written down to their estimated fair values. No such impairments were recorded during 2019 or 2018.
F-9
Leases
The Company determines if an arrangement is or contains a lease at inception. For leases with a term of 12 months or less, the Company does not recognize
a right-of-use asset or lease liability. The Company does not have any finance leases.
Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to
make lease payments arising from the lease, and excludes non-lease payments. Operating lease right-of-use assets and liabilities are recognized at the lease
commencement date based on the present value of lease payments over the lease term. As the Company’s leases typically do not provide an implicit rate,
the Company uses an estimate of its incremental borrowing rate based on the information available at the lease commencement date in determining the
present value of lease payments.
Operating lease right-of-use assets also include the effect of any lease payments made and excludes lease incentives. The lease terms may include options
to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense is recognized on a
straight-line basis over the lease term.
The Company has real estate operating lease agreements with lease and non-lease components, which are generally accounted for separately as operating
lease costs and variable lease costs. Non-lease components in real estate leases refer to services provided by the lessor related to the premises. Fixed and
variable lease payments are both allocated to lease and non-lease components. The allocation is determined on a relative fair value basis of the services
provided relative to the operating lease of premises. With respect to equipment leases, the Company has elected not to allocate payments amongst lease and
non-lease components as a practical expedient as afforded under ASC 842, Leases.
Taxes
Deferred Taxes
The Company records deferred taxes to recognize the future effects of temporary differences between the tax basis and financial statement carrying amount
of assets and liabilities. The Company measures the deferred taxes using enacted tax rates expected to be in place when the temporary differences are
realized and records a valuation allowance to reduce deferred tax assets if it is determined that it is more likely than not that all or a portion of the deferred
tax asset will not be realized. The Company considers many factors when assessing the likelihood of future realization of deferred tax assets, including
recent earnings results, expectations of future taxable income, carryforward periods available, reversing temporary differences and other relevant factors.
The Company records changes in the required valuation allowance in the period that the determination is made.
Unrecognized Tax Benefits
The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon management’s evaluation of the
technical merits, facts, circumstances and information available as of the reporting date. For those tax positions where it is more likely than not that a tax
benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50.0% likelihood of being realized upon settlement
with a taxing authority having full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax
benefit will be sustained, the Company does not recognize a tax benefit in the financial statements. The Company records interest and penalties related to
an underpayment of income taxes, if applicable, as a component of income tax expense.
Revenue Recognition
The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the
entity expects to receive in exchange for those goods or services. To determine revenue recognition for an arrangement, the Company performs the
following five step analysis:
i.
ii.
identify the contract(s) with a customer;
identify the performance obligations in the contract;
iii.
determine the transaction price;
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 has entered into collaboration and license agreements, which are within the scope of ASC 606, Revenue from Contracts with Customers, to
discover, develop, manufacture and commercialize product candidates. The terms of these agreements typically contain multiple promises or obligations,
which may include: (i) licenses, or options to obtain licenses, to product candidates or future product candidates directed to specific targets (referred to as
“exclusive licenses”) and (ii) research and development activities to be
F-10
performed on behalf of the collaboration partner related to the licensed targets. The Company also derives revenue from government grants.
As part of the accounting for these arrangements, the Company must use judgment to determine:
a)
b)
c)
the number of performance obligations based on the determination under step (ii) above and whether those performance obligations are distinct
from other performance obligations in the contract;
the transaction price under step (iii) above; and
the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above.
The Company uses judgment to determine whether milestones or other variable consideration, except for sales-based royalties, should be included in the
transaction price as described further below. The transaction price is allocated to each performance obligation on a relative stand-alone selling price basis,
for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. In validating its estimated stand-alone
selling price, the Company evaluates whether changes in the key assumptions used to determine its estimated stand-alone selling price will have a
significant effect on the allocation of arrangement consideration between performance obligations.
Amounts received prior to revenue recognition are recorded as deferred revenue. Amounts expected to be recognized as revenue within the 12 months
following the balance sheet date are classified as current portion of deferred revenue in the accompanying consolidated balance sheets. Amounts not
expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion.
Amounts recognized as revenue, but not yet received or invoiced are generally recognized as unbilled receivables.
Exclusive Licenses
If the license to the Company’s intellectual property is determined to be distinct from the other promises or performance obligations identified in the
arrangement, which generally include research and development services, the Company recognizes revenue from non-refundable, upfront fees allocated to
the license when the license is transferred to the customer and the customer is able to use and benefit from the license.
In assessing whether a license is distinct from the other promises, the Company considers relevant facts and circumstances of each arrangement, including
the rights and obligations set out in the contract, the research and development capabilities of the collaboration partner and the availability of the associated
expertise in the general marketplace. In addition, the Company considers whether the collaboration partner can benefit from the license for its intended
purpose without the receipt of the remaining promises, whether the value of the license is dependent on the unsatisfied promises, whether there are other
vendors that could provide the remaining promises, and whether it is separately identifiable from the remaining promises.
For licenses that are combined with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to
determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring
progress for purposes of recognizing revenue.
The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue
recognition. The measure of progress, and thereby periods over which revenue should be recognized, are subject to estimates by management and may
change over the course of the research and development and licensing agreement.
The Company’s arrangements may provide the collaboration partner with the right to select a target for licensing either at the inception of the arrangement
or in the future. Under these arrangements, fees may be due to the Company (i) at the inception of the arrangement as an upfront fee or payment, (ii) upon
the exercise of an option to acquire a license or (iii) upon extending the selection period as an extension fee or payment. If an arrangement is determined to
contain customer options that allow the customer to acquire additional goods or services, the goods and services underlying the customer options are not
considered to be performance obligations at the outset of the arrangement, as they are contingent upon option exercise. The Company evaluates the
customer options for material rights, or options to acquire additional goods or services for free or at a discount. If the customer options are determined to
represent a material right, the material right is recognized as a separate performance obligation at the inception of the arrangement. The Company allocates
the transaction price to material rights based on the relative stand-alone selling price, which is determined based on the identified discount and the
probability that the customer will exercise the option. Amounts allocated to a material right are not recognized as revenue until, at the earliest, the option is
exercised or expires.
For arrangements that include sales-based milestones and royalties, and the license is deemed to be the predominant item to which the royalties relate, the
Company recognizes revenue at the later of (i) when the related sales occur or (ii) when the performance obligation to which some or all of the royalty has
been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any sales-based milestones or royalty revenue resulting
from any of its arrangements.
F-11
Research and Development Services
The promises under the Company’s collaboration and license agreements generally include research and development services to be performed by the
Company on behalf of the collaboration partner. For performance obligations that include research and development services, the Company recognizes
revenue allocated to such performance obligations based on an appropriate measure of progress. The Company utilizes judgment to determine the
appropriate method of measuring progress for purposes of recognizing revenue, which is generally an input measure such as costs incurred. The Company
evaluates the measure of progress each reporting period as described under Exclusive Licenses above.
Reimbursements from the partner are evaluated as to whether the Company acts as a principal or an agent in such relationships. The Company evaluates
whether control over the underlying goods or services were obtained prior to transferring these goods or services to the collaboration partner. Where the
Company does not control the goods or services prior to transferring these goods or services to the collaboration partner, such reimbursements are
presented net of costs.
At the inception of each arrangement that includes development milestone payments in respect of development efforts, the Company evaluates whether the
development 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 development milestone value is included in the
transaction price. Development milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not
considered probable of being achieved until those approvals are received. The Company evaluates factors such as the scientific, clinical, regulatory,
commercial, and other risks that must be overcome to achieve the particular development milestone in making this assessment. There is judgment involved
in determining whether it is probable that a significant revenue reversal would not occur.
At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of all development milestones subject to
constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which
would affect revenues and earnings in the period of adjustment. If a milestone or other variable consideration relates specifically to the Company’s efforts
to satisfy a single performance obligation or to a specific outcome from satisfying the performance obligation, the Company generally allocates the
milestone amount entirely to that performance obligation once it is probable that a significant revenue reversal would not occur.
Government Grants
The Company receives certain government and regional grants, which support its research efforts in defined projects, and include contributions towards the
R&D cost. When there is reasonable assurance that the Company will comply with the conditions attached to a received grant, and when there is reasonable
assurance that the grant will be received, government grants are recognized as revenue on a gross basis in the consolidated statement of profit or loss and
comprehensive loss on a systematic basis over the periods in which the Company recognizes expenses for the related costs for which the grants are
intended to compensate. In the case of grants related to assets, the received grant will be deducted from the carrying amount of the asset. Government grant
revenue may be subject to review by a government authority in periods subsequent to their recognition and may result in the reversal of grant revenue
previously recognized. Reversals of grant revenue are presented as contra revenue in the consolidated statement of operations.
Research and Development Expenses
Research and development expenses are expensed as incurred. Research and development expenses are comprised of costs incurred in providing research
and development activities, including salaries and benefits, facilities costs, overhead costs, contract research and development services, and other outside
costs. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the
activity has been performed or when the goods have been received rather than when the payment is made.
When third-party service providers’ billing terms do not coincide with the Company’s period-end, the Company is required to make estimates of its
obligations to those third parties, including clinical trial and pharmaceutical development costs, contractual services costs and costs for supply of its
product candidates incurred in a given accounting period and record accruals at the end of the period. The Company bases its estimates on its knowledge of
the research and development programs, services performed for the period, past history in conducting similar activities and the expected duration of the
third-party service contract, among other considerations.
The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be
instances in which payments made to vendors will exceed the level of services provided and result in a prepayment of research and development expenses.
The WBSO (afdrachtvermindering speur- en ontwikkelingswerk) is a Dutch fiscal facility that provides subsidies to companies, knowledge centers and
self-employed people who perform research and development activities (as defined in the WBSO Act). Under this act, a contribution is paid towards the
labor costs of employees directly involved in research and development. For the year ended December 31, 2019 and 2018, the Company recognized $4.5
million and $5.0 million as a reduction of research and development expenses, respectively.
F-12
Share-Based Payments
The Company measures employee share-based compensation based on the grant date fair value of the share-based compensation award. The Company
grants stock options at exercise prices equal to the fair value of the Company’s common stock on the date of grant, based on observable market prices.
For share-based payments subject time-based vesting, the Company recognizes employee stock-based compensation expense on a straight-line basis over
the requisite service period of the awards, generally from the date of grant through each vesting date. The Company recognizes forfeitures at the time they
occur. The actual expense recognized over the vesting period will only represent those options that vest; the effect of forfeitures in the recognition of
periodic compensation expense are not estimated prior to their occurrence.
Earnings (Loss) per Share
The Company computes basic earnings (loss) per share by dividing income (loss) allocable to common stockholders by the weighted average number of
shares of common stock outstanding. During periods of income, the Company allocates participating securities a proportional share of income determined
by dividing total weighted average participating securities by the sum of the total weighted average common shares and participating securities. During
periods of loss, the Company allocates no loss to participating securities because they have no contractual obligation to share in the losses of the Company.
The Company computes diluted earnings (loss) per share after giving consideration to the dilutive effect of stock options and restricted stock units (“RSU”)
that are outstanding during the period, except where such non-participating securities would be anti-dilutive.
Segment Information
The Company operates in one reportable segment, which comprises the discovery and development of innovative bispecific therapeutics.
Pending Accounting Pronouncements
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 new guidance aligns the requirements for capitalizing
implementation costs incurred in a cloud-based 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). This ASU is effective for the
Company at the beginning of fiscal 2021, including interim periods within that reporting period, although early adoption is permitted. The Company does
not expect the impact of adoption to be significant.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808), which clarifies that certain transactions between
collaborative arrangement participants should be accounted for as revenue when the collaborative arrangement participant is a customer in the context of a
unit of account and precludes recognizing as revenue consideration received from a collaborative arrangement participant if the participant is not a
customer. The ASU will be effective for the Company in the first quarter of fiscal 2021, with early adoption permitted. As of December 31, 2019, none of
the Company’s arrangements fall within the scope of ASC 808. However, as the Company may engage in future collaborative arrangements in the future,
this ASU may apply to those new arrangements.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
along with subsequent related updates which replaces the existing incurred loss impairment methodology with an expected credit loss methodology and
requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates and amends disclosure requirements. As
permitted under this ASU, the Company has early-adopted this ASU, applied retrospectively to all periods presented.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and
Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral
for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a
Scope Exception. Among other changes described in the ASU, Part I changes the classification analysis of certain equity-linked financial instruments (or
embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity
instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. As a
result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair
value as a result of the existence of a down round feature. Prior to the earliest period presented in these consolidated financial statements and prior to the
initial public offering of securities in which all such instruments were converted or exchanged for common shares, the Company issued instruments that
involved down round features. As permitted under this ASU, the Company has early-adopted this ASU, applied retrospectively to all periods presented.
F-13
In June 2018, the FASB issued ASU 2018-07, Improvements to Non-employee Share-Based Payment Accounting (Topic 718). The ASU expands the scope
of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. The standard aligns measurement and
classification guidance for share-based payments to non-employees with the guidance applicable to employees. The ASU was early-adopted by the
Company and is reflected in these consolidated financial statements, applied retrospectively to all periods presented.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820); Disclosure Framework—Changes to the Disclosure Requirements
for Fair Value Measurement. This ASU modified disclosure requirements to remove, modify and add certain disclosures with an aim to improve disclosure
effectiveness. The ASU was early-adopted by the Company and is reflected in these consolidated financial statements, applied retrospectively to all periods
presented.
In November 2019, the FASB issued ASU 2019-08, Compensation—Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic
606), Codification Improvements—Share-Based Consideration Payable to a Customer. This ASU requires that an entity measure and classify share-based
payment awards granted to a customer by applying the guidance in Topic 718. The amount recorded as a reduction of the transaction price is required to be
measured on the basis of the grant-date fair value of the share-based payment award in accordance with Topic 718. The ASU was early-adopted by the
Company and is reflected in these consolidated financial statements, applied retrospectively to all periods presented.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740); Simplifying the Accounting for Income Taxes. Among the amendments in
this ASU were amendments to simplify the accounting for income taxes by (1) removing the exception to the general methodology for calculating income
taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year; and (2) requiring that an entity reflect the effect of an enacted
change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. Other aspects of this ASU are
not expected to have an impact on the Company’s financial statements in the current or future periods. The Company early-adopted this ASU and is
reflected in these consolidated financial statements.
3. Investments in Debt Securities
Debt securities are classified in the consolidated balance sheet as follows:
Cash equivalents
Current marketable securities
Non-current marketable securities
Total
The following table summarizes debt securities by maturity at December 31, 2019 (in thousands):
Maturity
Within one year
After one year through five years
Total
The following table summarizes debt securities by credit-quality indicator:
December 31,
2019
Balance
2018
Balance
(in thousands)
34,053 $
42,153
2,009
78,215 $
23,457
70,761
—
94,218
$
$
Amortized Cost
76,206
2,009
78,215
$
$
Money market funds
Corporate paper and notes
U.S. government agency securities
U.S. treasuries
Total
Credit Quality Indicator as of December 31, 2019
AAA
AA- to AA+
A- to A+
Total
$
$
34,053 $
—
—
—
34,053 $
(In thousands)
— $
11,550
3,987
1,496
17,033 $
— $
27,129
—
—
27,129 $
34,053
38,679
3,987
1,496
78,215
The credit quality indicator was derived from publicly available ratings published by Moody’s or a comparable credit rating agency, last updated as of
December 31, 2019.
F-14
The following table summarizes the fair value of debt securities by major security type held at December 31, 2019 (in thousands):
Description
Money market funds
Corporate paper and notes
U.S. government agency securities
U.S. treasuries
Total
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
$
$
34,053 $
38,679
3,987
1,496
78,215 $
— $
32
7
2
41 $
— $
(2)
—
—
(2) $
34,053
38,709
3,994
1,498
78,254
The following table summarizes the fair value of debt securities by major security type held at December 31, 2018 (in thousands):
Description
Money market funds
Term deposits
Corporate paper and notes
U.S. government agency securities
U.S. treasuries
Total
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
$
$
4,463 $
18,000
62,066
1,980
7,709
94,218 $
— $
—
—
—
—
— $
— $
—
(86)
—
(1)
(87) $
4,463
18,000
61,980
1,980
7,708
94,131
The allowance for credit losses applicable to debt securities was immaterial in all periods presented.
Fair Value
The fair value of money market funds is determined based on publicly available market price for these funds (Level 1). The fair value of other debt
securities is determined based on the publicly available inputs which includes a market price for the same or similar instruments adjusted for estimates in
interest yield (Level 2).
4. Prepaid Expenses and Other Assets
Prepaid expenses and other current assets consisted of the following:
Prepaid clinical and manufacturing costs
Interest receivable
Other
Total
December 31,
2019
2018
(In thousands)
2,779 $
259
1,913
4,951 $
2,106
244
2,383
4,733
$
$
Restricted cash included in other assets totaled $0.2 million and $0.1 million as of December 31, 2019 and 2018, respectively. The nature of the restriction
relates to amounts held as collateral for a credit card borrowing arrangement.
5. Property and Equipment, net
Property and equipment, net consists of the following:
Laboratory equipment
Office equipment and furniture
Leasehold improvements
Property and equipment
Less: accumulated depreciation and amortization
Property and equipment, net
December 31,
2019
2018
(In thousands)
4,538 $
1,186
79
5,803
(2,088)
3,715 $
3,159
713
40
3,912
(1,206)
2,706
$
$
Depreciation and amortization expense was $0.9 million, and $0.6 million for the years ended December 31, 2019, and 2018, respectively. Property and
equipment are predominantly located in the Netherlands.
F-15
6. Intangible assets, net
Intangible assets, net consists of the following:
Licenses of intellectual property
Software licenses
Intangible assets
Less: accumulated amortization
Intangible assets, net
December 31,
2019
2018
(In thousands)
3,568 $
264
3,832
(956)
2,876 $
3,532
65
3,597
(733)
2,864
$
$
Amortization expense was $0.2 million and $0.1 million for the years ended December 31, 2019, and 2018, respectively. Intangible assets are
predominantly located in the Netherlands.
Amortization expense over the next five years are expected to be as follows (in thousands):
Year
Expected
amortization
2020
2021
2022
2023
2024
Thereafter
Total remaining value
7. Accrued Expenses
Accrued expenses consisted of the following:
Accrued research and development expenses
Accrued general and administrative expenses
Accrued personnel costs
Other
Accrued expenses
8. Taxes
The components of loss from operations before income taxes are as follows:
United States
Netherlands
Total loss before income taxes
F-16
$
$
269
269
269
206
200
1,663
2,876
December 31,
2019
2018
(In thousands)
6,618 $
2,402
4,495
21
13,536 $
5,048
2,891
2,386
61
10,386
$
$
Year ended December 31,
2018
2019
(In thousands)
$
$
(1,363) $
(53,594)
(54,957) $
(2,731)
(25,374)
(28,105)
The components of the income tax expense (benefit) from continuing operations are as follows:
U.S. federal
U.S. state
Total current tax expense
U.S. federal
U.S state
Total deferred tax benefit
Total tax expense
December 31,
2019
2018
(In thousands)
243 $
40
283 $
(63) $
(26)
(89) $
251
166
417
(150)
(62)
(212)
194 $
205
$
$
$
$
$
The parent company is subject to income tax in the Netherlands where a greater proportion of economic activity is attributed. A reconciliation of the
Netherlands statutory income tax rate to the Company’s effective income tax rate is as follows:
Netherlands statutory income tax rate
U.S. tax rate differential
Changes in tax rates
Non-deductible expenses
Other
Change in valuation allowance
Effective income tax rate
Year Ended December 31,
2018
2019
25.0%
—
1.5
(3.7)
0.1
(23.3)
(0.4)%
25.0%
(0.1)
(35.9)
(8.7)
—
19.0
(0.7)%
In 2018, Dutch tax authorities enacted new tax rates. The effect of the change in the valuation allowance each year reflects the increase or decrease in the
valuation allowance against deferred tax assets attributable to the Netherlands.
The components of the Company’s deferred tax assets (liabilities) consist of the following:
December 31,
2019
2018
(In thousands)
Deferred tax assets:
Net operating loss carryforwards
Deferred revenue
Lease obligation
Accrued expenses and other
Total deferred tax assets
Deferred tax asset valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Operating lease right-of-use assets
Other
Total deferred tax liabilities
$
$
33,917 $
23,926
1,333
319
59,495
(57,876)
1,619
1,331 $
—
1,331
Net deferred tax asset
$
288 $
17,798
26,814
551
206
45,369
(44,643)
726
520
7
527
199
After consideration of all positive and negative evidence, we believe that it is more-likely-than-not that our Netherlands deferred tax assets will not be
realized that are not supported by reversing temporary differences. As a result, we established a valuation allowance of $57.9 million and $44.6 million as
of December 31, 2019 and 2018, respectively. The increase in the valuation allowance of $13.2 million and $5.3 million is primarily attributable to the
increase in net operating loss carryforward deferred tax assets for which a full valuation allowance applies and change in tax rates in 2018, respectively. As
of December 31, 2019, the portion of the valuation allowance for deferred tax assets for which subsequently recognized tax benefits would be credited
directly to contributed capital totaled $1.4 million.
F-17
As of December 31, 2019, the Company did not have any net operating losses for US federal or state income tax purposes. The Company had net operating
loss carryforwards for Dutch income tax purposes, the amount and expiry are as follows (in thousands):
Expiry Year
2024
2025
2026
2027
Total
Netherlands Tax
Loss Carryforward
21,174
100,864
—
34,263
156,301
$
$
As of December 31, 2019, the Company had no unrecognized tax benefits. As of December 31, 2019, the Company had no accrued interest or penalties
related to underpayments of income taxes and no amounts have been recognized in the consolidated statements of operations. The Company will recognize
interest and penalties related to an underpayment of income taxes in income tax expense.
The Company files income tax returns in the U.S. federal and Massachusetts jurisdictions as well as in the Netherlands. The statute of limitations for
assessment by the Internal Revenue Service (IRS), and Massachusetts tax authorities is closed for tax years prior to 2016. The statute of limitations for
assessment by the Netherlands tax authorities is closed for tax years prior to 2014. The Company is not currently under examination by the IRS or any
other jurisdictions for any tax years.
9. Operating Leases
Merus N.V. leases its corporate headquarters under an agreement term of five years, which expires in the fourth quarter of 2021. On May 1, 2018, Merus
N.V. leased additional space to expand its corporate headquarters under a separate agreement. Under the terms of the new agreement, the term began on
May 1, 2018 and expires in the fourth quarter of 2021. If the leases are not terminated by Merus N.V., they will be automatically renewed for a period of
two years. Given the Company’s current plans, the renewal term has not been included in the estimate of the lease term. Fixed lease payments increase
annually and include an increase based on an inflationary measure. Variable payments include amounts due to the lessor for additional services and cost
reimbursements.
In March 2019, Merus US, Inc. entered into a lease agreement for office space in Cambridge, Massachusetts. The lease commenced in the second quarter
of 2019 and has a term of seven years, and may be extended for another five years. Given the Company’s current plans, the renewal term has not been
included in the estimate of the lease term. Fixed lease payments increase annually and include an increase on an inflationary measure. Variable payments
include amounts due to the lessor for additional services and cost reimbursements.
The Company’s operating leases relate to its real estate leases that are not classified as finance leases.
In July 2019, the Company entered into a lease with Kadans Science Partner XII B.V. (“Kadans”), pursuant to which the Company agreed to lease
approximately 5,070 square meters of office and laboratory space in a new multi-tenant office building that is to be constructed in Utrecht, the Netherlands.
The initial term of the lease is ten years from the date that the premises are completed in accordance with certain specifications provided in a development
agreement (described below), which is expected to occur in mid-2022. The lease will renew for two 5-year terms following the initial term, unless earlier
terminated by the Company or Kadans, except that the earliest Kadans may terminate the lease is 20 years from the completion date. The lease provides for
an estimated initial rent of approximately €1.3 million per annum. The rent amount is subject to adjustment based on the consumer price index (the “CPI”)
beginning on January 1, 2019 through the completion date and then annually thereafter, subject to certain limitations if the CPI is greater than 3.0%. The
final initial rent amount is contingent upon, among other things, the parameters of the final constructed premises, the final floor area, and the CPI
adjustment described above, and will be determined upon the completion date and recorded in a first rider, signed by the Company and Kadans, to the
lease. The Company is also responsible for certain fit-out costs and service fees related to the premises.
In July 2019, the Company also entered into a development agreement with Kadans and another party, Genmab B.V., which provides for the design,
development and construction of the new multi-tenant office building of which the premises is a part.
F-18
The components of lease cost recorded in the Company’s consolidated statement of operations and statement of cash flows were as follows:
Operating lease cost
Variable lease cost
Total lease cost included in operating expenses
Cash paid to lessors included in operating cash outflows
For the Year
Ended December 31,
2018
2019
(In thousands)
1,386 $
297
1,683 $
834
177
1,011
2,273 $
1,199
$
$
$
The Company’s non-lease cost and other costs paid to the lessor are primarily related to services provided by the lessor in operating the premises that
includes fees, operating costs, taxes and insurance related to the leased premises.
Maturities of the Company’s operating lease obligations as of December 31, 2019 were as follows (in thousands):
Year
Operating
Leases
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: amount representing interest
Total lease obligations
$
$
1,602
1,495
614
630
645
884
5,870
(618)
5,252
The weighted-average remaining lease terms and discount rates related to the Company’s leases were as follows:
Weighted-average remaining operating lease term (in years)
Weighted-average discount rate for operating leases
4.8
5.0%
2.8
6.0%
As of December 31,
2019
2018
10. Commitments and Contingencies
Indemnities
The Company indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s
request in such capacity. The maximum potential amount of future payments the Company could be required to make is unlimited; however, the Company
has directors’ and officers’ insurance coverage that is intended to limit its exposure and enable it to recover a portion of any future amounts paid.
The Company enters into certain agreements with other parties in the ordinary course of business that contain indemnification provisions. These typically
include agreements with directors and officers, business partners, contractors, landlords, clinical sites and customers. Under these provisions, the Company
may indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities,
such as gross negligence, willful misconduct or at times, other activities. These indemnification provisions may survive termination of the underlying
agreements. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions may be
unlimited. However, to date the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As
a result, the estimated fair value of these obligations is minimal. Accordingly, the Company did not have any liabilities recorded for these obligations as of
December 31, 2019.
F-19
Litigation
On March 11, 2014, Regeneron Pharmaceuticals, Inc. (“Regeneron”) filed a complaint in the U.S. District Court for the Southern District of New York,
alleging that the Company was infringing one or more claims in Regeneron’s U.S. Patent No. 8,502,018, entitled “Methods of Modifying Eukaryotic
Cells.” On December 20, 2018, the Company signed a global settlement and cross-license agreement with Regeneron, where the parties have agreed to end
all pending litigation and opposition proceedings pertaining to the Company’s and Regeneron’s respective antibody generation technologies. Regeneron
also purchased 600,000 of the Company’s common shares at a price of $25 per share for total aggregate proceeds of $15.0 million. The cross-license and
stock purchase were made in conjunction with the agreement to withdraw Regeneron’s appeal of the fee award, and agreement to dismissal of all claims to
approximately $10.5 million for the reimbursement of attorneys’ fees and other expenses, plus interest, awarded to Merus by the trial court. Under the
terms of the settlement, Regeneron has withdrawn its appeal of the decision awarding attorneys’ fees to the Company as a result of the U.S. District Court
litigation described above. In addition, Regeneron has dismissed its stayed case in the Netherlands asserting the EP 1 360 287 B1 patent, and both parties
have withdrawn all pending oppositions as of December 20, 2018. As a result of the settlement, the Company recognized a gain of $8.1 million included in
other income in the consolidated statement of operations and comprehensive loss for the year ended December 31, 2018.
On April 5, 2018, an unnamed third party and Regeneron Pharmaceuticals Inc. or Regeneron filed notices of opposition against the Company’s EP 2604625
patent, entitled “Generation of Binding Molecules,” in the European Opposition Division of the European Patent Office (the “EPO”). The notices asserted,
as applicable, added subject matter, lack of novelty, lack of inventive step, and insufficiency. Regeneron withdrew its opposition pursuant to a global
December 20, 2018 settlement with Merus. On August 20, 2018, the Company timely responded to these submissions with respect to the unnamed third
party. An opposition hearing was held in June 2019, wherein the EPO revoked the EP 2604625 patent in its entirety under Art. 123(2) EPC. We timely
appealed that decision in December 2019 before the Technical Board of Appeals for the EPO seeking reinstatement of the patent and proposing auxiliary
requests for certain amended claims, with further proceedings to be scheduled in the future. As this opposition proceeding continues, the Company cannot
be certain that the Company will ultimately prevail.
From time to time, the Company may be involved in various other claims and legal proceedings relating to claims arising out of the Company’s operations.
The Company is not currently a party to any other material legal proceedings.
11. Stockholders’ Equity
Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are
entitled to dividends when and if declared by the board of directors.
Private Placement of Common Shares
On February 13, 2018, the Company entered into the Purchase Agreement. Pursuant to the Purchase Agreement, the Company agreed to sell an aggregate
of 3,099,997 of its common shares to the Investors at a purchase price equal to $18.00 per share. The Purchase Agreement contains customary
representations and warranties from the Company and the Investors and customary closing conditions. On February 15, 2018, the Company completed the
sale under the Private Placement and received net proceeds of approximately $55.1 million.
Share Subscription Agreement with Regeneron
On December 20, 2018, the Company entered into a share subscription agreement (the “Regeneron Subscription Agreement”) with Regeneron
Pharmaceuticals, Inc. (“Regeneron”). Pursuant to the Regeneron Subscription Agreement, the Company agreed to sell an aggregate of 600,000 of its
common shares to Regeneron at a purchase price equal to $25.00 per share. On December 21, 2018, the Company completed the sale under the Regeneron
Subscription Agreement and received gross proceeds of $15.0 million. Accordingly, the Company recorded the common shares issued at the fair value of
the underlying securities on the date of issuance. The difference between the total proceeds received of $15.0 million, and the aggregate value of common
shares issued of $6.9 million, was recorded as other income of $8.1 million relating to the litigation settlement during the year ended December 31, 2018.
Public Share Offerings
On November 7, 2019, the Company completed an underwritten public offering in which the Company sold 5,462,500 common shares, including 715,500
common shares pursuant to the underwriters’ option to purchase additional shares, at a price to the public of $14.50 for aggregate net proceeds of $74.0
million.
F-20
Equity Compensation Plan
As of January 1, 2020, a total of 1,901,162 shares of common stock were reserved for additional grants of stock awards under the Company’s 2016
Incentive Award Plan. Stock-based compensation expense related to the equity compensation plan is more fully described in Note 13, Employee Benefit
Plans.
12. Collaborations
Incyte
In December 2016, pending regulatory clearance, Incyte agreed to pay the Company a $120.0 million, non-refundable upfront payment, and purchased 3.2
million common shares at a stated price per share of $25.00, for an aggregate purchase price of $80.0 million. In exchange, the Company granted Incyte
with a license to certain of its intellectual property and committed to collaborate with Incyte to research, discover and develop monospecific or bispecific
antibodies utilizing the Company’s proprietary bispecific technology platform. The collaboration is managed by a joint steering committee in which both
parties are represented and is tasked with overseeing the activities which significantly contributes to the collaboration. The collaboration may encompass
up to 11 product candidates that result from the Company’s application of its proprietary Biclonics® technology platform. During the course of the initial
research term, Merus proposes product candidates to Incyte, which evaluates whether to designate proposed product candidates from the Company to make
a selection for further research. Proposed product candidates begin at a pre-clinical stage of development. Incyte has certain rights to replace product
candidates, including the right to substitute a product candidate after initial selection. The Company would be entitled to future consideration in the form of
cost reimbursements for research services, development milestones, commercialization milestones and royalties related to the programs under the
arrangement.
At inception of the collaboration, two potential bispecific product candidates were under preliminary evaluation. After further research, a lead candidate
was ultimately selected for the first product candidate, designated MCLA-145, and the other potential product candidate was not pursued. For the
designated product candidate (MCLA-145), the Company retains the exclusive right to develop and commercialize products and product candidates in the
United States, while Incyte has the exclusive right to develop and commercialize products and product candidates arising from such program outside the
United States. For MCLA-145, the parties will conduct and share equally the costs of mutually agreed global development activities and will be solely
responsible for independent development activities in each party’s respective territories. For all other programs under the arrangement to be selected by
Incyte, Incyte will be responsible for all research, development and commercialization costs. The Company may elect to co-fund the development of
certain of the other programs in the future, in which case costs and benefits would be shared. The Company has not elected to co-fund any programs to
date.
At inception of the arrangement, the Company identified a performance obligation comprised of a combined delivery of a license and related activities,
including the activities of the joint steering committee, to which to allocate consideration. The arrangement also allowed for optional future research
services to advance selected product candidates through discovery and research. The transaction price was comprised of fixed consideration of an upfront
payment of $120.0 million and proceeds from the sale of shares of $80.0 million. All other consideration under the arrangement was determined to be
variable consideration and fully constrained at inception. $152.6 million of the transaction price was allocated to the license and related activities
performance obligation after accounting for the purchase of common shares by Incyte.
On January 23, 2017, the Company completed the sale of shares and exchange of the license. The Company initially deferred the transaction price allocated
to the license and related activities performance obligation as deferred revenue, to be recognized as revenue over time as the primary benefit of the license
to Incyte is access to the platform for the generation of potential product candidates. Development milestones, commercialization milestones and royalties
are variable consideration, fully constrained, to be recognized in future periods in accordance with the Company’s revenue recognition policy. Cost
reimbursements for research services are recognized as they are performed over time as these are considered a separate performance obligation.
At December 31, 2019, the Company is currently engaged in research and development activities for MCLA-145 and developing candidates for the other
programs. No development or commercialization milestones have been achieved to date.
ONO
On March 14, 2018, the Company granted ONO an exclusive, worldwide, royalty-bearing license, with the right to sublicense, research, test, make, use and
market bispecific antibody candidates based on the Company’s Biclonics® technology platform against two undisclosed targets directed to a particular
undisclosed target combination. ONO is responsible for identifying lead candidates and conducting further non-clinical and clinical development activities
for such licensed bispecific antibodies and pharmaceutical products containing such antibodies, including manufacture and process development.
Additionally, ONO controls and has exclusive rights over the worldwide commercialization of any approved products, including worldwide supply, and is
solely responsible for all costs and expenses related to commercialization. ONO has also agreed to fund the Company’s research and development activities
and be responsible for the payment of all costs and expenses for its own research and development activities, which are set out in a mutually
F-21
agreed upon research plan. The Company retains all rights to use and commercialize any antibodies that are generated under the collaborative research
program, excluding the up to five lead and/or selected antibodies against the targets ONO is pursuing, provided that the use and commercialization is not
with respect to the particular target combination. ONO agreed to pay the Company an upfront, non-refundable payment of €0.7 million. In addition, the
Company was entitled to €0.3 million intended to compensate the Company for research services already completed upon entering into the agreement, and
€0.2 million to be paid to the Company over time for full time equivalent funding. The Company is entitled to research and development milestones in
addition to royalties on future sales. The Company identified performance obligations for: (1) provision of a license for the target combination, and (2)
research and development services. The Company concluded that Ono would be able to develop and benefit from the license, independent of the research
and development services. The research and development services are capable of being performed by third parties with an appropriate sub-license, and are
recognized over time as these services are delivered. Milestone payments are fully constrained as variable consideration to be recognized in future periods
in accordance with the Company’s revenue recognition policy.
On March 3, 2016, the Company was engaged to perform manufacturing services for Ono in support of their clinical trials that was the subject of a prior
arrangement with Ono initiated in 2014. The Company was entitled to compensation to oversee and support a manufacturing process with the use of an
outside third-party and to deliver quantities of manufactured product. The Company identified one performance obligation to provide manufacturing
supervision services involving the transfer of know-how and the development of a manufacturing process with the third-party and three performance
obligations related to the services provided in connection with the delivery of product each having separate and distinct requirements. The Company acts as
an agent for Ono with respect to the third-party manufacturing costs incurred for the underlying product and presents the recovery of such costs net in
research and development expense in the consolidated statement of operations.
The Company received €3.7 million (approximately $4.1 million) for the year ended December 31, 2019 for development milestones received from Ono
based on their progress. The amounts are recognized as revenue in the consolidated statement of operations. Research and development services were
completed in 2018. The Company recognized €4.0 million (approximately $4.7 million) of the transaction price as revenue in the year ended December 31,
2018 mainly related to the three performance obligations for the services provided in connection with the delivery of product completed in the period.
Simcere
In January 2018, the Company granted Simcere an exclusive license to develop and commercialize three bispecific antibodies to be produced by Merus
utilizing the Company’s Biclonics® technology platform in the area of immuno-oncology in China. The Company will retain all rights outside of China.
The Company has agreed to lead research and discovery activities, while Simcere has agreed to be responsible for the Investigational New Drug (“IND”)
enabling studies, clinical development, regulatory filings and commercialization of these product candidates in China. The Company received an upfront,
non-refundable payment of $2.75 million, relating to three separate research programs. The Company may be entitled to future development milestone
payments.
At inception of the arrangement, the Company identified three performance obligations comprised of the combined delivery of a license and performance
of research and development activities with respect to each program. The Company performs research and development activities to achieve candidate
nomination. The Company concluded that these activities were not distinct from the underlying license for each program as Simcere would not be able to
benefit from the license apart from research and development activities at this phase of development.
The transaction price under the arrangement comprised fixed consideration of $2.75 million. The transaction price was allocated to each separate
performance obligation on a relative standalone fair value basis. The Company deferred the portion of the upfront payment allocated to the three
performance obligations as deferred revenue, to be recognized over time. Compensation for research and development services prior to candidate
nomination are allocated to each program performance obligation and also recognized over time. Development milestone payments allocated to each of the
program performance obligations are constrained as variable consideration to be recognized in future periods in accordance with the Company’s revenue
recognition policy.
At December 31, 2019, research and development for two of the three programs is on-going.
Betta
On December 10, 2018, the Company granted Betta an exclusive license to develop and commercialize in China MCLA-129, a proprietary Biclonics®
produced by its Biclonics® technology platform. The Company retains all rights outside of China. Betta has agreed to retain a contract manufacturing
organization with experience in filing IND applications with U.S. regulatory authorities and CTAs with European regulatory authorities in order to produce
clinical trial materials for the Chinese market and rest of the world. As a key strategic component of the collaboration, Betta will be responsible for IND
enabling studies and manufacturing of clinical trial materials in China, which the Company intends to use to assist regulatory filing and early stage clinical
development in the rest of the world.
F-22
In addition to a non-refundable upfront payment of $1.0 million, Betta and the Company will share equally the cost of the transfer of the manufacturing
technology to a contract manufacturing organization. The Company is also eligible to receive an aggregate of $12.0 million in milestone payments
contingent upon Betta achieving certain specified development and commercial goals as well as tiered royalty payments of net sales of any products
resulting from the collaboration in China.
The Company identified a single combined performance obligation, being the delivery of the MCLA-129 license including activities necessary to complete
the technology transfer. The Company had no other commitments. The transaction price is comprised of fixed consideration of $1.0 million and fully
allocated to the single performance obligation which would be fulfilled at a point in time. The technology transfer to deliver the license was completed in
2018 and Company recognized the revenue related to this performance obligation of $1.0 million as revenue for the year ended December 31, 2018.
Development milestone payments allocated to the performance obligation are constrained as variable consideration to be recognized in future periods in
accordance with the Company’s revenue recognition policy.
Contract Assets, Liabilities, Revenues and Expenses
The following tables provide amounts by year indicated and by line item included in the Company's accompanying consolidated financial statements
attributable to transactions arising from its collaboration arrangements. The dollar amounts in the tables below are in thousands.
Related Party
Incyte
Ono
Third Party
Other
Total
Contract assets
Accounts receivable
Balance at January 1, 2019
Billings
Cash receipts
Foreign exchange
Balance at December 31, 2019
Unbilled receivables
Balance at January 1, 2019
Accrued receivables
Billings
Foreign exchange
Balance at December 31, 2019
Contract liabilities
Deferred revenue
Balance at January 1, 2019
Cash receipts
Revenue recognized in the period
Foreign exchange
Balance at December 31, 2019
Less: current portion
Non-current balance at December 31, 2019
$
—
8,480
(8,511)
31
—
$
2,982
7,270
(8,480)
(61)
1,711
$
128,871
—
(17,839)
(2,494)
108,538
(17,901)
90,637
$
70
4,504
(3,788)
—
786
$
270
4,239
(4,504)
(5)
—
$
543
—
(196)
(11)
336
(197)
139
29 $
949
(978)
—
—
— $
1,104
(949)
—
155
$
1,388
949
(926)
(26)
1,385
(744)
641
99
5,453
(4,766)
—
786
270
5,343
(5,453)
(5)
155
1,931
949
(1,122)
(37)
1,721
(941)
780
$
$
$
F-23
The balance of unbilled receivables predominantly represents reimbursement revenue under the Company’s collaboration arrangements earned in the
period to be billed and collected in the next period, generally quarterly. Incyte is a related party as a shareholder, as more fully described in Note 15.
Upfront payments
Reimbursement revenue
Milestones
Total collaboration revenue
Operating expenses:
Research and development expense
General and administrative expense
Total operating expenses from collaborations
For the Year Ended December 31, 2019
Related Party
Incyte
Ono
Third Party
Other
Total
$
$
$
$
17,839 $
7,992
—
25,831 $
680 $
—
680 $
196 $
99
4,142
4,437 $
$
—
—
— $
643 $
153
284
1,080 $
$
—
—
— $
839
252
4,426
5,517
—
—
—
Revenue recognized that was included in deferred revenue at the beginning of
the period
$
17,839 $
196 $
945 $
1,141
Upfront payments
Reimbursement revenue
Milestones
Total collaboration revenue
Operating expenses:
Research and development expense
General and administrative expense
Total operating expenses from collaborations
For the Year Ended December 31, 2018
Related Party
Incyte
Ono
Third Party
Other
Total
$
$
$
$
18,819 $
11,150
—
29,969 $
678 $
44
722 $
341 $
1,036
4,724
6,101 $
$
—
—
— $
1,660 $
—
415
2,075 $
$
—
—
— $
Revenue recognized that was included in deferred revenue at the beginning of
the period
$
18,819 $
73 $
— $
2,001
1,036
5,139
8,176
—
—
—
73
13. Employee Benefit Plans
Share-Based Payments
2010 Plan
In 2010, the Company established the Merus B.V. 2010 Employee Option Plan (the “2010 Plan”) that entitled key management personnel, staff and
consultants providing similar services to purchase shares in the Company. Under the 2010 Plan, holders of vested options were entitled to purchase
depositary receipts for common shares at the exercise price determined at the date of grant. Upon exercise of the option, common shares were issued to a
foundation established to facilitate administration of share-based compensation awards and pool the voting interests of the underlying shares, and
depositary receipts were issued by the foundation to the individual holders. In connection with the IPO, the 2010 Plan was amended to cancel the
depositary receipts and allow individual holders to directly hold the common shares obtained upon exercise of their options.
Options granted under the 2010 Plan generally vest in installments over a four-year period from the grant date: 25% percent on the first anniversary of the
vesting commencement date, and the remaining 75% of the options vest in 36 monthly installments for each full month of continuous service provided
thereafter. Options expire after 8 years from the date of grant. The last grant of options pursuant to the 2010 Plan occurred in 2016, with no further grants
expected.
F-24
2016 Plan
In 2016, the Company established the 2016 Incentive Award Plan (the “2016 Plan”). All incentive award grants since 2016 are being made under the 2016
Plan.
Options granted to employees under the 2016 Plan generally vest in installments over a four-year period from the grant date: 25% percent on the first
anniversary of the vesting commencement date, and the remaining 75% of the options vest in 36 monthly installments for each full month of continuous
service provided thereafter. Options expire after 10 years from the date of grant.
Options granted to non-executive directors consist of initial option grant as well as subsequent annual awards. The initial award of options granted vest in
installments over a three-year period: 33% of the options vest on the first anniversary of the vesting commencement date, and 67% of the options vest in 24
monthly installments thereafter. Each subsequent award vest over a one-year period in 12 monthly installments thereafter. The Company measures the fair
value of an option through the application of an option pricing model, as more fully described below.
The RSUs granted to employees under the 2016 Plan vest in installments over a four-year period from the grant date. Each RSU represents the right to
receive one common share. The fair value of an RSU is determined by reference to the price of the underlying common share.
The number of common shares authorized for issuance for future grants under the plan as of January 1, 2020 totaled 1,901,162.
Share-Based Compensation Expense
Share-based compensation expense is classified in the consolidated statements of operations and comprehensive loss as follows:
Research and development
General and administrative
Total
Year Ended December 31,
2019
2018
(In thousands)
3,186 $
4,648
7,834 $
3,333
6,421
9,754
$
$
As of December 31, 2019, there was $4.6 million in unrecognized stock-based compensation that are expected to vest. These costs are expected to be
recognized over a weighted average remaining vesting period of 1.4 years.
Stock Option Valuation
The Company uses the Hull & White option-pricing model to measure the fair value of stock option awards. Key weighted average assumptions used in
this pricing model on the date of grant for options granted to employees are as follows:
Risk-free interest rate
Expected life of options (years)
Expected volatility of underlying stock
Expected dividend yield
Year Ended December 31,
2019
2018
2.5%
10.0
87.0%
0.0%
2.9%
10.0
93.7%
0.0%
The risk-free interest rate is based upon the U.S. Treasury yield curve in effect at the time of grant, with a term that approximates the expected life of the
option. The Company determines the expected volatility using a blended approach encompassing its historical experience and the historical volatility of a
peer group of comparable publicly traded companies with product candidates in similar stages of development to the Company’s product candidates. The
Company has applied an expected dividend yield of 0.0% as the Company has not historically declared a dividend and does not anticipate declaring a
dividend during the expected life of the options.
F-25
Stock Option Activity
The following is a summary of stock option activity for the year ended December 31, 2019:
Outstanding at January 1, 2019
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2019
Exercisable at December 31, 2019
Weighted-average fair value of options granted
Number of
Options
2,633,039 $
1,145,221
(12,080)
(451,309)
3,314,871 $
1,795,089 $
Weighted
Average
Exercise
Price per
Share
Weighted
Average
Remaining
Contractual
Term
(years)
Aggregate
Intrinsic
Value
(In thousands)
17.20
12.18
4.01
15.80
14.67
14.61
7.3 $
6.0 $
7,757
5,572
Year Ended December 31,
2019
2018
$
7.54 $
11.69
RSU Activity
The following is a summary of RSU activity for the year ended December 31, 2019:
Non-vested at January 1, 2019
Granted
Vested
Non-vested at December 31, 2019
Intrinsic Value of Stock Options Exercised and Vested RSUs
Total fair value of RSUs vested
Aggregate intrinsic value of options exercised
Post-Employment Benefit Plan
Number of
RSUs
101,302 $
30,000
(48,660)
82,642 $
Weighted
Average
Grant-date
Fair Value
21.11
17.17
21.11
19.68
Year Ended December 31,
(In thousands)
2019
2018
$
726 $
112
1,775
1,642
The Company has established a post-employment benefit plan for employees of the Netherlands that entitles executive officers and other staff members to
retire at the age of 67 and receive annual payments based upon the average salary earned during the service period. The Company has insured the benefit
liabilities through purchased non-participating annuities from an insurance company and has no other obligation other than to pay the annual insurance
premiums to the insurance company. After purchasing the insurance, the Company has no further obligation (legal or constructive) to pay further amounts
if the insurance fund has insufficient assets to pay all employee benefits relating to current and prior service. Contributions to purchase non-participating
annuities are expensed as incurred as service costs. Company contributions to the post-employment benefit plan totaled $1.3 million and $0.8 million in the
years ended December 31, 2019 and 2018, respectively.
401(k) Savings Plan
The Company has a defined contribution 401(k) savings plan (the “401(k) Plan”). The 401(k) Plan covers substantially all U.S. employees, and allows
participants to defer a portion of their annual compensation on a pretax basis. The Company matches contributions to the 401(k) Plan, matching 50% of an
employee’s contribution up to a maximum of 3% of the participant’s compensation. Company contributions to the 401(k) Plan totaled $0.1 million and $0.1
million in the years ended December 31, 2019 and 2018, respectively.
F-26
Executive Settlement
In December 2019, in connection with the departure of the Chief Executive Officer of the Company, the Company awarded benefits, including the
following: cash compensation of $0.9 million, a grant of 30,000 RSUs, extended vesting of his equity incentive awards through June 30, 2021 and extended
exercisability of his equity incentive awards through December 31, 2021. The cash compensation is to be paid by the Company January 31, 2020. There
were no substantive service conditions associated with the benefits awarded other than the passage of time. The Company incrementally recognized $1.8
million in general and administrative expense associated with these benefits in the consolidated statement of operations for the year ended December 31,
2019.
14. Loss per Share
The two-class method was not applied for the years ended December 31, 2019 and 2018 due to the net loss recognized in each of those periods.
Basic and diluted loss per share allocable to common stockholders are computed as follows:
Net loss
Weighted average shares outstanding
Basic and diluted loss per share allocable to common stockholders
15. Related Party Transactions
Year Ended December 31,
2019
2018
(In thousands except per share data)
$
$
(55,151) $
24,218,083
(2.28) $
(28,310)
22,286,720
(1.27)
The Company has entered into the Incyte collaboration and license agreement and the Incyte share subscription agreement in which the terms and
transactional amounts incurred between Incyte and the Company are more fully described in Note 12. Incyte is a shareholder with holdings representing
approximately 11.1% of the outstanding shares of the Company as of December 31, 2019, and 13.7% as of December 31, 2018.
F-27
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Exhibit 4.1
As of December 31, 2019, Merus N.V. (the “Company,” “we,” “us,” and “our”) had one class of securities registered under Section 12 of the Securities
Exchange Act of 1934, as amended: our common shares. Set forth below is a summary of certain information concerning our share capital as well as a
summary of certain material provisions of our articles of association (our “Articles of Association”) and relevant provisions of Dutch law. Because the
following is only a summary, it does not contain all of the information that may be important to you. The summary below does not purport to be complete
and is qualified in its entirety by reference to applicable Dutch law and our Articles of Association, which has been publicly filed with the Securities and
Exchange Commission.
DESCRIPTION OF SHARE CAPITAL AND ARTICLES OF ASSOCIATION
General
We were incorporated on June 16, 2003 as a private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid) under Dutch
law. In connection with the initial public offering of our common shares, we converted into a Dutch public company with limited liability (naamloze
vennootschap).
We are registered with the Dutch Trade Register (handelsregister) under number 30189136. Our corporate seat is in Utrecht, the Netherlands, and our
registered office is Yalelaan 62, 3584 CM Utrecht, the Netherlands.
Share Capital
Common Shares
Our authorized share capital is €8,100,000, comprised of 45,000,000 common shares and 45,000,000 preferred shares, nominal value €0.09 per share.
Preferred Shares
On May 24, 2016, we entered into a call option agreement (the “call option agreement”) with an independent foundation (stichting) under Dutch law called
Stichting Continuïteit Merus (the “Protective Foundation”) which agreement was most recently amended on August 27, 2018, pursuant to which the
Protective Foundation would be allowed to acquire a number of preferred shares, which number is equal to the lesser of the following numbers: (i) the total
number of shares (of whichever class) of our issued capital held by third parties immediately prior to the issuance of such preferred shares less the number
of preferred shares already held by the Protective Foundation at that time (if any) and less one; or (ii) the maximum number of preferred shares that may be
issued under our authorized capital as included in the Articles of Association, without approval by our general meeting of shareholders or our board of
directors. There are no preferred shares outstanding and we have no present plans to issue any preferred shares other than pursuant to an exercise by the
Protective Foundation of its rights under the call option agreement.
Articles of Association
Set forth below is a summary of relevant information concerning our share capital and material provisions of our Articles of Association and applicable
Dutch law. This summary does not constitute legal advice regarding those matters and should not be regarded as such.
Amendment of Articles of Association
1
The general meeting of shareholders can only resolve to amend the Articles of Association at the proposal of the board of directors. A resolution by the
general meeting of shareholders to amend the Articles of Association requires a simple majority of the votes cast.
Exhibit 4.1
Company’s Shareholders’ Register
We must keep our shareholders’ register accurate and up-to-date. The board of directors keeps our shareholders’ register and records names and addresses
of all holders of registered shares, showing the date on which the registered shares were acquired, the date of the acknowledgement of the transfer by or
notification of the transfer to us as well as the amount paid on each share. The register also includes the names and addresses of those with a right to use
and enjoyment in common shares belonging to another person (vruchtgebruik) or a pledge in respect of registered shares, as well as any other particulars
which must be recorded in our shareholders’ register pursuant to Dutch law.
Corporate Objectives
Our corporate objectives are: (1) to develop products and services in the area of biotechnology, (2) to finance group companies or other parties, (3) to
borrow, to lend to raise funds, including the issue of bonds, promissory notes or other financial instruments or evidence of indebtedness as well as to enter
into agreements in connection with the aforementioned, (4) to supply advice and to render services to group companies and other parties, (5) to render
guarantees, to bind us, to provide security, to warrant performance in any other way and to assume liability, whether jointly and severally or otherwise, in
respect of obligations of group companies or other parties, (6) to incorporate, to participate in any way whatsoever in, to manage, to supervise and to hold
any other interest in other entities, companies, partnerships and businesses, (7) to obtain, alienate, encumber, manage and exploit registered property and
items of property in general, (8) to trade in currencies, securities and items of property in general, (9) to develop and trade in patent, trademarks, licenses,
know-how and other intellectual property rights, and (10) to perform any and all activity of an industrial, financial or commercial nature and to do anything
which in the broadest sense is connected with or may be conducive to the above-mentioned objects.
Limitation on Liability and Indemnification Matters
Under Dutch law, directors may be held liable by us or by third parties for damages in the event of improper or negligent performance of their duties,
including as a result of infringement of our Articles of Association or of certain provisions of the Dutch Civil Code. In certain circumstances, they may also
incur additional specific civil and criminal liabilities. Directors and certain other officers are insured under an insurance policy taken out by us against
damages resulting from their conduct when acting in the capacities as such directors or officers. We have also entered into agreements with our directors
and our senior management to indemnify them against expenses and liabilities to the fullest extent permitted by law. These agreements provide, subject to
certain exceptions, for indemnification for related expenses including, among other expenses, attorneys’ fees, judgments, penalties, fines and settlement
amounts incurred by any of these individuals in any action or proceeding. In addition, our Articles of Association provide for indemnification of our current
and former directors (and such other of our current or former officer or employee as designated by our board of directors), including reimbursement for
reasonable legal fees and damages or fines based on acts or failures to act in their duties. No indemnification shall be given to an indemnified officer (1) if
a competent court or arbitral tribunal has established, without possibility for appeal, that the acts or omissions of such indemnified officer that led to the
financial losses, damages, expenses, suit, claim, action or legal proceedings resulted from either an improper performance of his or her duties as an officer
of the company or an unlawful or illegal act, (2) to the extent that his or her financial losses, damages and expenses are covered by insurance and the
insurer has settled, or has provided reimbursement for, these financial losses, damages and expenses (or has irrevocably undertaken to do so) and (3) in
relation to proceedings brought by such indemnified officer against us, except for proceedings brought to enforce indemnification to which he or she is
entitled pursuant to our Articles of Association or an agreement between such indemnified officer and us which has been approved by our board of
directors. Furthermore, indemnification under our Articles of Association will generally not be available in instances of willful (opzettelijk), intentionally
reckless (bewust roekeloos) or seriously culpable (ernstig verwijtbaar) conduct unless Dutch law provides otherwise.
2
Exhibit 4.1
Shareholders’ Meetings and Consents
General Meeting
General meetings of shareholders are held in Utrecht, Amsterdam, Rotterdam, The Hague or in the municipality of Haarlemmermeer (Schiphol Airport), all
of which are in the Netherlands. The annual general meeting of shareholders must be held within six months of the end of each financial year. Additional
extraordinary general meetings of shareholders may also be held, whenever considered appropriate by the board of directors. An additional extraordinary
general meeting of shareholders must also be held within three months after our board of directors has considered it to be likely that our shareholders’
equity has decreased to an amount equal to or lower than half of our paid up and called up capital, in order to discuss the measures to be taken if so
required. If our board of directors has failed to ensure the annual general meeting of shareholders or the mandatory extraordinary general meeting of
shareholders is held, each shareholder or others with meeting rights under Dutch law may be authorized by the competent Dutch court in preliminary relief
proceedings to do so.
Pursuant to Dutch law, one or more shareholders or others with meeting rights under Dutch law, who jointly represent at least one-tenth of the issued
capital may request us to convene a general meeting, setting out in detail the matters to be discussed. If our board of directors has not taken the steps
necessary to ensure that such meeting can be held within six weeks after the request, the requesting party/parties may, on their application, be authorized by
the competent Dutch court in preliminary relief proceedings to convene a general meeting of shareholders.
General meetings of shareholders can be convened by a notice to be published in a Dutch daily newspaper with national circulation, which shall include an
agenda stating the items to be voted and/or discussed and any other particulars required under Dutch law. The agenda shall include such items as have been
included therein by the board of directors. The agenda shall also include such items requested by one or more shareholders or others with meeting rights
under Dutch law, representing at least 3% of the issued share capital. Requests must be made in writing and received by us at least 60 days before the day
of the meeting. No resolutions shall be adopted on items other than those which have been included in the agenda, unless by a unanimous vote of all
shareholders and others with voting rights.
In accordance with the Dutch Corporate Governance Code (the “DCGC”), shareholders are expected to exercise the right of requesting the convening of a
general meeting of shareholders or of putting an item on the agenda only after consulting the board of directors in that respect. If one or more shareholders
intend to request that an item be put on the agenda that may result in a change in our strategy (e.g., the removal of directors), the board of directors should
be given the opportunity to invoke a reasonable response time of up to 180 days after the board of directors is informed of the intentions of the
shareholder(s). The board of directors should use this period for further deliberation, constructive consultation (in any event with the shareholder(s) who
have made the request) and the exploration of alternatives. At the end of the response period, the board of directors should report its actions to the general
meeting of shareholders. The response time may be invoked only once for any given general meeting of shareholders and may not be invoked for an agenda
item in respect of which the response period has been invoked previously or for a general meeting of shareholders if a shareholder holds at least 75% of our
issued share capital as a consequence of a successful public offer (irrespective of whether the offer was friendly or hostile).
The general meeting is presided over by the chairman of the board of directors. If no chairman has been elected or if he or she is not present at the meeting,
the general meeting shall be presided over by the chief executive officer. If no chief executive officer has been elected or if he or she is not present at the
meeting, the general meeting shall be presided over by another director present at the meeting. If no director is present at the meeting, the general meeting
shall be presided over by any other person appointed by the general meeting. In each case, the person who should chair the general meeting pursuant to the
rules described above may appoint another person to chair the general meeting instead. Directors may always attend a general meeting of shareholders. In
these meetings, they have an advisory vote. The chairman of the meeting may decide at his or her discretion to admit other persons to the meeting.
All shareholders and others with meeting rights under Dutch law are authorized to attend the general meeting of shareholders, to address the meeting and,
in so far as they have such right, to vote. For this purpose, those who have voting rights and/or meeting rights under Dutch law on the record date for a
general meeting of shareholders (i.e., the 28th day prior to the meeting) and are recorded as such in a register designated by the board of directors shall be
3
Exhibit 4.1
considered to have those rights, irrespective of whoever is entitled to the shares at the time of the general meeting of shareholders. The board of directors is
free to determine, when convening a general meeting of shareholders, whether to apply a record date.
Quorum and Voting Requirements
Each common share and each preferred share carries the right to cast one vote at the general meeting of shareholders. This right can be exercised in person
or by proxy. No vote may be cast at a general meeting of shareholders in respect of a share belonging to us or any of our subsidiaries or in respect of a share
for which we or any of our subsidiaries holds the depository receipts. Persons with a right to the use and enjoyment of our shares held by another person
and pledgees of shares belonging to us or our subsidiaries are not precluded from exercising their voting rights if the right to use and enjoyment or pledge
was created before the relevant share belonged to us or one of our subsidiaries. We and our subsidiaries may not vote shares in respect of which we or any
of our subsidiaries hold(s) a right of use and enjoyment or a pledge. Shares which cannot be voted pursuant to these rules will not be taken into account for
the purpose of determining the number of votes cast, or the amount of the share capital that is represented, at a general meeting of shareholders.
Subject to any provision of mandatory Dutch law and any higher quorum requirement stipulated in our Articles of Association, if and for as long as the
Company is subject to the rules and requirements of a securities exchange and such securities exchange requires the Company to have a quorum for the
general meeting of shareholders, then the general meeting of shareholders can only pass resolutions if at least one third of our issued and outstanding shares
are present or represented at such general meeting.
Board of Directors
Election of Directors
Under our Articles of Association, the directors are appointed by the general meeting of shareholders upon nomination by our board of directors. However,
the general meeting of shareholders may at all times overrule the
binding nomination by a resolution adopted by at least a two-thirds majority of the votes cast, provided such majority represents more than half of the
issued share capital. If the general meeting of shareholders overrules the binding nomination, the board of directors shall make a new nomination. If the
nomination comprises one candidate for a vacancy, a resolution concerning the nomination shall result in the appointment of the candidate, unless the
nomination is overruled.
At a general meeting of shareholders, a resolution to appoint a director can only be passed in respect of candidates whose names are stated for that purpose
in the agenda of that general meeting of shareholders or in the explanatory notes thereto. Upon the appointment of a person as a director, the general
meeting of shareholders shall determine whether that person is appointed as executive director or as non-executive director.
Duties and Liabilities of Directors
Under Dutch law, the board of directors as a collective is responsible for our management, strategy, policy and operations. The executive directors manage
our day-to-day business and operations and implement our strategy. The non-executive directors focus on the supervision on the policy and functioning of
the performance of the duties of all directors and our general state of affairs. Each director has a statutory duty to act in the corporate interest of the
company and its business. Under Dutch law, the corporate interest extends to the interests of all corporate stakeholders, such as shareholders, creditors,
employees, customers and suppliers. The duty to act in the corporate interest of the company also applies in the event of a proposed sale or break-up of the
company, provided that the circumstances generally dictate how such duty is to be applied and how the respective interests of various groups of
stakeholders should be weighed. Any resolution of the board of directors regarding a material change in our identity or character requires approval of the
general meeting of shareholders.
Dividends and Other Distributions
Amount Available for Distribution
4
Exhibit 4.1
As a Dutch public company with limited liability (naamloze vennootschap), we may only make distributions to the extent that our shareholders’ equity
exceeds the sum of the paid-in and called-up share capital plus the reserves as required to be maintained by Dutch law. Under our Articles of Association, a
dividend is first paid out of the profit, if available for distribution, with respect to any preferred shares. After that, the board of directors shall determine
which part of the remaining profit shall be added to our reserves. After reservation by the board of directors of any profit, the remaining profit will be at the
disposal of the general meeting of shareholders for distribution on our common shares. However, a distribution to the holders of common shares can only
be resolved upon by the general meeting upon a proposal of the board of directors.
We may only make a distribution of dividends after the adoption of our annual accounts demonstrating that such distribution is legally permitted. The board
of directors is permitted, subject to certain requirements, to declare interim dividends (or other interim distributions) without the approval of the general
meeting of shareholders. The general meeting of shareholders, subject to certain requirements and a proposal to that effect made by the board of directors,
may decide to make distributions from our distributable reserves. The board of directors, however, may resolve to charge amounts to be paid up on shares
against our reserves, irrespective of whether those shares are issued to existing shareholders.
Dividends and other distributions shall be payable on such date and, if it concerns a distribution in cash, in such currency as determined by the board of
directors. If it concerns a distribution in the form of assets, the board of directors shall determine the value attributed to such distribution for purposes of
recording the distribution in our accounts with due observance of applicable law (including the applicable accounting principles). Claims to dividends and
other distributions not paid within five years from the date that such dividends or distributions became payable, will lapse and any such amounts will be
considered to have been forfeited to us (verjaring). For the purpose of calculating the amount or allocation of any distribution, shares held by us in our own
capital shall not be taken into account. No distribution shall be made to us in respect of shares held by us in our own capital.
We do not anticipate paying any cash dividends for the foreseeable future.
Squeeze out Procedures
Under Dutch law, a shareholder who, alone or together with one or more group companies, for his/their own account contribute(s) at least 95% of our
issued share capital may initiate proceedings against our minority shareholders jointly for the transfer of their shares to the claimant. The proceedings are
held before the Enterprise Chamber of the Amsterdam court of Appeal (the “Enterprise Chamber”). The Enterprise Chamber may grant the claim for
squeeze out in relation to all minority shareholders and will determine the price to be paid for the shares, if necessary after appointment of one or three
experts who will offer an opinion to the Enterprise
Chamber on the value to be paid for the shares of the minority shareholders. Once the order to transfer becomes final before the Enterprise Chamber, the
shareholder acquiring the shares shall give written notice of the date and place of payment and the price to the holders of the shares to be acquired whose
addresses are known to such shareholder. Unless the addresses of all of them are known to the acquiring shareholder, such shareholder is required to
publish the same in a Dutch daily newspaper with a national circulation.
Protective measures
Under Dutch law, various protective measures are possible and permissible within the boundaries set by Dutch law and Dutch case law. Our governance
arrangements include several provisions that may have the effect of making a takeover of our company more difficult or less attractive. In this respect, our
general meeting of shareholders has granted the right to the Protective Foundation to acquire preferred shares pursuant to the call option agreement. The
call option is continuous in nature and can be exercised repeatedly on multiple occasions. If the Protective Foundation exercises the call option pursuant to
the call option agreement, a number of preferred shares, which number is equal to the lesser of the following numbers: (i) the total number of shares (of
whichever class) of our issued capital held by third parties immediately prior to the issuance of such preferred shares less the number of preferred shares
already held by the Protective Foundation at that time (if any) and less one; or (ii) the maximum number of preferred shares that may be issued under our
authorized capital as included in the Articles of Association, will be issued to the Protective Foundation. These preferred shares will be issued to the
Protective
5
Exhibit 4.1
Foundation under the obligation to pay up to 25% of their nominal value upon issuance. In order for the Protective Foundation to finance the issue price in
relation to the preferred shares, the Protective Foundation intends to enter into a finance arrangement with a bank. As an alternative to securing financing
with a bank, subject to applicable restrictions under Dutch law, the call option agreement provides that the Protective Foundation may request us (1) to
provide, or cause our subsidiaries to provide, sufficient funding to the Protective Foundation to enable it to satisfy the payment obligation (or part thereof)
in cash and/or (2) to charge an amount equal to the payment obligation (or part thereof) against our profits and/or reserves in satisfaction of such payment
obligation. The Protective Foundation’s articles of association provide that it will promote and protect the best interests of us, our associated business and
our stakeholders and opposing influences that conflict with these interests and threaten our strategy, continuity, independence and/or identity. These
influences may include a third party acquiring a significant percentage of our common shares, the announcement of an unsolicited public offer for our
common shares, other concentration of control over our common shares or any other form of undue pressure on us to alter our strategic policies. The
Protective Foundation is structured to operate independently of us.
As indicated above, if the Protective Foundation would exercise its call option, the preferred shares to be issued pursuant thereto shall be issued against the
obligation to pay up to 25% of their nominal value. The voting rights of our shares are based on nominal value and, as we expect our common shares to
trade substantially in excess of nominal value, preferred shares issued at 25% of their nominal value can carry significant voting power for a substantially
reduced price compared to the price of our common shares and thus can be used as a defensive measure. These preferred shares will have both a liquidation
and dividend preference over our common shares and will accrue cash dividends at a pre-determined rate.
The Protective Foundation would be expected to require us to cancel its preferred shares once the perceived threat to the company and its stakeholders has
been removed or sufficiently mitigated or neutralized. However, subject to the same limitations described above, the Protective Foundation would continue
to have the right to exercise the call option in the future in response to a new threat to the interests of us, our business and our stakeholders from time to
time.
In addition, our Articles of Association contain certain provisions which might have the effect of delaying or preventing a change in control or otherwise
discouraging a potential acquirer from attempting to obtain control of us. These provisions include:
•
•
•
requirements that certain shareholder matters, including the amendment of our Articles of Association may only be voted on by the general
meeting of shareholders at the proposal of our board of directors;
a provision that our directors may only be removed by the general meeting of shareholders by a two-thirds majority of votes cast, provided
such majority represents more than half of our issued share capital if such removal is not proposed by our board of directors; and
our directors being appointed on the basis of a binding nomination by our board of directors, which can only be overruled by the general
meeting of shareholders by a resolution adopted by at least a two-thirds majority of the votes cast, provided such majority represents more
than half of the issued share capital (in which case the board of directors shall make a new nomination).
Also, we have implemented staggered terms of our directors, as a result of which our directors are not all subject to election in any one year.
Listing
Our common shares are listed on The Nasdaq Global Market under the symbol “MRUS.”
Transfer Agent and Registrar
The U.S. transfer agent and registrar for our common shares is American Stock Transfer & Trust Company, LLC.
6
THE UNDERSIGNED
SETTLEMENT AGREEMENT
Exhibit 10.1.12
1.
and
2.
Merus N.V., a public limited liability company (in Dutch: naamloze vennootschap), incorporated under the laws of the Netherlands,
having its statutory seat at Utrecht, the Netherlands, registered with the Dutch Trade Register with number 30189136 (the Company);
Mr. T. Logtenberg, born on 22 July 1958, residing at Frans van Mierisstraat 121G (1071 RR), Amsterdam (the Director);
each a Party and together, collectively, the Parties.
WHEREAS
A.
B.
C.
D.
E.
F.
The Director entered into a Services Agreement with the Company dated 17 September 2019 with effect from 1 September 2019 (the
Services Agreement).
The Director has been appointed as statutory director (in Dutch: statutair bestuurder) of the Company as per 16 June 2003.
The Company has taken the initiative to come to a termination of the Services Agreement effective 1 January 2020.
The Company informed the Director of the above initiative on 25 November 2019 and the Parties entered into discussions on the terms
and conditions of an amicable settlement on the termination of the Services Agreement as well as any other issues there may be and
wish to lay down the settlement in this settlement agreement (this Agreement).
The Director has obtained legal advice from a lawyer on the content of this Agreement and the consequences thereof.
By means of this Agreement - which is considered to be a settlement agreement within the meaning of article 7:900 et seq. of the
Dutch Civil Code (the DCC) - the Parties wish to record and lay down what they exhaustively and comprehensively have established
and agreed in respect of the termination of the Services Agreement, with a view to end and prevent any uncertainty or dispute between
them as to what applies between them by law, whereby the Parties waive any and all claims and agreements against each other, which
might exist or might have existed.
HAVE AGREED AS FOLLOWS
1.
1.1.
1.2.
2.
2.1.
2.2.
2.3.
2.4.
2.5.
Termination of Services Agreement
The Services Agreement shall terminate with mutual consent (in Dutch: eindigt met wederzijds goedvinden) with effect on 1 January
2020 (the Termination Date).
The Company confirms that the termination of the Services Agreement is triggered on the Company's initiative and that the Director is
nothing to blame in this respect.
Duties
Without prejudice to article 1 of this Agreement, the Director resigns as statutory director, President, Chief Executive Officer and
Principal Financial Officer of the Company and as President and Director of Merus US, Inc., with effect from 31 December 2019, as
evidenced by the letter attached hereto as Annex I, to be signed by the Director simultaneously with this Agreement.
The Director shall resign upon first request from the Company from all other functions he holds on behalf of the Company and its
affiliated companies and comply with all necessary formalities with regard thereto.
Unless otherwise instructed, the Director shall continue to perform his duties pursuant to the Services Agreement and his position as
statutory director, whereby the Director shall co- operate to ensure a proper transition of his tasks and duties to his (temporary)
successor. If and when the board of the Company decides such, the Director shall be exempt from his duties pursuant to his Services
Agreement and position as statutory director with effect from the date of such decision and until the Termination Date.
Notwithstanding the provisions under articles 2.1 up to and including 2.3 of this Agreement, the Director shall remain available as an
employee of the Company to, if so requested, perform duties for the Company and its affiliated companies concerning the transition of
the function of the Director to his (temporary) successor, until ultimately the Termination Date. The Director will be facilitated
accordingly and shall perform such duties to the best of his abilities and in a loyal manner.
After termination of the Services Agreement the Director shall remain available for assistance and defense in any proceedings against
the Company and its affiliated companies, which relate to the period during which the Director was a statutory director of the
Company. The reasonable expense of the Director shall, upon proper receipt of written invoices, be compensated by the Company.
3.
3.1.
3.2.
4.
4.1
4.2
4.3
5.
5.1.
5.2.
Consultancy services after Termination Date
Without prejudice to the Director's obligation to remain available pursuant to clause 2.5, during the 12 (twelve) month period
immediately following the Termination Date, the Director shall remain available to the Company to answer such questions and/or
provide such information and/or consultancy services as may be requested from time to time, within reason, with a view to the transfer
of know-how to the Director's successor (the Consultancy Services). For the purpose of concretizing the words "within reason" used
in the previous sentence, Parties expect that the performance of the Consultancy Services will involve approximately 5 (five) hours per
month.
For the avoidance of doubt, Parties specifically intend that the provision of the Consultancy Services by the Director, if so requested,
qualifies as the provision of services as defined in Section 7:400 of the Dutch Civil Code.
Compensation
As a compensation for the termination of the Services Agreement, including the termination of all functions the Director holds on
behalf of the Company and its affiliated companies, the Company shall pay the Director a compensation of, in total, an amount equal to
18 (eighteen) months of the Director's base salary (gross), thus constituting an amount of EUR 688,461 gross.
The compensation referred to in clause 0 shall be paid, under withholding of the required wage tax and social premiums (if any),
within 1 (one) month after the Termination Date, by wire transfer to the salary account of the Director as known to the Company.
The Director acknowledges that the payments and benefits set forth in clause 4.1 and Article 5 of this Agreement represent settlement
in full of all payments and benefits owed to the Director by the Company in connection with the termination of the Director’s
employment with the Company and the Director shall not be entitled to any additional notice period or continued payment of his base
salary pursuant to clause 2.2 of the Services Agreement.
Outstanding benefits
Until the Termination Date, the Director shall be entitled to his fixed base salary as referred to in the Services Agreement as well as all
other current fringe benefits.
The Director shall be entitled to EUR 247,846 in satisfaction of Director’s annual bonus (STI) for the year 2019, which amount will be
paid to Director, under withholding of the required wage tax and social premiums (if any), within 1 (one) month after the Termination
Date, by wire transfer to the salary account of the Director as known to the Company. In addition, the Company will issue the Director
30.000 RSUs with a vesting period of 18 (eighteen) months, which vesting will commence on January 1, 2020 with the first 1/18th of
the RSU vesting on 31 January 2020 and the remainder vesting 1/18th at the end of each month thereafter.
5.3.
5.4.
5.5.
5.6.
5.7.
5.8.
5.9.
Subject to the Director's continued compliance with the terms and conditions of this Agreement, including clause 7.4, and the
Company's Employee Proprietary Information and Inventions Assignment Agreement as meant in clause 7.1, the Director's unvested
equity awards granted to him under the applicable equity-based long-term incentive plan of the Company (LTIP) will continue to vest
under the LTIP until June 30 2021 as if the Director had continued in full time service with the Company through such date and will be
further dealt with and settled according to the terms and conditions of the relevant applicable LTIP scheme. In no event shall the
Director be eligible to vest in any portion of the LTIP following 30 June 2021.
The post-termination exercise period of the Director's options to purchase common shares of the Company as set out in the relevant
applicable LTIP will not commence until June 30 2021. The exercise period ends at 31 December 2021. Before this date the Director is
free to sell his securities at any time.
The Director is advised that the Director should not sell or otherwise transfer any securities of the Company in violation of any lock-up
agreement entered into by the Director in connection with registering the offering of any Company securities or while the Director is in
possession of material, non-public information about the Company.
The Company shall draw up a final statement of indebtedness (in Dutch: eindafrekening) in connection with the termination of the
Services Agreement as soon as possible after the Termination Date.
The final statement shall include the balance of outstanding days' holiday as of the Termination Date. If there is a positive balance of
accrued but untaken holidays, these unused holidays shall be paid out to the Director. If there is a negative balance of holidays taken
these holidays will be settled with either the final compensation payment and/or the compensation mentioned in clause 0.
The Company shall pay the amounts ensuing from the final statement of indebtedness as referred to in clause 5.6, under withholding of
the required wage tax and social premiums (if any), within 1 (one) month after the Termination Date by wire transfer to the Director's
salary account as known to the Company.
For the avoidance of doubt, the Parties acknowledge that the Director shall not be entitled to any other benefits, compensation,
incentive plans or other type of payments, than those explicitly mentioned and provided for in this Agreement. As of the Termination
Date, the Director is no longer entitled to and shall not receive any salary (including benefits) anymore.
6.
6.1.
6.2.
7.
7.1.
7.2.
7.3.
7.4.
Insurances & pension
At the Termination Date, all insurances and/or schemes in which the Director participates under his Services Agreement shall terminate
and cease to be effective, with the exception of the run-off period of any applicable director's liability insurance taken out by the
Company for the benefit of its directors and officers.
The Director's pension will be settled in accordance with the rules of the pension scheme and pension legislation.
Restrictive Covenants
Contemporaneously with the execution of this Agreement, the Director agrees to deliver to the Company an executed version of the
Company’s Employee Proprietary Information and Inventions Assignment Agreement that was referred to in his Services Agreement
(the “Company's Employee Proprietary Information and Assignment Agreement”) and the Director confirms that the Company's
Employee Proprietary Information and Inventions Assignment Agreement shall remain in full force and effect following the date of
this Agreement.
Without prejudice to the confidentiality provisions of the Company's Employee Proprietary Information and Inventions Assignment
Agreement, the Director shall observe confidentiality with respect to all information, know-how and data relating to the Company and
its affiliates that is confidential and shall not use any of such information, know-how and data.
The Director confirms that he has no intellectual property rights related to the business of the Company and its affiliates.
In consideration for the portion of the consideration provided under this Agreement to which the Director is not otherwise entitled, and
in order to protect the value of any confidential information of the Company to which the Director was provided access during his
employment with the Company, the Director agrees that, from the date hereof and during the 12 (twelve) month period following the
Termination Date, the Director will not, directly or indirectly, on Director's own behalf or for the benefit of any other individual or
entity: (a) operate, conduct, engage in or own (except as the holder of not more than 1% of the outstanding stock of a publicly-held
company), or prepare to operate, conduct, engage in or own any business or enterprise that develops, manufactures, markets, licenses,
sells or otherwise provides, or is preparing to develop, manufacture, market, license, sell or otherwise provide any product or service
that relates to bispecific, trispecific or other multispecific antibody therapeutics and competes with any product or service developed,
manufactured, marketed, licensed, sold or otherwise provided, or planned to be developed, manufactured, marketed, licensed, sold or
otherwise provided, by the Company or any of its subsidiaries while Director was providing services to the Company (the Competing
Business) or (b) participate in, render services to, or assist any individual or entity that engages in a Competing Business in any
capacity (whether
as an employee, manager, consultant, director, officer, contractor, or otherwise) (A) which involve the same or similar types of services
Director performed for the Company at any time during the last two years of his services to or engagement with the Company or (B) in
which Director could reasonably be expected to use or disclose proprietary information of the Com- pany or any of its subsidiaries, in
each case (a) and (b) limited to each city, county, state, territory and country in which (x) Director provided services or had a material
presence or influence at any time during the last two years of Director's services to or engagement with the Company or (y) the
Company or any of its subsidiaries is engaged in or has plans to engage in the Competing Business as of the date hereof.
From the date hereof and during the 18 (eighteen) month period following the Termination Date (the Nonsolicitation Restricted
Period), Director will not, directly or indirectly, on Director's own behalf or for the benefit of any other individual or entity: (i) solicit,
encourage, induce or attempt to induce or assist others to solicit, encourage, induce or attempt to induce any employees, consultants or
independent contractors of the Company or any of its subsidiaries to terminate their employment or other engagement with the
Company or any of its subsidiaries; (ii) hire, or recruit or attempt to hire, or engage or attempt to engage as an independent contractor,
any person who was employed or otherwise engaged by the Company or any of its subsidiaries at any time during the term of
Director's employment with the Company; provided, that this clause (ii) shall not apply to the recruitment or hiring or other
engagement of any individual whose employment or other engagement with the Company or any of its subsidiaries has been
terminated for a period of six months or longer; (iii) solicit, divert or take away, or attempt to divert or take away, the business of any
customer or client of the Company or any of its subsidiaries (served by the Company or any of its subsidiaries during the 12-month
period prior to the termination of Director's services to the Company); or (iv) cause or encourage any vendor or supplier to reduce or
cease doing business with the Company or any of its subsidiaries. Without limiting the Company's ability to seek other remedies
available in law or equity, if Director violates any of the provisions of this clause 7.5, the Nonsolicitation Restricted Period shall be
extended by one day for each day that Director is in violation of such provisions, up to a maximum extension equal to the length of the
Nonsolicitation Restricted Period, so as to give the Company the full benefit of the bargained- for length of forbearance.
If any provision of clause 7.4 or 7.5 shall be determined to be unenforceable by any court of competent jurisdiction or arbitrator by
reason of its extending for too great a period of time or over too large a geographic area or over too great a range of activities, it shall
be interpreted to extend only over the maximum period of time, geographic area or range of activities as to which it may be
enforceable.
Communication; references
In view of external statements to be made regarding the Director's departure, the Company will issue a press release as soon as possible
after signing of this Agreement or such other date as mutually agreed by the Parties, within the form as laid down in Annex II.
7.5.
7.6.
8.
8.1.
8.2.
8.3.
8.4.
8.5.
9.
9.1.
9.2.
9.3.
It is intended that any internal statements to be made by the Company regarding the Director's departure will have materially the same
contents as this external statement (press release).
The Director shall observe absolute confidentiality in respect of third parties regarding the contents of this Agreement, unless he is
required to disclose information on the grounds of applicable statutory or regulatory provisions. In that case, the Director shall consult
the Company about such disclosure in advance.
The Parties shall not make negative comments on each other and shall refrain from (co- operating with) any publication or
communication made in the public domain with respect to each other; provided, that, the Company's obligations in this regard shall be
limited to disparaging statements by officers and directors of the Company and nothing in this section shall preclude the Company
(including its officers and directors) from making truthful statements that are reasonably necessary to comply with applicable law,
regulation or legal process, or to defend or enforce the Company's rights under this Agreement.
Mr. R. Greig will act as contact person with regard to any references to be given about the person and performance of the Director.
Return company property; right to access records
By no later than the Termination Date, the Director shall return to the Company or a person to be designated by the Company, in clean
and good condition the company car and all records and property belonging to the Company, including credit cards, access passes,
emails, notes and (copies of) any data related to the business of the Company and/or any other group companies or affiliates, including
any data on the Director’s personal computer and/or other electronic devices used by and/or in the possession of the Director. The
Director may retain his Company-issued laptop computer and cell phone; provided, that the Company shall first have the opportunity
to remove all of its confidential information from the laptop computer and cell phone.
The Director shall not keep any copies of such data as referred to in clause 9.1 of this Agreement, with the exception of documents
related to the Services Agreement.
In the event the Director will have to defend himself against one or more claims brought forward with a view to the Director's former
capacity as statutory director of the Company, the Director shall have access to the records and minutes of the Company's board of
directors (in Dutch: bestuursverslagen) relating to the period that the Director was a statutory director of the Company and/or similar
company documents that may be of relevance to the Director for defence against such claim, subject to prior approval by the
Company's board, which approval will not be unreasonably withheld or delayed. The Director shall treat any documents accessed
pursuant to the previous sentence as strictly confidential and shall not use such documents for any other purposes than defence against
the claim at hand.
10.
No issues
The Director declares that he is not aware of any acts or circumstances that are unknown to the Company and its shareholders and
could have a materially adverse effect on the Company and/or its affiliates or its business.
11.
Discharge
11.1.
11.2.
11.3.
Save for the rights and obligation that arise from this Agreement, the Parties grant each other full and final discharge (in Dutch: finale
kwijting) with respect to the Services Agreement as well as the termination thereof; provided, that, nothing in this Agreement is
intended to waive or release the Director’s continuing rights (to the extent existing as of the date of this Agreement) to indemnification
in accordance with the Company’s Articles of Association or any applicable individual indemnity agreement as in effect on the date of
this Agreement.
The Parties recognise and confirm that save for the arrangements laid down in this Agreement, no other agreements, claims and/or
arrangements exist anymore, at least that any such agreements, claims and/or arrangements will be waived and nullified by this
Agreement, which means to regulate and cover all possible arrangements between the Parties, with a view to pursue a termination of
the Services Agreement exhaustively.
With respect to the termination of the Director's position as statutory director, the Company intends to endeavour that the Director will
be proposed for discharge (in Dutch: decharge) on the agenda of the next annual general meeting of shareholders of the Company
(which is expected to be held in June 2020), save for facts or circumstances regarding acts and/or omissions of the Director which
justify that such proposal will not be made. At the date of this Agreement, there are no facts or circumstances known to the board of
directors of the Company which would cause that the Director would not be proposed for discharge or which may be expected to give
reason to belief that the discharge, if and when proposed, will be denied by the general meeting of shareholders.
12.
Rescission
To the extent permitted by law, the Parties hereby waive their rights under articles 6:265 to 6:272 inclusive of the DCC to rescind (in
Dutch: ontbinden), or demand in legal proceedings the rescission (in Dutch: ontbinding) of this Agreement on the grounds of breach
(in Dutch: toerekenbare tekortkoming) or error (in Dutch: dwaling).
13.
Partial invalidity
In the event that an article of this Agreement is invalid, illegal, not binding, or unenforceable (either in whole or in part), the remainder
of the Agreement shall continue to be effective to the extent that, in view of this Agreement's substance and purpose, such remainder is
not inextricably related to and therefore in severable from the invalid, illegal, not binding or unenforceable provision. The Parties shall
make every effort to reach agreement on a new respective article which differs as little as possible from the invalid, illegal, not binding
or unenforceable article, taking into account the substance and purpose of this Agreement.
14.
Settlement agreement
This Agreement is considered to be a settlement agreement (in Dutch: vaststellingsovereen- komst) within the meaning of article 7:900
of the Dutch Civil Code.
15.
Legal costs
15.1.
15.2.
The Company agrees to reimburse legal costs incurred by the Director in connection with entering into this Agreement up to a
maximum of EUR 10,500 (net), including office costs and including VAT.
The Director should submit the invoice paid by him for legal assistance to the Company as an expense statement, before the
Termination Date, after which the Company shall pay the amount stated to the Director up to the maximum referred to in clause 15.1
by transferring it to the Director's salary account as known to the Company.
16.
Entire Agreement
16.1.
This Agreement embodies the entire agreement and understanding of the Parties with respect to the subject matter hereof and
supersedes all prior agreements and understandings, oral or written, relative to said subject matter.
16.2.
This Agreement may only be amended in writing and such amendment signed by each of the Parties.
17.
Governing law and competent court
17.1.
This Agreement shall be governed by and construed in accordance with the laws of the Netherlands.
17.2.
Any dispute in connection with this Agreement shall finally be settled before the competent court of Amsterdam, the Netherlands.
This Agreement is dated 11 December 2019 and may be executed in any number of counterparts, each of which will be deemed an original and
all of which together shall constitute one and the same instrument.
Thus agreed,
on behalf of Merus N.V.
/s/ R. Greig
name: R. Greig
title: Chair
Mr. T. Logtenberg
/s/ T. Logtenberg
List of Omitted Schedules and Exhibits
The following schedules and exhibits to the Settlement Agreement, dated as of December 11, 2019, by and between Ton Logtenberg and the
Registrant have not been provided herein:
Annex I: Resignation as Statutory Director, President, Chief Executive Officer, Principal Financial Officer and Director
Annex II: Press release
The Registrant hereby undertakes to furnish supplementally a copy of any omitted schedules or exhibits to the Securities and Exchange
Commission upon request.
Exhibit 10.1.13
Execution Version
EMPLOYMENT AGREEMENT
This Employment Agreement (this “Agreement” ), dated as of December 16, 2019, is made by and between Merus US, Inc., a
Delaware corporation (together with any successors or assigns, the “Company”), and Sven A. Lundberg, M.D. (the “ Executive” )
(collectively referred to herein as the “Parties” or individually referred to as a “Party”).
RECITALS
(A)
(B)
It is the desire of the Company to assure itself of the services of Executive on the terms set forth in this Agreement beginning on
and following the Effective Date (as defined below).
Executive and the Company mutually desire that Executive provide services to the Company on the terms provided herein.
NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements set forth below, the Parties
AGREEMENT
hereto agree as follows:
1.
Employment.
(a)
General. Effective as of January 1. 2020 (the “Effective Date”), the Company shall employ Executive and Executive
shall be employed by the Company, for the period and in the position set forth in this Section 1. and subject to the other terms and conditions
herein provided.
(b)
At-Will. Employment. The Company and Executive acknowledge that Executive’s employment is and shall continue to
be at-will, as defined under applicable law, and that Executive’s employment with the Company may be terminated by either Party at any
time for any or no reason (subject to the notice requirements of Section 3(b)). This “at-will” nature of Executive’s employment shall remain
unchanged during Executive’s tenure as an employee and may not be changed, except in an express writing signed by Executive and a duly
authorized officer of the Company or of Merus N.V., a Dutch public limited liability company (“Parent” ), as applicable. If Executive’s
employment terminates for any reason, Executive shall not be entitled to any payments, benefits, damages, award or compensation other than
as provided in this Agreement or otherwise agreed to in writing by a duly authorized officer of the Company, a duly authorized officer of
Parent or as provided by applicable law. The period of Executive’s employment by the Company beginning on the Effective Date shall be
referred to herein as the“Term”.
(c)
Position: Duties and Location. Executive shall serve as President and Chief Executive Officer of the Company and of
the Parent, with such responsibilities, duties and authority normally associated with such position and as may from time to time be assigned
to Executive by the Board of Directors of Parent or an authorized committee thereof (in either case, the “Board”). During the Term,
Executive shall serve as a member of the Board, subject to the approval of the shareholders of Parent. Executive’s normal place of work shall
be at the Company’s office in the Boston, Massachusetts metropolitan area. Executive shall devote substantially all of Executive’s working
time and efforts to the business and affairs of the Company (which shall include service to its affiliates, if applicable) and shall not engage in
outside business activities (including serving on outside boards or committees) without the
consent of the Board, provided that Executive shall be permitted to (i) manage Executive’s personal, financial and legal affairs, (ii) participate
in trade associations, (iii) serve on the board of directors of not-for-profit or tax-exempt charitable organizations, and (iv) serve on the boards
of directors of (x) AdMlRx, Inc., (y) Vor BioPharma, Inc., and (z) 1928 Diagnostics, in each case, subject to compliance with this Agreement
and provided that such activities do hot materially interfere with Executive’s performance of Executive’s duties and responsibilities
hereunder. Executive agrees to observe and comply with the rules and policies of the Company and Parent as adopted by the Company or
Parent, as applicable, from time to time, in each case as amended from time to time, as set forth in writing, and as delivered or made available
to Executive, including, without limitation, the Parent’s articles of association (statuteri) and board regulations (bestuursreglement) (each, a
“Policy”).
(d)
Shareholder Approval. Notwithstanding anything to the contrary in this Agreement, in the event the shareholders of
Parent do not approve Executive’s appointment as the executive director of Parent or President and Chief Executive Officer of Parent within
ninety (9i)) days following the Effective Date, the Company may terminate this Agreement and Executive’s employment hereunder without
any obligation to pay additional compensation under this Agreement or any other liability to Executive, other than any payments required by
the first sentence of Section 3(c). For the avoidance of doubt, Executive shall not have Good Reason to resign his employment in the event he
is not appointed as member of the Board or President and Chief Executive Officer or Parent because of the failure to obtain such shareholder
approval.
2.
Compensation and Related Matters.
(a)
Annual Base Salary. During the Term, Executive shall receive a base salary at a rate of $564,900 per annum, which
shall be paid in accordance with the customary payroll practices of the Company and shall be pro-rated for partial years of employment. Such
annual base salary shall be reviewed (and may be upwardly adjusted) from time to time by the Board (such annual base salary, as it may be
upwardly adjusted from time to time, the “Annual Base Salary”).
(b)
Annual Bonus: Signing Bonus. Dining the Term, Executive will be eligible to participate in an annual incentive
program established by the Board. Executive’ s annual incentive compensation under such incentive program (the “Annual Bonus”) shall be
targeted at 55% of Executive’s Annual Base Salary. Such target bonus shall be reviewed (and may be upwardly adjusted) from time to time
by the Board (such target bonus, as it may be upwardly adjusted from time to time, the “Target Bonus”). The Annual Bonus payable under
the incentive program shall be based on the achievement of performance goals to be determined by the Board. The payment of any Annual
Bonus pursuant to the incentive program shall be subject to Executive’s continued employment with the Company through the date of
payment, except as. provided in Section 4(b), In addition, the Company shall pay Executive a signing bonus of $25,000, less applicable
withholdings, at the first regularly scheduled payroll date following the Effective Date.
(c)
Equity Awards. Promptly following the Effective Date, and subject to the approval of the Board, Executive will be
granted an option to purchase 414,917 common shares of Parent, reflecting 1.50% of the fully-diluted capitalization of the Parent, at an
exercise price per share equal to the closing price per Parent common share on the date of grant or the last trading day preceding the date of
grant if the date of grant is not a trading day (the “Option”). Subject to Executive’s continued engagement with the Company or Parent,
consisting of full or part-time employment, advisory services, or service as a member of the Board of Directors of the Company or Parent
(Executive’s “Business Relationship”), the Option shall vest over a four-year period, with 25% vesting on the first anniversary of the
Effective Date
and the remaining 75% vesting in 36 equal monthly installments following the first anniversary of the Effective Date. The Option will be
subject to the terms of Parent’s 2016 Incentive Award Plan and an award agreement evidencing such Option. Executive shall be eligible to
receive additional equity awards at the discretion of the Board. Notwithstanding anything in Parent’s Non-Executive Director Compensation
Program (the “NED Program”) to the contrary, those unvested options to purchase Common Shares granted to Executive prior to the
Effective Date under the NED Program shall continue to vest during Executive’s Business Relationship.
(d)
Benefits. During the Term, Executive shall be eligible to participate in employee benefit plans, programs and
arrangements of the Company (including medical, dental, vision, life insurance, disability insurance and defined contribution 401(k) plan)
made available to other similarly-situated employees of the Company, consistent with the terms thereof and as such plans, programs and
arrangements may be amended from time to time.
(e)
Vacation. During the Term, Executive shall be entitled to paid personal leave in accordance with the Company’s paid
time off Policies. Any vacation shall be taken at the reasonable and mutual convenience of the Company and Executive.
(f)
Business Expenses. During the Term, the Company shall reimburse Executive for all reasonable travel and other
business expenses incurred by Executive in the performance of Executive’s duties to the Company in accordance with the Company’s
expense reimbursement Policy.
(g)
Key Person Insurance. At any time during the Term, the Company and its affiliates shall have the right to insure the life
of Executive for the Company’s and its affiliates’ benefit. The Company shall have the right to determine the amount of insurance and the
type of policy. Executive shall reasonably cooperate with the Company in obtaining such insurance by. submitting to physical examinations,
by supplying all information reasonably required by any insurance carrier, and by executing all necessary documents reasonably required by
any insurance carrier, provided that any information provided to an insurance company or broker shall not be provided to the Company
without the prior written authorization of Executive. Executive shall incur no financial obligation by executing any required document, and
shall have no interest in any such policy.
3.
Termination.
(a)
. Circumstances. Executive’s employment hereunder may be terminated by the Company or Executive, as applicable,
without any breach of this Agreement, at any time, under the following circumstances:
(i)
Death. Executive’s employment hereunder shall terminate upon Executive’s death.
(ii)
employment.
(iii)
(iv)
(v)
Disability. If Executive has incurred a Disability, as defined below, the Company may terminate Executive’s
Termination for Cause. The Company may terminate Executive’s employment for Cause, as defined below.
Termination without Cause. The Company may terminate Executive’s employment without Cause.
Resignation from the Company for Good Reason. Executive may resign Executive’s employment with the
Company for Good Reason, as defined below.
(vi)
Resignation from the Company Without Good Reason. Executive may resign Executive’s employment with
the Company for any reason other than Good Reason or for no reason.
(b)
Notice of Termination. Any termination of Executive’s employment by the Company or by Executive under this
Section 3 (other than termination pursuant to Section 3(a)(i)) shall be communicated by a written notice to the other Party hereto (i)
indicating the specific termination provision in this Agreement relied upon, (ii) setting forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive’s employment under the provision so indicated, if applicable, and (iii) specifying a
Date of Termination which, if submitted by Executive, shall be at least thirty (30) days following the date of such notice (a “ Notice of
Termination”); provided, however, that in the event that Executive delivers a Notice of Termination to the Company, the Company may, in its
sole discretion, change the Date of Termination to any date that occurs on or following the date of the Company’s receipt of such Notice of
Termination and is prior to the date specified in such Notice of Termination. A Notice of Termination submitted by the Company may
provide for a Date of Termination on the date Executive receives the Notice of Termination, or any date thereafter elected by the Company in
its sole discretion. The failure by the Company or Executive to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Cause or Good Reason shall not waive any right of such Party hereunder or preclude such Party from asserting
such fact or circumstance in enforcing such Party’s rights hereunder.
(c)
Company Obligations upon Termination. Upon'termination of Executive’s employment pursuant to this Section 3,
Executive (or Executive’s estate) shall be entitled to receive the sum of: (i) the portion of Executive’s Annual Base Salary earned through the
Date of Termination, but not yet paid to Executive; (ii) any expenses owed to Executive pursuant to Section 2(f); and (iii) any amount
accrued and arising from Executive’s participation in, or benefits accrued under any employee benefit plans, programs or arrangements,
which amounts shall be payable in accordance with the terms and conditions of such employee benefit plans, programs or arrangements
(collectively, the “Company Arrangements”). Except as otherwise expressly required by law (e.g., COBRA) or as specifically provided
herein, all of Executive’s rights to salary, severance, benefits, bonuses and other compensatory amounts hereunder (if any) shall cease upon
the termination of Executive’s employment hereunder. In the event that Executive’s employment is terminated by the Company for any
reason, Executive’s sole and exclusive remedy shall be to receive the payments and benefits described in this Section 3(c) or Section 4. as
applicable.
(d)
Deemed Resignation. Upon termination of Executive’s employment for any reason, Executive shall be deemed to have
resigned from all offices and directorships, if any, then held with the Company, Parent or any of their subsidiaries or affiliates and Executive
agrees to execute any documentation (including, without limitation, resignation letters) reasonably requested by the Company or Parent to
document any such resignation.
4.
Severance Payments.
(a)
Termination for Cause, or Termination Upon Death, Disability or Resignation from the Company Without Good
Reason. If Executive’s employment shall terminate as a result of Executive’s death pursuant to Section 3(a)(i) or Disability pursuant to
Section 3(a)(ii), pursuant to Section 3(a)(iii) for Cause, or pursuant to Section 3(a)(vi) for Executive’s resignation from the Company without
Good Reason, then Executive shall not be entitled to any severance payments or benefits, except as provided in Section 3(c).
(b)
Termination without Cause or Resignation from the Company for Good Reason. If Executive’s employment is
terminated by the Company without Cause pursuant to Section 3(a)(iv) (other than as provided in Section 1(d) or pursuant to Section 3(a)(v)
due to Executive’s resignation for Good Reason, in either case, which termination does not occur withjn twelve (12) months following the
date of a Change in Control, then, subject to Executive signing on or before the 21st day following Executive’s Separation from Service (as
defined below), and not revoking, a release of claims in substantially the form attached hereto as Exhibit A (the “Release”), and Executive’s
continued compliance with Section 5. Executive shall receive, in addition to payments and benefits set forth in Section 3(c). the following:
an amount in cash equal to 1.0 times the Annual Base Salary, payable in the form of salary continuation in
regular installments over the 12-month month period following the date ofExecutiye’s Separation from Service (the “Severance Period”) in
accordance with the Company’s customary payroll practices;
(i)
(ii)
any unpaid Annual Bonus earned by Executive for the year prior to the year in which the Date of
Termination occurs, as determined by the Board based upon actual performance achieved, which Annual Bonus, if any, shall be paid to
Executive when bonuses for such year are paid to actively employed senior executives of the Company, but in no event later than the end of
the year in which the Date of Termination occurs;
(iii)
solely in the event that Executive’s employment is terminated or Executive resigns prior to the first
anniversary of the Effective Date, immediate vesting of any unvested equity or equity-based awards that would have vested if the Executive’s
Business Relationship had continued for twelve months following such termination or resignation; and
(iv)
if Executive elects to receive continued medical, dental or vision coverage under one or more of the
Company’s group healthcare plans pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), the
Company shall directly pay, or reimburse Executive for, the COBRA premiums for Executive and Executive’s . covered dependents under
such plans during the period commencing on Executive’s Separation from Service and ending upon the earliest of (X) the last day of the
Severance Period, (Y) the date that Executive and/or Executive’s covered dependents become no longer eligible for COBRA or (Z) the date
Executive becomes eligible to receive healthcare coverage from a subsequent employer (and Executive agrees to promptly notify the
Company of such eligibility). Notwithstanding the foregoing, if the Company determines in its sole discretion that it cannot provide the
foregoing benefit without potentially violating applicable law or incurring an excise tax (including, without limitation, by reason of Section
2716 of the Public Health Service Act), the Company shall, in lieu thereof, provide to Executive a taxable monthly payment in an amount
equal to the monthly COBRA premium that Executive would be required to pay to continue Executive’s and Executive’s covered
dependents’ group health coverage in effect on the Date of Termination (which amount shall be based on the premium for the first month of
COBRA coverage), less the amount the Executive would have had to pay to receive group health coverage for Executive and Executive’s
covered dependents based on the cost sharing levels in effect on the Date of Termination, which payments shall be made regardless of
whether Executive elects COBRA continuation coverage and shall commence in the month following the month in which the Date of
Termination occurs and shall end on the earlier of (X) the last day of the Severance Period, (Y) the date that Executive and/or Executive’s
covered dependents become no longer eligible for COBRA or (Z) the date Executive becomes eligible to receive healthcare coverage from a
subsequent employer.
(c)
Change in Control. In lieu of the payments and benefits set forth in Section 4(b), in the event Executive’s employment
is terminated by the Company without Cause pursuant to Section 3(a)(iv) or pursuant to Section 3(a)(v) due to Executive’s resignation for
Good Reason, in either case, on or within twelve (12) months following the date of a Change in Control, then, subject to Executive signing
on or before the 21st day following Executive’s Separation from Service, and not revoking, the Release, and Executive’s continued
compliance with Section 5, Executive shall receive, in addition to the payments and benefits set forth in Section 3(c) the following:
payable in a lump sum on the First Payment Date;
(i)
an amount in cash equal to 1.5 times the sum of (A) the Annual Base Salary and (B) the Target Bonus,
Period” for purposes of Section 4(b)(iii) is eighteen (18) months; and
(ii)
the payments and benefits provided under Section 4(b)(ii) and Section 4(b)(iii), except the “Severance
(iii)
provided that the Date of Termination occurs more than twelve (12) months following the Effective Date,
immediate vesting of all unvested equity or equity-based awards held by Executive under any equity compensation plans of Parent that vest
solely based on the passage of time (with any such awards that vest in whole or in part based on the attainment of performance-vesting
conditions being governed by the terms of the applicable award agreement).
5.
Employee Proprietary Information and Inventions Assignment Agreement
As a condition to the effectiveness of this Agreement, Executive will execute and deliver to the Company contemporaneously
herewith an Employee Proprietary Information and Inventions Assignment Agreement (the “Proprietary Information Agreement”), which
Proprietary Information Agreement contains certain non-competition, non-solicitation, non-disclosure and assignment of inventions
provisions in favor of the Company and Parent. Executive agrees to abide by the terms of the Proprietary Information Agreement, which are
hereby incorporated by reference into this Agreement. Executive acknowledges that the provisions of the Proprietary Information Agreement
will survive the termination of Executive’s employment and the termination of the Term for the, periods set forth in the Proprietary
Information Agreement.
6.
Assignment and Successors.
The Company may assign its rights and obligations under this Agreement to any of its affiliates, including, without limitation, any
successor to all or substantially all of the business or the assets of the Company (by merger or otherwise), and may assign or encumber this
Agreement and its rights hereunder as security for indebtedness of the Company and its affiliates. This Agreement shall be binding upon and
inure to the benefit of the Company, Executive and their respective successors, assigns, personnel and legal representatives, executors,
administrators, heirs, distributees, devisees, and legatees, as applicable. None of Executive’s rights or obligations may be assigned or
transferred by Executive, other than Executive’s rights to payments hereunder, which may be transferred only by will or operation of law.
Notwithstanding the foregoing, Executive shall be entitled, to the extent permitted under applicable law and applicable Company
Arrangements, to select and change a beneficiary or beneficiaries to receive compensation hereunder following Executive’s death by giving
written notice thereof to the Company.
7.
Certain Definitions.
(a)
Cause. The Company shall have “Cause” to terminate Executive’s employment hereunder upon:
(i)
Executive’s failure to (A) substantially perform Executive’s duties with the Company (other than any such
failure resulting from Executive’s Disability) or (B) comply with, in any material respect, any of the Company’s Policies; provided that such
“Cause” shall be deemed to occur only after the Company has given notice thereof to the Executive specifying in reasonable detail the
conduct constituting “Cause,” and, to the extent curable and correctable and the failure is not another breach after a prior cure period, the
Executive fails to cure and correct his conduct within thirty (30) days after such notice;
(ii)
the Board’s determination that Executive failed in any material respect to carry out or comply with any
lawful and reasonable directive of the Board; provided that such “Cause” shall be deemed to occur only after the Company has given notice
thereof to the Executive specifying in reasonable detail the conduct constituting “Cause,” and, to the extent curable and correctable and the
failure is not another failure after a prior cure period, the Executive fails to cure and correct his conduct within thirty (30) days after such
notice;
(iii)
Executive’s breach of a material provision of this Agreement or the Proprietary Information Agreement;
provided that such “Cause” shall be deemed to occur only after the Company has given notice thereof to the Executive specifying in
reasonable detail the conduct constituting “Cause,” and, to the extent curable and correctable and the failure is not another breach after a prior
cure period, the Executive fails to cure and correct his conduct within thirty (30) days after such notice;
.
probation for any felony or crime involving moral turpitude;
(iv)
Executive’s conviction, plea of no contest, plea of nolo contendere, or imposition of unadjudicated
Company’s (or any of its affiliate’s) premises or while performing Executive’s duties and responsibilities under this Agreement; or
(v)
Executive’s unlawful use (including being under the influence) or possession of illegal drugs on the
of fiduciary duty against the Company or any of its affiliates.
(vi)
Executive’s commission of an act of fraud, embezzlement, misappropriation, willful misconduct, or breach
(b)
Change in Control. “Change in Control” shall mean and include each of the following:
(i)
A transaction or series of related transactions (other than an offering of common shares of Parent to the
general public through a registration statement filed with the Securities and Exchange Commission or a transaction or series of related
transactions that meets the requirements of clauses (A) and (B) of subsection (ii) below) whereby any “person” or related “group” of
“persons” (as such terms are used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the “Exchange Act”)) (other than
the Parent, any of its subsidiaries, an employee benefit plan maintained by the Parent or any of its subsidiaries or a “person” that, prior to
such transaction, directly or indirectly controls, is controlled by, or is under common control with, the Parent) directly or indirectly acquires
beneficial ownership (within the meaning of Rule. 13d-3 under the Exchange Act) of securities of the Parent possessing more than 50% of
the total combined voting power of the Parent’s securities outstanding immediately after such acquisition; or
(ii)
The consummation by the Parent (whether directly involving the Parent or indirectly involving the Parent
through one or more intermediaries) of (x) a merger, consolidation, reorganization, or business combination or (y) a sale or other disposition
of all or substantially all of the Parent’s assets in any single transaction or series of related transactions or (z) the acquisition of assets or stock
of another entity, in each case other than a transaction:
(A)
which results in the Parent’s voting securities outstanding immediately before the transaction
continuing to represent (either by remaining outstanding or by being converted into voting securities of the Parent or
the person that, as a result of the transaction, controls, directly or indirectly, the Parent or owns, directly or indirectly,
all or substantially all of the Parents assets or otherwise succeeds to the business of the Parent (the Parent or such
person, the “Successor Entity” )) directly or indirectly, at least a majority of the combined voting power of the
Successor Entity’s outstanding voting securities immediately after the transaction, and
(B)
after which no person or group beneficially owns voting securities representing 50% or more of
the combined voting power of the Successor Entity; provided, however, that no person or group shall be treated for
purposes of this clause (B) as beneficially owning 50% or more of the combined voting power of the Successor Entity
solely as a result of the voting power held in the Parent prior to the consummation of the transaction.
Notwithstanding the foregoing, in no event shall the transaction or event described in subsection (i) or (ii) constitute a Change in
Control for purposes of this Agreement unless such transaction also constitutes a “ change in control event,” as defined in Treasury
Regulation Section 1.409A-3(i)(5).
(c)
promulgated thereunder.
Code. “Code” shall mean the Internal Revenue Code of 1986, as amended, and the regulations and guidance
(d)
Date of Termination. “Date of Termination” shall mean (i) if Executive’s employment is terminated by Executive’s
death, the date of Executive’s death; or (ii) if Executive’s employment is terminated pursuant to Section 3(a)(ii) - (vi) either the date indicated
in the Notice of Termination or the date specified by the Company pursuant to Section 3(b), whichever is earlier.
(e)
Disability. “Disability” shall mean, at any time the Company or any of its affiliates sponsors a .long-term disability plan
for the Company’s employees, “disability” as defined in such long-term disability plan for the purpose of determining a participant’s
eligibility for benefits, provided, however, if the long-term disability plan contains multiple definitions of disability, “Disability” shall refer to
that definition of disability which, if Executive qualified for such disability benefits, would provide coverage for the longest period of time.
The determination of whether Executive has a Disability shall be made by the person or persons required to make disability determinations
under the long-term disability plan. At any time the Company does not sponsor a long-term disability plan for its employees, “Disability”
shall mean Executive’s inability to perform, with or without reasonable accommodation, the essential functions of Executive’s position
hereunder for a total of three months during any six-month period as a result of incapacity due to mental or physical illness as determined by
a physician selected by the Company or its insurers and acceptable to Executive or Executive’s legal representative, with such agreement as
to acceptability not to be unreasonably withheld or delayed. Any refusal by Executive to submit to a medical examination for the purpose of
determining Disability shall be deemed to constitute conclusive evidence of Executive’s Disability.
(f)
Good Reason. For the sole purpose of determining Executive’s right to severance payments as described above,
Executive’s resignation will be for “Good Reason” if Executive resigns within ninety days after any of the following events, unless Executive
consents to the applicable event: (i) a decrease in Executive’s Annual Base Salary, other than a reduction in Annual Base Salary of less than
10% that is implemented in connection with a contemporaneous reduction in annual base salaries affecting other senior executives of the
Company and the
Parent, (ii) a material decrease in Executive’s
authority or areas of responsibility as are commensurate with Executive’s title or position (other than in connection with a corporate
transaction where Executive continues to hold the position referenced in Section 1(c) above with respect to the Parent’s business,
substantially as such business exists prior to the date of consummation of such corporate transaction, but does not hold such position with
respect to the successor corporation), (iii) the relocation of Executive’s primary office to a location more than 50 miles from the Boston,
Massachusetts metropolitan area, or (iv) Executive’s removal from the Board. Notwithstanding the foregoing, no Good Reason will have
occurred unless and until Executive has: (i) provided the Company and Parent, within 90 days of Executive’s knowledge of the occurrence of
the facts and circumstances underlying the Good Reason event, written- notice stating with specificity the applicable facts and circumstances
underlying such finding of Good Reason; and (ii) provided the Company or Parent, as applicable, with an opportunity to cure the same within
30 days after the receipt of such notice.
(g)
Person. “Person” means any individual or any corporation, limited liability company, general partnership, limited
partnership, venture, trust, business trust, unincorporated association, estate or other entity.
8.
Parachute Payments.
(a)
Notwithstanding any other provisions of this Agreement or any Parent equity plan or agreement, in the event that any
payment or benefit by the Company, Parent or otherwise to or for the benefit of Executive, whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise (all such payments and benefits, including the payments and benefits under
Section 4(b) or Section 4(c) hereof, being hereinafter referred to as the “Total Payments” ), would be subject (in whole or in part) to the
excise tax imposed by Section 4999 of the Code (the “Excise Tax” ), then the Total Payments shall be reduced (in the order provided in
Section 8(b)) to the extent necessary to avoid the imposition of the Excise Tax on the Total Payments, but only if (i) the net amount of such
Total Payments, as so reduced (and after subtracting the net amount of federal, state and local income and employment taxes on such reduced
Total Payments and after taking into account the phase out of itemized deductions and personal exemptions attributable to such reduced Total
Payments), is greater than or equal to (ii) the net amount of such Total Payments without such reduction (but after subtracting the net amount
of federal, state and local income and employment taxes on such Total Payments and the amount of the Excise Tax to which Executive would
be subject in respect of such unreduced Total Payments and after taking into account the phase out of itemized deductions and personal
exemptions attributable to such unreduced Total Payments).
(b)
The Total Payments shall be reduced in the following order: (i) reduction on a pro-rata basis of any cash severance
payments that are exempt from Section 409A of the Code (“Section 409A”). (ii) reduction on a pro-rata basis of any non-cash severance
payments or benefits that are exempt from Section 409A, (iii) reduction on a pro-rata basis of any other payments or benefits that are exempt
from Section 409A, and (iv) reduction of any payments or benefits otherwise payable to Executive on a pro-rata basis or such other manner
that complies with Section 409A; provided, in case of clauses (ii), (iii) and (iv), that reduction of any payments attributable to the
acceleration of vesting of equity awards shall be first applied to equity awards that would otherwise vest last in time.
(c)
The Company or Parent will select an accounting firm or consulting group with experience in performing calculations
regarding the applicability of Section 280G of the Code and the Excise Tax (the “Independent Advisors”) to make determinations regarding
the application of this Section 8. For purposes of such determinations, no portion of the Total Payments shall be taken into account
which, in the opinion of the Independent Advisors, (i) does not constitute a “ parachute payment” within the meaning of Section 280G(b)(2)
of the Code (including by reason of Section 280G(b)(4)(A) of the Code) or (ii) constitutes reasonable compensation for services actually
rendered, within the meaning of Section 280G(b)(4)(B) of the Code, in excess of the “ base amount” (as defined in Section 280G(b)(3) of the
Code) allocable to such reasonable compensation. The costs of obtaining such determination and all related fees and expenses (including
related fees and expenses incurred in any later audit) shall be borne by the Company or Parent, as applicable.
In the event it is later determined that, to implement the objective and intent of this Section 8, a greater reduction in the
Total Payments should have been made, the excess amount shall be returned promptly by Executive to the Company or Parent, as applicable.
(d)
9.
Miscellaneous Provisions.
(a)
Governing Law. This Agreement shall be governed, construed, interpreted and enforced in accordance with its express
terms, and otherwise in accordance with the substantive laws of the Commonwealth of Massachusetts without reference to the principles of
conflicts of law of the Commonwealth of Massachusetts or any other jurisdiction, and where applicable, the laws of the United States.
(b)
Validity. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity
or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
(c)
Notices. Any notice, request, claim, demand, document and other communication hereunder to any Party shall be
effective upon receipt (or refusal of receipt) and shall be in writing and delivered personally or sent by facsimile or certified or registered
mail, postage prepaid, as follows:
(i)
(ii)
or
If to the Company or the Parent, the General Counsel of the Parent at its headquarters,
If to Executive, at the last address that the Company or the Parent has in its personnel records for Executive,
(iii)
At any other address as any Party shall have specified by notice in writing to the other Party.
(d)
Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an
original, but all of which together will constitute one and the same Agreement. Signatures delivered by facsimile, PDF or email shall be
deemed effective for all purposes.
(e)
Entire Agreement. The terms of this Agreement and die Proprietary Information Agreement are intended by the Parties
to be the final expression of their agreement with respect to the subject matter hereof and thereof and supersede all prior understandings and
agreements, whether written or oral, including any prior employment agreement or offer letter between Executive, the Company and/or
Parent. The Parties further intend that this Agreement and the Proprietary Information Agreement shall constitute the complete and exclusive
statement of their terms and that no extrinsic evidence whatsoever may be introduced in any judicial, administrative, or other legal
proceeding to vary the terms of this Agreement or the Proprietary Information Agreement.
(f)
Amendments: Waivers. This Agreement may not be modified, amended, or terminated except by an instrument in
writing, signed by Executive and a duly authorized officer of the Parent or the
Company. By an instrument in writing similarly executed, Executive or a duly authorized officer of the Company or the Parent may waive
compliance by the other Party with any specifically identified provision of this Agreement that such other Party was or is obligated to comply
with or perform; provided, however, that such waiver shall not operate as a waiver of, or estoppel with respect to, any other or subsequent
failure. No failure to exercise and no delay in exercising any right, remedy, or power hereunder preclude any other or further exercise of any
other right, remedy, or power provided herein or by law or in equity.
(g)
No Inconsistent Actions. The Parties hereto shall not voluntarily undertake or fail to undertake any action or course of
action inconsistent with the provisions or essential intent of this Agreement. Furthermore, it is the intent of the Parties hereto to act in a fair
and reasonable manner with respect to the interpretation and application of the provisions of this Agreement.
(h)
Construction. This Agreement shall be deemed drafted equally by both the Parties. Its language shall be construed as a
whole and according to its fair meaning. Any presumption or principle that the language is to be construed against any Party shall not apply.
The headings in this Agreement are only for convenience and are not intended to affect construction or interpretation. Any references to
paragraphs, subparagraphs, sections or subsections are to those parts of this Agreement, unless the context clearly indicates to the contrary.
Also, unless the context clearly indicates to the contrary, (a) the plural includes the singular and the singular includes the plural; (b) “and”
and “or” are each used both conjunctively and disjunctively; (c) “any,” “all,” “each,” or “every” means “any and all,” and “each and every”;
(d) “includes” and “including” are each “without limitation”; (e) “herein,” “hereof,” “hereunder” and other similar compounds of the word
“here” refer to the entire Agreement and not to any particular paragraph, subparagraph, section or subsection; and (f) all pronouns and any
variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural as the identity of the entities or persons
referred to may require.
(i)
Arbitration. Any controversy, claim or dispute arising out of or relating to this Agreement, shall be settled solely and
exclusively by a binding arbitration process administered by JAMS/Endispute in Boston, Massachusetts. Such arbitration shall be conducted
in accordance with the then-existing JAMS/Endispute Rules of Practice and Procedure, with the following exceptions if in conflict: (a) one
arbitrator who is a retired judge shall be cliosen by JAMS/Endispute; (b) each Party to the arbitration will pay one-half of the expenses and
fees of the arbitrator, together with other expenses of the arbitration incurred or approved by the arbitrator; and (c) arbitration may proceed in
the absence of any Party if written notice (pursuant to the JAMS/Endispute rales and regulations) of the proceedings has been given to Such
Party. Each Party shall bear its own attorneys’ fees and expenses; provided that the arbitrator may assess the prevailing Party’s fees and costs
against the non-prevailing Party as part of the arbitrator’s award. The Parties agree to abide by all decisions and awards rendered in such
proceedings. Such decisions and awards rendered by the arbitrator shall -be final and conclusive. All such controversies, claims or disputes
shall be settled in this manner in lieu of any action at law or equity; provided, however, that nothing in this subsection shall be construed as
precluding the bringing an action for injunctive relief or specific performance as provided in this Agreement or the Proprietary Information
Agreement. This dispute resolution process and any arbitration hereunder shall be confidential and neither any Party nor the neutral arbitrator
shall disclose the existence, contents or results of such process without the prior written consent of all Parties, except where necessary or
compelled in a Court to enforce this arbitration provision or an award horn such arbitration or otherwise in a legal proceeding. If
JAMS/Endispute no longer exists or is otherwise unavailable, the Parties agree that the American
Arbitration Association (“AAA”) shall administer the arbitration in accordance with its then-existing rules as modified by this subsection. In
such event, all references herein to JAMS/Endispute shall mean AAA.
(j)
Enforcement. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future
laws effective during the Term, such provision shall be fully severable; this Agreement shall be construed and enforced as if such illegal,
invalid or unenforceable provision had never comprised a portion of this Agreement; and the remaining provisions of this Agreement shall
remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this
Agreement. Furthermore, in lieu of such illegal, invalid or unenforceable provision there shall be added automatically as part of this
Agreement a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and
enforceable.
(k)
Withholding. The Company shall be entitled to withhold from any amounts payable under this Agreement any federal,
state, local or foreign withholding or other taxes or charges which the Company is required to withhold. The Company shall be entitled to
rely on an opinion of counsel if any questions as to the amount or requirement of withholding shall arise.
(l)
Survival. Notwithstanding anything to the contrary in this Agreement, the provisions of Sections 5 through 9 will
survive the termination of Executive’s employment and the expiration or termination of the Term.
(m)
Section 409A.
(i)
General. The intent of the Parties is that the payments and benefits under this Agreement comply with or be
exempt from Section 409A and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in compliance
therewith.
(ii)
Separation from Service. Notwithstanding anything in this Agreement to the contrary, any compensation or
benefits payable under this Agreement that are designated under this Agreement as payable upon Executive’s termination of employment
shall be payable only upon Executive’s “separation from service” with the Company within the meaning of Section 409A (a “Separation from
Service”) and, except as provided below, any such compensation or benefits described in Sections 4(b) and 4(c) shall not be paid, or, in the
case of installments, shall not commence payment, until the 30th day following Executive’s Separation from Service (the “First Payment
Date”). Any installment payments that would have been made to Executive during the 30-day period immediately following Executive’s
Separation from Service but for the preceding sentence shall be paid to Executive on the First Payment Date and the remaining payments
shall be made as provided in this Agreement.
(iii)
Specified Employee. .Notwithstanding anything in this Agreement to the contrary, if Executive is deemed
by the Company at the time of Executive’s Separation from Service to be a “ specified employee” for purposes of Section 409A, to the extent
delayed commencement of any portion of the benefits to which Executive is entitled under this Agreement is required in order to avoid a
prohibited distribution under Section 409A, such portion of Executive’s benefits shall not be provided to Executive prior to the earlier of (i)
the expiration of the 6-month period measured from the date of Executive’s Separation from Service with the Company or (ii) the date of
Executive’s death. Upon the first business day following the expiration of the applicable Section 409A period, all payments deferred pursuant
to the preceding sentence shall be paid in a lump sum to Executive (or Executive’s estate or beneficiaries), and any remaining payments due
to Executive under this Agreement shall be paid as otherwise provided herein.
(iv)
Expense Reimbursements. To the extent that any reimbursements under this Agreement are subject to
Section 409A, any such reimbursements payable to Executive shall be paid to Executive no later than December 31 of the year following the
year in which the expense was incurred, provided that Executive submits Executive’s reimbursement request promptly following the date the
expense is incurred. The amount of expenses reimbursed in one year shall not affect the amount eligible for reimbursement in any subsequent
year, other than medical expenses referred to in Section 105(b) of the Code, and Executive’s right to reimbursement under this Agreement
will not be subject to liquidation or exchange for another benefit.
(v)
Installments. Executive’s right to receive any installment payments under this Agreement, including, without
limitation, any continuation of salary payments that are payable on Company payroll dates, shall be treated as a right to receive a series of
separate payments and, accordingly, each such installment payment shall at all times be considered a separate and distinct payment as
permitted under Section 409A. Except as otherwise permitted under Section 409A, no payment hereunder shall be accelerated or deferred
unless such acceleration or deferral would not result in additional tax or interest pursuant to Section 409A.
10.
Executive Acknowledgement.
Executive acknowledges that Executive has read and understands this Agreement, is fully aware of its legal effect, has not acted in
reliance upon any representations or promises made by the Company other than those contained in writing herein, and has entered into this
Agreement freely based on Executive’s own judgment.
11.
Third Party Beneficiary Rights.
The Parent has third party beneficiary rights to the terms of this Agreement applicable to the Company.
12.
Legal Fees.
The Company agrees to pay Executive’s reasonable legal fees incurred in connection with the negotiation of this Agreement, up to
a maximum of ten thousand dollars ($10,000). The Company will pay such legal fees within sixty (60) days following receipt of an invoice
establishing such fees which invoice shall be provided by Executive to the Company in January 2020.
[Signature Page Follows]
IN WITNESS WHEREOF, the persons below have executed this Agreement on the date and year first above written.
MERUS US, INC.
By: /s/ R. Greig
Name: R. Greig
Title: Chair
EXECUTIVE
/s/ S A Lundberg
Sven A. Lundberg, M.D.
For purposes of Parent’s rights and obligations hereunder:
MERUS N.V.
By: /s/ R. Greig
Name:
Title:
By:
Name:
Title:
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
Merus N.V.
We consent to the incorporation by reference in the registration statements (No. 333-211497 and No. 333-230708) on Form S-8 of Merus
N.V. of our report dated March 16, 2020, with respect to the consolidated balance sheets of Merus N.V. as of December 31, 2019 and 2018,
the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the years in the
two-year period ended December 31, 2019, and the related notes, which report appears in the December 31, 2019 Annual Report on Form 10-
K of Merus N.V.
/s/ KPMG Accountants N.V.
Amstelveen, the Netherlands
March 16, 2020
CERTIFICATION
Exhibit 31.1
I, Sven (Bill) Ante Lundberg, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Merus N.V.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) 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)
(b)
(c)
(d)
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;
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;
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
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(s) 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)
(b)
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
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 16, 2020
By:
/s/ Sven A. Lundberg
Sven (Bill) Ante Lundberg
President, Chief Executive Officer and
Principal Financial Officer
(Principal Executive Officer and
Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of Merus N.V. (the “Company”) for the period ended December 31, 2019 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1)
(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 result of operations of the
Company.
Date: March 16, 2020
By:
/s/ Sven A. Lundberg
Sven (Bill) Ante Lundberg
President, Chief Executive Officer and
Principal Financial Officer
(Principal Executive Officer and
Principal Financial Officer)