Protagonist Therapeutics, Inc.
Annual Report 2017

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10‑K☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2017or☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from toCommission File No. 001‑37852PROTAGONIST THERAPEUTICS, INC.(Exact name of registrant as specified in its charter)Delaware98-0505495(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification No.)7700 Gateway Boulevard, Suite 140Newark, California 94560(510) 474-0170(Address, including zip code, of registrant’sprincipal executive offices)(Telephone number, including area code, of registrant’sprincipal executive offices)Securities registered pursuant to Section 12(b) of the Act:Title of each className of each exchange on which registeredCommon Stock, $0.00001 par valueThe Nasdaq Global MarketSecurities registered pursuant to Section 12(g) of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe 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 thepast 90 days. Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to besubmitted and posted 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 registrantwas required to submit and post such files). Yes ☒ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation SK (§ 229.405 of this chapter) is not contained herein, and will notbe contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10K or anyamendment to this Form 10K. Yes ☐ No ☒ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerginggrowth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 ofthe Exchange Act.Large accelerated filer☐Accelerated filer☒Non-accelerated filer☐ (Do not check if a smaller reporting company)Smaller reporting company☐ Emerging growth company☒ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new orrevised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ☒ No ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act of 1934). Yes ☐ No ☒The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $109.6 million as of June 30, 2017, based upon theclosing sale price on The Nasdaq Global Market reported on June 30, 2017. Excludes an aggregate of 7,209,737 shares of the registrant’s common stock held byofficers, directors and affiliated stockholders. For purposes of determining whether a stockholder was an affiliate of the registrant at June 30, 2017, the registrantassumed that a stockholder was an affiliate of the registrant at June 30, 2017 if such stockholder (i) beneficially owned 10% or more of the registrant’s common stock,as determined based on public filings and/or (ii) was an executive officer or director or was affiliated with an executive officer or director of the registrant at June 30,2017. Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of themanagement or policies of the registrant or that such person is controlled by or under common control with the registrant.There were 21,103,775 shares of registrant’s Common Stock, par value $0.00001 per share, outstanding as of February 28, 2018. DOCUMENTS INCORPORATED BY REFERENCE:Portions of the registrant’s definitive Proxy Statement for the registrant’s 2018 Annual Meeting of Stockholders, to be filed subsequent to the date hereof with theSecurities and Exchange Commission (SEC), are incorporated by reference into Part III of this report. Such proxy statement will be filed with the SEC not later than120 days after the end of the registrant’s fiscal year ended December 31, 2017. Table of ContentsPROTAGONIST THERAPEUTICS, INC.2017 FORM 10‑K ANNUAL REPORTTABLE OF CONTENTS PagePART I Item 1. Business1Item 1A. Risk Factors32Item 1B. Unresolved Staff Comments80Item 2. Properties80Item 3. Legal Proceedings80Item 4. Mine Safety Disclosures80 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities81Item 6. Selected Financial Data84Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations85Item 7A. Quantitative and Qualitative Disclosures about Market Risk101Item 8. Financial Statements and Supplementary Data103Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure137Item 9A. Controls and Procedures137Item 9B. Other Information138 PART III Item 10. Directors, Executive Officers, and Corporate Governance139Item 11. Executive Compensation139Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters139Item 13. Certain Relationships and Related Transactions, and Director Independence139Item 14. Principal Accounting Fees and Services139 PART IV Item 15. Exhibits, Financial Statement Schedules140SIGNATURES Table of Contents PART IStatements made in this Annual Report on Form 10‑K contain certain forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.Forward-looking statements are identified by words such as “believe,” “will,” “may,” “estimate,” “continue,”“anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” or the negative of these terms orsimilar expressions. You should read these statements carefully because they discuss future expectations, containprojections of future results of operations or financial condition, or state other “forward-looking” information. Thesestatements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptionsthat underlie these statements. These forward-looking statements are subject to certain risks and uncertainties that couldcause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might causesuch a difference include, but are not limited to, those discussed in this report in “Item 1A. Risk Factors” and elsewhere inthis Annual Report. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on therelevant subject. These statements are based upon information available to us as of the date of this report, and while webelieve such information forms a reasonable basis for such statements, such information may be limited or incomplete, andour statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, allpotentially available relevant information. These statements are inherently uncertain and investors are cautioned not tounduly rely upon these statements. Forward-looking statements are based on our management’s beliefs and assumptionsand on information currently available to our management. These statements, like all statements in this report, speak only asof their date, and we undertake no obligation to update or revise these statements in light of future developments. Wecaution investors that our business and financial performance are subject to substantial risks and uncertainties. Item 1.Business.We are a clinical-stage biopharmaceutical company with a proprietary technology platform that enables the discoveryand development of novel constrained peptide-based drug candidates that address significant unmet medical needs. Ourproduct candidates are designed to affect critical steps in the biological pathways of particular diseases, for example, byblocking protein-protein interactions (“PPI’s”). We believe our peptide-based approach has advantages over alternativeapproaches such as small molecules and antibodies. Two of our clinical stage product candidates, PTG-100 and PTG-200,are potential first-in-class oral drugs that block biological pathways currently targeted by marketed injectable antibody drugsand offer targeted delivery to the gastrointestinal (“GI”) tissue compartment. We believe that, as compared to antibody drugs,these product candidates have the potential to provide improved safety due to minimal exposure in the blood, increasedconvenience and compliance due to oral delivery, and the opportunity for the earlier introduction of targeted therapy. As aresult, if approved, they may transform the existing treatment paradigm for inflammatory bowel disease (“IBD”), a GI diseaseconsisting primarily of ulcerative colitis (“UC”), and Crohn’s disease (“CD”). Our third clinical stage product candidate,PTG-300, mimics the effect of the hormone hepcidin and has the potential to treat the anemia caused by certain rare blooddisorders.Peptide therapeutics represent a substantial and growing therapeutic class with more than 60 U.S. Food and DrugAdministration (“FDA”) approved drugs. Our platform enables us to discover novel, structurally constrained peptides thatretain certain key advantages of both oral small molecules and injectable antibody drugs, while overcoming many of theirlimitations as therapeutic agents. Constrained peptides are rigid, well-folded structures typically formed by disulfide bondsthat alleviate the fundamental instability inherent in traditional peptides, which cannot be delivered orally. Further, theseconstrained peptides are designed to bind to biological targets, including PPI targets, which are typically approached byantibodies since small molecules cannot bind effectively to these targets. It is estimated that up to 80% of all potentialdisease targets are not amenable to drug development by small molecules and have therefore traditionally been approachedby injectable antibody drugs.PTG-100, a potential first-in-class oral, alpha-4-beta-7 (“α4β7”) integrin antagonist, is currently in a global Phase 2bclinical trial for the treatment of moderate-to-severe UC that is anticipated to randomize approximately 240 patients atapproximately 100 clinical sites. We anticipate conducting an interim futility analysis in the first quarter of 2018 andreporting top-line results in the fourth quarter of 2018. If this trial is successful, we anticipate conducting end-of-Phase 2meetings with global health authorities and initiating pivotal clinical development programs in both UC and CD in 2019. 1 Table of ContentsWe also anticipate developing PTG-100 for the treatment of chronic pouchitis, a GI condition that occurs in many post-surgical IBD patients. We have completed a pre-Investigational New Drug (“IND”) meeting with the FDA regarding thedevelopment pathway for PTG-100 in this indication and anticipate proceeding with clinical development activities pendinga successful outcome of the Phase 2b futility analysis.PTG-200 is a potential first-in-class oral Interleukin-23 receptor (“IL-23R”) antagonist for the treatment of IBD. It iscurrently in a Phase 1 healthy volunteer clinical study that was initiated in the fourth quarter of 2017. We have entered into aworldwide license and collaboration agreement with Janssen Biotech, Inc. (“Janssen”), a Johnson and Johnson company, toco-develop and co-detail PTG-200 for all indications, including IBD. See “Item 7. Management’s Discussion and Analysis –Overview” and Note 3 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K foradditional information.Our novel peptides have potential applicability in a wide range of therapeutic areas in addition to GI diseases. Ourthird product candidate, PTG-300, is a mimic of the hormone hepcidin that we are developing for the treatment of anemia incertain rare blood disorders, with an initial focus on beta-thalassemia. In the fourth quarter of 2017, we completed asuccessful Phase 1 study of PTG-300 in healthy volunteers which established pharmaceutical proof of concept. In 2018, weanticipate filing an IND in the United States and related clinical trial applications outside the United States and initiating aPhase 2 study of PTG-300 in patients with beta-thalassemia. PTG-300 has received an orphan drug designation from the FDAfor the treatment of beta-thalassemia.In addition, we continue to use our peptide technology platform to discover product candidates against targets indisease areas with significant unmet medical needs. In 2018, we anticipate initiating IND-enabling studies for a fourthproduct candidate, an oral peptide targeting a GI condition other than IBD. Our Product Candidates PTG‑100 PTG‑100 has the potential to be a first in class oral, α4β7 antagonist for the treatment of IBD. The α4β7 integrin is oneof the most GI-specific biological targets for IBD. It is a cell surface protein present on T cells that plays an important role inthe trafficking of T cells to the GI tissue compartment by binding to MAdCAM‑1, an extracellular protein that resides mostlyin the GI vasculature. We are leveraging several factors to inform and guide the clinical development of PTG‑100 for the treatment of IBD.First, PTG‑100 shares the same α4β7 integrin target as the injectable antibody drug vedolizumab, marketed as Entyvio®, forthe treatment of moderate-to-severe UC and CD. Second, we utilized pharmacodynamic (“PD”) biomarker assays similar tothose described in scientific publications as used with Entyvio® and other antibodies as indicators of target engagement toestablish proof-of-concept (“POC”) in our Phase 1 clinical trial with PTG‑100. These PD data include dose dependentincreases in receptor occupancy and decreases in receptor expression. We believe that we can utilize published informationdescribing the development and regulatory path of Entyvio® and other approved antibody drugs for IBD to help inform thedesign of our clinical development studies.We have completed extensive pre-clinical studies of PTG‑100 in which we established pharmacological POC,including effects on T cell trafficking and mucosal healing similar to the comparator α4β7 rodent antibody, DATK‑32.Following the submission and approval of a Clinical Trial Notification (“CTN”) in Australia in December 2015, we initiateda Phase 1 clinical trial, comprised of single ascending dose (“SAD”) and multiple ascending dose (“MAD”) components, eachof which evaluated safety, pharmacokinetics (“PK”), and PD-based POC in healthy subjects. The Phase 1 clinical trial wascompleted in June 2016. Dose escalation proceeded up to 1,000 mg in both single and multiple dosing. There were noserious adverse events reported in the trial, and no dose-limiting toxicities were observed. All reported adverse events were ofmild to moderate severity. There were no dose-dependent increases observed for any adverse events. The most frequentadverse events reported by subjects on PTG‑100 were headache and upper respiratory tract infection. These events were alsoobserved in subjects who received placebo.2 Table of ContentsWe initiated a global Phase 2b randomized, double-blinded, placebo-controlled dose-finding clinical trial in the fourthquarter of 2016 to assess the safety and efficacy of PTG‑100 in moderate-to-severe UC patients. We anticipate that the trialwill enroll approximately 240 subjects at approximately 100 sites in the United States, Canada, Europe (Western, Central,and Eastern), Asia, Australia, and New Zealand. The primary objectives of our Phase 2b clinical trial are to evaluate the safetyand tolerability of PTG‑100 and its efficacy in the induction of remission in subjects with moderate-to-severe UC. Secondaryobjectives are to select PTG‑100 induction doses for continued development, to characterize PTG‑100 plasma concentrationsand pharmacodynamic responses, and to evaluate any immunogenicity over 12 weeks. The trial will include subjects whohave had prior exposure to tumor necrosis factor-alpha (“TNF‑α”) inhibitors and subjects who have not been treated withbiologics. Subjects will be randomized to one of four dose arms (150mg/300mg/900mg PTG‑100 or placebo) for 12 weeks ofonce-daily oral dosing, followed by four weeks of safety follow-up. An interim futility analysis is expected to be performedin the first quarter of 2018, and if futility criteria are not met, one or two PTG‑100 doses will be selected for continuedrandomization of the remaining subjects. We expect to complete the study and report top-line data in the fourth quarter of2018. We expect that this trial will support end-of-Phase 2 meetings with global health authorities and enable the initiationof a Phase 3 pivotal program.The primary endpoints are consistent with those used in the clinical development of previously approved drugs for UC.The trial is statistically powered to detect a clinically meaningful difference in induction of remission in subjects withmoderate-to-severe UC who are treated with PTG‑100 compared to placebo. The evaluation of clinical remission is based onthe Mayo Score, which is a well-established composite assessment that utilizes patient-reported outcomes and endoscopicimprovement. Secondary efficacy endpoints will include endoscopic response, clinical response, endoscopic remission,change in endoscopic subscore, change in stool frequency and rectal bleeding subscores, change in fecal calprotectin,change in the IBD questionnaire, change in Mayo score and change in partial Mayo score, from baseline to multiple pointsduring the induction period.We plan to develop PTG‑100 initially for the treatment of moderate-to-severe UC and CD, as well as chronicpouchitis. Subsequent indications may include mild-to-moderate UC, CD, and pediatric IBD, the latter being an orphanindication.PTG‑200 Our second oral, GI-restricted peptide product candidate is PTG‑200, a potential first-in-class IL‑23R specificantagonist for the treatment of IBD. Interleukin‑23 (“IL‑23”), a member of the IL‑12 family of pro-inflammatory cytokines, isa protein that regulates inflammatory and immune function and plays a key role in the development of IBD. By blocking theIL‑23 receptor with PTG‑200 in the GI tissue compartment, we expect to reduce inflammation while potentially minimizingthe risk of systemic side effects due to its GI-restricted nature. The IL‑23 pathway is targeted by the IL‑12 and IL‑23antagonist infused antibody drug ustekinumab, marketed as Stelara®, for psoriasis, psoriatic arthritis, and moderate-to-severeCD.We have completed pre-clinical POC studies and IND-enabling studies for PTG‑200, and we initiated a Phase 1 clinicaltrial in the fourth quarter of 2017. The Phase 1 study, which is being conducted in Australia, is a randomized, double-blind,placebo-controlled, single and multiple dose-escalation trial in approximately eighty healthy volunteers. Secondaryendpoints include the identification of the maximally tolerated dose and the evaluation of pharmacokinetic parameters.We have a worldwide license and collaboration agreement with Janssen to co-develop and co-detail PTG-200 for allindications as described in Item 7. “Management’s Discussion and Analysis – Overview” and Note 3 to the ConsolidatedFinancial Statements included elsewhere in this Annual Report on Form 10-K. We and Janssen currently plan to developPTG‑200 initially for the treatment of moderate-to-severe CD, potentially followed by UC.PTG‑300 PTG‑300 is an injectable peptide that mimics the effect of the hormone hepcidin. We are developing PTG-300 for thetreatment the chronic anemia that arises from insufficient red blood cell production, known as ineffective erythropoiesis, incertain rare blood disorders, including beta-thalassemia. In these diseases, excessive quantities of iron3 Table of Contentsin the bone marrow inhibit the production of red blood cells causing anemia. In healthy individuals, hepcidin regulates ironlevels by inhibiting iron absorption from the GI tract and by limiting macrophage release of iron in the bonemarrow. Individuals with beta-thalassemia and MDS often have insufficient hepcidin to maintain appropriate ironlevels. Because of stability issues, complexity of synthesis and solubility limitations, direct hepcidin replacement is not apractical therapeutic approach. We developed PTG‑300 as a stable, soluble, manufacturable hepcidin mimetic that couldpotentially prevent excessive iron accumulation and iron toxicity with weekly sub-cutaneous injections.We completed IND-enabling studies during the first half of 2017 and completed a Phase 1 clinical trial during thefourth quarter of 2017. The Phase 1 study demonstrated that PTG-300 induces dose-related reductions in serum iron, whichpersist beyond 72 hours at higher dose levels. In the study PTG-300 produced dose-dependent increases in blood exposureand was well tolerated, with no serious adverse events or dose-limiting toxicities. In 2018, we anticipate filing an IND in the United States and related clinical trial applications outside the UnitedStates and initiating a Phase 2 study of PTG-300 in patients with beta-thalassemia. PTG-300 has received orphan designationfrom the FDA for the treatment of beta-thalassemia.Additional Product CandidatesWe are currently researching potential oral and injectable peptide-based product candidates for a range of conditionsincluding, but not restricted to, GI diseases. In 2018, we anticipate initiating IND-enabling studies for a fourth productcandidate, an oral peptide targeting a GI condition other than IBD. The Evolution of Antibody Drugs for Targeted Therapy and Their Limitations Before FDA approval of antibody drugs, chemically synthesized oral small molecules were the standard-of-care for thetreatment of many diseases. However, small molecules are often not capable of affecting the critical processes involved indiseases, for example by blocking protein-protein interactions (“PPIs”) or by mimicking naturally occurring molecules. It isestimated that small molecules cannot be developed as drugs for the treatment of up to 80% of all identified potential diseasetargets. With the availability of antibody drugs, targeted therapy for many PPI-driven diseases became feasible.Despite their growing use, antibody drugs present several limitations for patients including, but not limited to, thefollowing:·Antibody drugs may have significant safety issues. Antibody drugs are typically administered at highconcentrations in order to attain appropriate therapeutic levels at distal sites of a disease. High systemicexposure of immunomodulatory agents can increase the risks of use for patients:·Elevated risk of serious or opportunistic infection, malignancy and severe hypersensitivity events. Manyantibody drugs are immunosuppressive, which may lead to increased risk of serious or opportunisticinfection, such as tuberculosis, histoplasmosis and hepatitis B, or malignancy. Further, injection or infusionmay increase the risk of severe hypersensitivity reactions including anaphylaxis.·Long half-life resulting in delayed clearance from the bloodstream. Antibody drugs are large moleculesengineered to have long half-lives and to circulate in the bloodstream for extended periods of time. Thislongevity can be potentially problematic for patients who experience adverse reactions and cannot readilyeliminate the drug from their systems.·Immunogenicity reactions can lead to loss of response or possible safety risks. Antibody drugs may inducenatural immunogenic responses from the body including the introduction of anti-drug antibodies(“ADAs”). These ADAs can neutralize the action of the therapeutic antibody either by enhancing itsclearance or blocking its function, either of which can result in loss of therapeutic response. ADAs cancause immunogenic reactions in patients leading to possible adverse events, frequently necessitating drugwithdrawal.4 Table of Contents·Antibody drugs are expensive. Compared to other classes of therapeutics, the complexity and size of antibodydrugs can result in high manufacturing, storage and administration costs. To date, these costs have not beensignificantly reduced through the introduction of biosimilar drugs.·Injections or infusions are associated with significant patient burden. Antibody drugs are large proteins thatare not stable when orally administered. As a consequence, antibody based therapies are administered primarilyby injection or infusion into systemic circulation even when the target of the antibody is a specific site in thebody. Injections or infusions as a mode of delivery can increase patient burden, including site reactions andsystemic hypersensitivity, inconvenience, and needle anxiety and phobia, each of which may negatively affectpatient complianceOur Therapeutics Platform Our novel peptide therapeutics platform may provide important benefits over existing non-targeted small molecule,injectable antibody, and conventional peptide therapeutics. In addition, our platform represents a major step forward in theevolution of peptides as therapeutics. Most of the more than 60 currently FDA approved peptides have unstructured shapes,leading to chemical and biological stability limitations, which confine their use to injectable drugs. In contrast, our peptidetechnology platform allows us to identify constrained peptides that can serve as a starting point for discovery anddevelopment of selective and potent peptides that may be orally delivered if desired. The well-folded conformation in ourconstrained peptides is typically derived by disulfide bonds, a structural feature inherent in many naturally occurringpeptides.Our IBD Solution: Oral, GI-Restricted Peptides as Targeted TherapiesFor the IBD targets of interest, the size and nature of our peptides is carefully selected and modified so as to acquire thedesired potency and specificity, and also to restrict their presence to the GI tissue compartment when administered orally.These features translate to oral, GI-restricted, selective and potent peptide drug candidates with specific advantagescompared to antibody drugs:·Oral administration. We are developing our peptide therapeutics in a convenient capsule or tablet formintended for oral administration. We believe oral administration may reduce many of the problems andlimitations associated with injections or infusions, including injection site pain and local reactions,inconvenience, anxiety, high rates of immunogenicity and potential safety risks.·Potential for improved safety and tolerability compared to antibody drugs.·Oral and GI-restricted delivery minimizes systemic exposure in the blood. Oral GI-restricted delivery resultsin lower drug levels in the blood that may provide the potential for an enhanced safety profile overantibody drugs.·Peptides can be cleared more quickly from systemic circulation. Small molecules and peptides below a sizethreshold can be rapidly cleared from blood circulation by kidney filtration and excretion. Rapid clearancemay be beneficial especially if patients need to discontinue therapy. In contrast, antibody drugs, because oftheir long plasma half-life, may take months to clear from blood circulation leaving patients exposed tocontinued or increased safety risk.·The likelihood of much lower immunogenicity of small stable peptides compared to antibody drugsreduces the risk of loss of response. We believe that ADAs are less likely to be elicited against constrainedpeptides, due to their small size, lack of epitope density, resistance to proteolysis, oral tolerance, andminimal systemic absorption.·Potential for localized delivery to site of disease. We believe oral dosing of GI-restricted peptides results insubstantially higher drug concentrations in the diseased GI tissue compartment compared to injectable5 Table of Contentsantibody drugs. This targeted delivery to the site of action may lead to more immediate and significant targetengagement at the site of active disease in the GI tissue compartment.·Cost-effective and less complex manufacturing. Because of their size and stability, we believe that our oral, GI-restricted peptide product candidates can be produced, stored and shipped in a more cost-effective manner thanmany antibody drugs.In chronic GI diseases such as IBD, we believe that our oral, GI-restricted peptide product candidates may offerimproved delivery, the potential for improved safety and tolerability, and cost efficiencies that may provide an overallbenefit to patients, payers, and physicians.Overview of Inflammatory Bowel Disease Inflammatory bowel disease is a group of chronic autoimmune and inflammatory conditions of the colon and smallintestine, consisting primarily of UC and CD, and characterized by abdominal pain, diarrhea, weight loss, fatigue andanemia. In UC, inflammation starts in the rectum and generally extends proximally in a continuous manner through the entirecolon. In CD, the disease most commonly affects the small intestine and the proximal large intestine. These chronic diseasestend to run in families and they affect males and females equally. Both UC and CD have periods of various intensity andseverity, and when a patient is symptomatic, the disease is considered to be in an active or flare stage. Approximately 25% ofUC cases occur in persons under the age of 20. Market OverviewAccording to the Crohn’s & Colitis Foundation of America, there were an estimated 1.6 million IBD patients in theUnited States in 2013, an increase of approximately 200,000 patients since 2011. As many as 70,000 new cases of IBD arediagnosed in the United States each year. As of 2008, annual direct treatment costs for patients with IBD in the United Stateswere estimated to exceed $6.3 billion, while indirect costs such as missed work days were estimated to cost an additional$5.5 billion. In 2015, GlobalData estimated that the UC market reached approximately $4.8 billion across seven majormarkets: the United States, France, Germany, Italy, Spain, the United Kingdom and Japan. By the end of 2025, the UC marketis expected to reach $5.5 billion, reflecting a compound annual growth rate of 1.3%. In 2016, GlobalData estimated that theCD market reached approximately $9.2 billion across those same seven major markets. By the end of 2026, the CD market isexpected to reach $13.4 billion, representing a compound annual growth rate of 3.8%. History of IBD Treatments Non-Targeted Therapies Sulfasalazine was discovered as the first non-targeted therapy for treatment of UC. Non-targeted therapies continued toevolve, including the introduction of corticosteroids for treatment of moderate UC in the 1950s. Subsequently, theimmunosuppressive drug mercaptopurine was identified for UC in the 1960s, azathiopurine was developed in the 1970s,followed by 5‑aminosalicylic acid. While these oral, non-targeted broad-spectrum anti-inflammatory agents and non-specificimmunomodulators continue to be part of the IBD treatment paradigm, especially in mild-to-moderate IBD, these drugs areoften ineffective, and corticosteroid and oral immunosuppressive drugs may have significant and disabling adverse effectsthat limit their use. TNF- α and α4β7 Integrin Targeted Antibody Drugs Recent advances in molecular biology and genomics ushered in the development of the potent and highly targetedbiologic drugs. TNF‑α was identified as a cytokine, a protein involved in cell signaling, that plays an important role in theinflammatory processes associated with IBD. In developing therapies against TNF‑α, small molecule antagonists that directlybind TNF‑α and other PPI targets have yet to be discovered and approved as therapeutics for the treatment of IBD. Thus,monoclonal antibody drugs emerged as a new class of therapeutics that can inhibit TNF‑α activiy. There are currently fiveTNF‑α antibody drugs (Humira, Remicade, Cimzia, Simponi and Inflectra (infliximab biosimilar))6 ®®®®®Table of Contentsapproved for the treatment of UC and/or CD. In 2014, Entyvio, an intravenously administered antibody that selectivelytargets the α4β7 integrin, was approved for the treatment of adult patients with moderate-to-severe UC or CD where one ormore standard therapies have not resulted in an adequate response. Entyvio sales were approximately $530 million in 2015and are projected to peak at approximately $2 billion. In 2016, Stelara, a subcutaneously administered antibody that targetsthe IL-23 and IL-12 cytokines, was approved for the treatment of adult patients with moderate to severe active CD wo hadfailed to respond to, or were intolerant of, standard therapies or a TNF-α antibody. While antibody drugs have greatly improved the treatment of IBD, they generally serve as the last-line of treatmentbefore surgery due to their potential for severe adverse effects, diminishing efficacy over time, inherent limitations asinjectable-based therapies, and high costs of therapy.The Evolving IBD Treatment Paradigm Inducing and maintaining clinical remission is the primary goal of treatment for IBD patients. The current treatmentparadigm for IBD is considered a “step-up” approach. It involves a sequential “step-up” in treatment to more potent buthigher risk therapies according to the level of severity of the patient’s disease. Thus, targeted biologic therapies are generallyreserved for patients with moderate-to-severe disease who have failed to respond to non-targeted oral therapies including5‑ASA agents, corticosteroids and non-specific immunomodulators. As a result, only a portion of IBD patients currentlyreceive a targeted antibody therapy.For moderate-to-severe IBD patients, physicians may prescribe TNF‑α antibody drugs, Entyvio, or, in the case of CD,Stelara, to induce and maintain clinical remission. Patients who are transitioned to these targeted antibody drugs may fail torespond to treatment or lose response to some or all of these agents over time and may ultimately require surgery.Approximately 50% to 73% of CD and 65% of UC patients fail to reach remission with TNF‑α antibodies. Furthermore, 30%to 40% of UC patients and approximately 40% of CD patients treated with TNF‑α antibody drugs stop responding to theseagents over time (secondary non-responders) at a rate of approximately 10% to 13% per year. Of the CD patients whoinitially benefit from TNF‑α antibody drugs, 25% to 40% of these patients develop intolerable or serious adverse events orlose their response within the first year of therapy. Currently, a common approach for IBD patients with lack of efficacy orloss of response to TNF‑α antibody drugs is to switch such patients to other TNF‑α antibody drugs. Although this is initiallysuccessful in 40% to 60% of patients, there remains a lack of treatment options for patients who lose responses to multipleTNF‑α antibody drugs. Further, patient non-adherence with TNF‑α antibody drugs in IBD has been reported to be betweenapproximately 30% to 45% resulting in a greater need for hospitalization.We believe the development of new, potent and targeted therapies for IBD with oral delivery may offer more effectivetreatment options for moderate-to-severe IBD patients. In addition, many clinicians are already advocating for an earlierintroduction of targeted therapeutics in IBD to reduce, replace or delay the use of corticosteroids and non-specific oralimmunomodulators. This treatment approach is often referred to as a “top-down” approach as therapeutics that are currentlyat the top of the “step-up” pyramid are moved down to earlier in the treatment paradigm (see Figure 1). We believe we arewell-positioned to be leaders in this shift from “step-up” to “top-down” therapy. Our oral, GI-restricted, and targeted peptidedrugs work on the same specific targets as injectable antibody drugs and have the potential to offer improved patient safety,improved compliance and convenience and reduced immunogenicity as compared to antibody drugs. In addition, keyopinion leaders are increasingly viewing the a4β7 integrin antagonist Entyvio as a preferable alternative to TNF‑α blockersfor the treatment of IBD due to its improved safety profile. Taken together, we believe that these trends may result in ourproduct candidates, if approved, being used more broadly than antibody drugs in moderate-to-severe IBD patients andpotentially being used for the treatment of mild-to-moderate disease.7 ®®®®®®Table of ContentsFigure 1: Transforming the Existing IBD Treatment Paradigm with Oral Targeted Therapy DrugsPTG‑100: AN ORAL α4β7 INTEGRIN ANTAGONIST PTG‑100 was discovered through our peptide technology platform and is being developed as a potential first-in-classoral, GI-restricted α4β7 integrin-specific antagonist initially for patients with moderate-to-severe UC.Mechanism of Action and Rationale Integrins, such as α4β7, are transmembrane proteins that regulate cellular movement into extravascular tissue and playan important role in modulating the inflammatory reaction in the gut. The α4β7 integrin is expressed on the surface of Tcells, immune cells that help defend against foreign and potentially harmful substances that enter the body. The developmentof UC is driven by the migration of α4β7 T cells into the GI tissue compartment and their subsequent activation within the GItissue compartment. The entry of α4β7 T cells into the GI tissue compartment is facilitated by the PPI between the α4β7integrin and its corresponding ligand, MAdCAM‑1, which is primarily expressed in the GI tissue compartment. Hence, thebinding of α4β7 to MAdCAM‑1 can be categorized as a GI-specific interaction and has been identified as an IBD-specifictargeted therapeutic approach. By blocking the binding of a4β7 integrin to MAdCAM‑1, PTG‑100 may prevent T cells fromentering the GI tissue compartment, thereby reducing the inflammation that leads to the clinical manifestations of UC.α4β7 for IBD is targeted by FDA-approved Entyvio (vedolizumab), which has demonstrated safety and efficacy inpatients with moderate-to-severe UC and CD. Since PTG‑100 targets the same biological pathway as Entyvio, we utilizedsimilar PD-based POC in our pre-clinical studies and Phase 1 clinical trial to inform and guide our Phase 2b developmentprogram. We sourced these PD biomarker assays from public scientific publications and do not maintain any contractualarrangement providing access to this information with the makers of these marketed products.Translating PTG‑100’s Pre-Clinical POC to Clinical POC We established a potentially efficacious dose range of PTG‑100 in mice by demonstrating similar pharmacologicactivity between oral PTG‑100 and an injectable α4β7 antibody in mouse models of IBD. From this efficacious dose range inmice, approximately 6‑50 mg/kg per day, we were able to directly estimate a potentially efficacious dose range in humansthrough allometric scaling based on whole body surface areas, which we determined to be approximately 33‑300 mg per day.8 ®®Table of ContentsConcurrently, we employed a complementary approach for establishing a potentially efficacious human dose range andearly POC through specific blood PD response markers that reflect α4β7 integrin target engagement of PTG‑100 in the GItissue compartment and correlated those PD measurements with efficacy responses in mouse colitis models. Targetengagement is a critical feature for demonstrating that PTG‑100 can reach its intended target, thus inhibiting the traffickingof T cells into the GI tissue compartment. Our PD markers were monitored in mice and cynomolgus monkeys (“cyno”) andwere similarly evaluated in normal healthy volunteers in our Phase 1 clinical trial. These blood PD responses demonstratedthat PTG‑100 engaged its intended α4β7 target and helped guide human dosing for our Phase 2b clinical trial.PTG‑100’s Pre-Clinical Proof-of-Concept Studies Pre-clinical studies have demonstrated that PTG‑100 is a potent and highly selective α4β7 antagonist with minimalsystemic absorption. Mouse colitis models have further demonstrated that PTG‑100 can inhibit T cell trafficking in the gutsimilar to the actions of the mouse α4β7 antagonist antibody.PTG‑100 potently inhibited binding of α4β7 to MAdCAM‑1 in several human biochemical enzyme-linkedimmunosorbent assays (“ELISA”) and cell adhesion (transformed and primary cells) assays in a low nanomolar concentrationrange sufficient to inhibit 50% of binding (“IC50”) comparable to vedolizumab. PTG‑100 exhibited greater than a100,000‑fold selectivity against other structurally similar integrins, α4β1 and αLβ2, in cell adhesion assays which iscomparable to the selectivity of vedolizumab. PTG‑100 was stable in in vitro assays simulating the GI tissue compartment,such as the small intestine and gastric stomach, with half-lives exceeding 12 hours and in human liver microsomessuggesting strong oral stability and the potential for once daily dosing in humans. PTG‑100 did not affect the growth of andwas not metabolized by common members of the human intestinal microflora. In total, these drug properties provideevidence to characterize PTG‑100 as a potential first-in-class orally stable α4β7‑specific antagonist. Furthermore, these drugproperties allowed us to demonstrate proof-of-concept in animal colitis studies.Non-clinical metabolism and PK studies demonstrated that much greater amounts of PTG‑100 as measured by themaximum concentration (“Cmax”) as a percentage of total drug amount dosed orally, were present in the GI compartments,such as the small intestine, colon and feces compared to the systemic plasma and urine compartments of mice, rats, and cyno,thus confirming its GI-restricted properties. Further, PTG‑100 has an oral systemic bioavailability of less than 0.5%.We designed mouse colitis studies similar to those used for antibody drugs targeting this pathway to specificallymonitor T cell trafficking to and from the GI tissue compartment (Figure 2). PTG‑100 reduced α4β7 memory T cells migratingto the gut lymphoid tissues, including the mesenteric lymph nodes (“MLN”) and Peyer’s patches (“PP”), under inflammatoryconditions in the GI tissue compartment. Another example of the ability of PTG‑100 to inhibit T cell trafficking wasdemonstrated by the reduction in the number of α4β7 cells in colon lesions in colitis mice. Furthermore, treatment benefitwas demonstrated through blinded video endoscopy analysis for mucosal damage, and assessment of the incidence of bloodyfeces, which represent symptoms and measurements of UC in humans. In all studies in mouse models of colitis, the effects oforal PTG‑100 were comparable to those of an injection of high doses of a positive control α4β7 antibody. This allows us todefine the efficacious dose in mice with potential translation to the efficacious dose in humans.Establishing Blood Pharmacodynamic Readouts of Target Engagement We have used pre-clinical blood PD response markers that reflect target engagement in the GI tissue compartment andcorrelate with efficacy responses in mouse colitis studies to guide our dosing in human studies. Furthermore, we believe thesepre-clinical blood PD responses, specifically receptor occupancy (“RO”) increases reflecting target engagement and receptorexpression (“RE”) decreases reflecting subsequent pharmacologic activity, can be compared to the PD responses we observedin our Phase 1 clinical trial in healthy volunteers and ultimately can help to guide the dosing for evaluating clinical benefitin UC patients in the Phase 2b clinical trial. In the mouse colitis model, RO and RE were correlated with in vivo efficacy thatcan be extrapolated to the blood RO and RE observed in healthy mice and cyno. These PD markers from mice and cyno havespecifically demonstrated increases in RO that peak at approximately 4 hours following a single dose and multiple doses anddecreases in RE after multiple doses in healthy mice and colitis9 Table of Contentsmice. In translating the pre-clinical observations into a clinical setting, we are focused on evaluating dose- and time-dependent trends in RO and RE in our Phase 1 clinical trial that can be benchmarked to the animal data to give us greaterconfidence in progressing PTG‑100 in clinical trials. Emphasis is placed on trends and not on absolute numbers owing todifferences in GI transit times in different species and absence of absolute scaling methods from animals to humans for GI-restricted drugs.PTG‑100’s Non-GLP and GLP Safety Pharmacology and Toxicology Studies To date, all toxicology and safety pharmacology studies have not identified any safety issues. Good LaboratoryPractices (“GLP”) toxicology studies in rats and cyno over 42 days and 12 weeks of dosing showed that PTG‑100 was well-tolerated at all dose levels with no dose-limiting toxicities. GLP are those procedural and operational requirements specifiedby FDA regulation to ensure the validity and reliability of nonclinical studies. No adverse effects were seen in either rat orcyno studies at all doses tested. Standard safety pharmacology and genotoxicity studies were similarly negative. We arecurrently conducting chronic GLP toxicology studies to support our anticipated Phase 3 program.PTG‑100’s Phase 1 Clinical Trial Overview Following the submission and approval of a CTN, we initiated a Phase 1 randomized, double-blind, placebo-controlledclinical trial of PTG‑100 in 78 normal healthy male volunteers in Australia, which was completed in June 2016. The Phase 1SAD and MAD components were conducted with a solution-based liquid formulation of PTG‑100. In the formulationbridging component of the trial, we compared the relative bioavailability of the liquid formulation to the capsuleformulation that is being used in Phase 2b. In addition to determining the safety and tolerability and PK of PTG‑100, theSAD and MAD components of the trial evaluated PD-based POC through the assessment of α4β7 receptor occupancy thatindicates target engagement and α4β7 target expression on peripheral blood memory T cells similar to what was done in thepre-clinical studies.Safety and Tolerability In both the SAD and MAD portions of the clinical trial, dose escalation proceeded from 100 mg up to the planned1,000 mg dose level. There were no dose-limiting toxicities. There were no deaths or serious adverse events (“SAEs”)reported in the trial. All reported adverse events were of mild to moderate severity. There were no dose-dependent increasesobserved for any adverse events. The most frequent adverse events reported by subjects on PTG‑100 were headache andupper respiratory tract infection. These events were also observed in subjects who took placebo.Pharmacokinetics PTG‑100 plasma levels increased in a dose-dependent manner in both single and multiple dosing cohorts. Consistentwith the pre-clinical data in mice, rats, and cyno, the blood levels of PTG‑100 were extremely low as determined by the AreaUnder the Curve (AUC, which is a pharmacokinetic measurement of drug exposure in blood plasma against time) and Cmax(maximum concentration), thus demonstrating the GI-restricted nature of the drug. There was no apparent evidence of drugaccumulation at Day 14 in the MAD cohorts perhaps related to the relatively short half-life (“T1/2”) in the blood. PTG‑100 fecal levels increased in a dose-dependent manner in the multiple dosing cohorts. Minimum drug levels ofPTG‑100 were observed in urine samples, as expected, based on its characteristics as a GI-restricted drug with minimalsystemic exposure. Establishing Pharmacodynamic POC in Humans Data from our mouse colitis studies support our conclusion that blood RO is a correlate of target engagement in the GItissue compartment in the dose ranges studied. In our Phase 1 clinical trial, blood RO on CD4+ memory α4β7+T cellsincreased in a dose-dependent and time-dependent manner. For RO in the SAD cohorts, treatment groups were significantcompared to placebo at 100 mg (p<0.05), 300 mg (p<0.005) and 1,000 mg (p<0.0001). In the MAD cohorts,10 Table of Contentstreatment groups were significant compared to placebo at 100 mg (p<0.0005), 300 mg (p<0.0001) and 1,000 mg (p<0.0001)four hours post dose on Day 14 (Figure 2A).An additional parameter of pharmacologic activity that we measured was the change in α4β7 expression on the bloodmemory T cells. Based on in vitro studies comparing vedolizumab and PTG‑100, we expected that α4β7 expression would bereduced over time due to the internalization of the α4β7 receptor. Following single and multiple dose administration in thePhase 1 clinical trial, a dose-dependent and time-dependent reduction in α4β7 expression was observed, and it appears thatthe reduction in target expression may become saturated at 300 mg since a similar response was observed in the 1,000 mgcohort following both single and multiple dosing. For α4β7, downregulation of expression was significant in treatmentgroups, compared to placebo at 300 mg and 1,000 mg (p<0.01) (Figure 2B).The single dose 300 mg cohort was evaluated under fasted and fed (standard high fat diet) conditions. Blood druglevels and blood RO of PTG‑100 were compared under both conditions. Based on data from this SAD component andprevious pre-clinical studies, the MAD component of the clinical trial was conducted under fed conditions.Thus, we observed dose-dependent and time-dependent target engagement and pharmacologic activity of PTG‑100following single- and multiple-dose administration in healthy volunteers consistent with observations in the animal studies.Figure 2: (A) Percent Receptor Occupancy and (B) Receptor Expression of α4β7 on CD4+ Memory T Cells in Blood ofHealthy Humans Dosed for 14 DaysAB Establishing Pharmacodynamic POC in Humans Data from our mouse colitis studies support our conclusion that blood RO is a correlate of target engagement in the GItissue compartment in the dose ranges studied. In our Phase 1 clinical trial, blood RO on CD4+ memory α4β7+T cellsincreased in a dose-dependent and time-dependent manner. For receptor occupancy in the SAD cohorts, treatment groupswere significant compared to placebo at 100 mg (p<0.05), 300 mg (p<0.005) and 1,000 mg (p<0.0001). In the MAD cohorts,treatment groups were significant compared to placebo at 100 mg (p<0.0005), 300 mg (p<0.0001) and 1,000 mg (p<0.0001)four hours post dose on Day 14 (Figure 2A).An additional parameter of pharmacologic activity that we measured was the change in α4β7 expression on the bloodmemory T cells. Based on in vitro studies comparing vedolizumab and PTG‑100, we expected that α4β7 expression would bereduced over time due to the internalization of the α4β7 receptor. Following single and multiple dose administration in thePhase 1 clinical trial, a dose-dependent and time-dependent reduction in α4β7 expression was observed, and it appears thatthe reduction in target expression may become saturated at 300 mg since a similar response11 Table of Contentswas observed in the 1,000 mg cohort following both single and multiple dosing. For α4β7, downregulation of expression wassignificant in treatment groups, compared to placebo at 300 mg and 1,000 mg (p<0.01) (Figure 2B).The single dose 300 mg cohort was evaluated under fasted and fed (standard high fat diet) conditions. Blood druglevels and blood receptor occupancy of PTG‑100 were compared under both conditions. Based on data from this SADcomponent and previous pre-clinical studies, the MAD component of the clinical trial was conducted under fed conditions.Thus, we observed dose-dependent and time-dependent target engagement and pharmacologic activity of PTG‑100following single- and multiple-dose administration in healthy volunteers consistent with observations in the animal studies.PTG‑200: AN ORAL IL‑23R ANTAGONIST PTG‑200 was discovered through our peptide technology platform and is being developed as a potential first-in-classoral, GI-restricted antagonist that binds to the IL‑23R and specifically blocks its interaction with the IL‑23 cytokine.PTG‑200 will be initially studied in patients with moderate-to-severe CD potentially followed by UC and pediatric IBD.Mechanism of Action and Rationale IL‑23 is a member of the IL‑12 family of cytokines with pro-inflammatory and autoimmune properties. Cytokines arecell signaling proteins that are released by cells and affect the behavior of other cells. Binding of the IL‑23 ligand to theIL‑23R receptor leads to an expression of pro-inflammatory cytokines involved in the mucosal autocrine cascade that is animportant pathway of many inflammatory diseases, including IBD. Furthermore, genetic analyses of IBD patients haveimplicated IL‑23R mutations as a risk factor associated with susceptibility to IBD. The antagonist infused antibody drugustekinumab (marketed as Stelara for psoriasis, psoriatic arthritis, and moderate-to-severe CD) is a p40 antagonist antibodythat inhibits both the IL‑23 and IL‑12 pathways. Next-generation IBD antibody drugs, such as guselkumab, target the p19subunit of the IL‑23 ligand and are specific to the IL‑23 pathway, which is believed to be an important driver of IBDpathology, while not blockading the IL‑12 pathway. IL‑12 is believed to be important in immune surveillance against thedevelopment of infections and malignancies.We believe that the oral, GI-restricted nature of PTG‑200 will allow PTG‑200 to be a potent inhibitor of the IL‑23pathway for the treatment of IBD. By targeting IL‑23R with our GI-restricted oral IL‑23R antagonist PTG‑200, we believePTG‑200 will restore proper immune function in the GI tissue compartment where there is active disease while minimizingthe risk of systemic side effects. Several key cell types that reside in gut-associated lymphoid tissue (“GALT”), including Tcells, innate lymphoid cells, and natural killer cells, increase their expression of IL‑23R during the progression of IBD.Therefore, the high concentrations of PTG‑200 in GALT will facilitate access and binding to IL‑23R expressed in the sametissue.PTG‑200’s Pre-Clinical Proof-of-Concept Studies PTG‑200 potently inhibited binding of IL‑23 to the IL‑23 receptor in several biochemical (ELISA) and cell(transformed and primary) signaling assays in a subnanomolar to low nanomolar concentration range sufficient to inhibit50% of binding. PTG‑200 exhibited greater than a 50,000‑fold selectivity against other structurally similar receptors(IL‑12Rb1 and IL‑6R) thereby potentially reducing the risk of off target interactions. In total, these drug properties provideevidence to characterize PTG‑200 as a potential first-in-class orally stable IL‑23R-specific antagonist.In PK studies in rats and cyno, PTG‑200 was GI-restricted with less than 0.5% oral systemic bioavailability in plasma orurine and principal exposure in the small intestine, colon, and feces. Similar results were observed in cyno.We have also completed pre-clinical POC studies in rat 2, 4, 6‑trinitrobenzenesulfonic acid (TNBS) colitis modelsdemonstrating that oral delivery of PTG‑200 and other prototype antagonists significantly improved disease outcomes, suchas reducing body weight loss, reducing the increased colon weight/length ratio, and reducing the increased colon12 ®Table of Contentsmacroscopic score which is comprised of assessments of colon adhesions, strictures, ulcers, and wall thickness in a dosedependent manner (Figure 3). Furthermore, PTG‑200 was found to reduce the increased histopathology summary score, whichis comprised of assessments of mucosal and transmural inflammation, gland loss, and erosion parameters. Finally, PTG‑200was able to reduce the expression of the pro-inflammatory IL‑23 induced cytokines in the colon and the IBD diseasebiomarker lipocalin (LCN2) in the serum and feces.Figure 3: PTG‑200 Reduces Pathology in Rat TNBS-Induced ColitisThe efficacy of oral PTG‑200 seen in this IBD model was comparable to that of a positive control antibody against therat IL‑23p19 subunit which was injected and therefore present in the systemic blood compartment. This allows us to definethe efficacious dose range in rats (approximately 28‑61 mg/kg per day) with potential translation to the efficacious dose inhumans.PTG‑200’s Pre-Clinical Safety Studies In pre-clinical safety and toxicity studies in rats, PTG‑200 was well-tolerated with no adverse events at the highest doselevel tested.Clinical Development Plans We initiated a Phase 1 clinical trial of PTG‑200 in the fourth quarter of 2017 to evaluate safety, tolerability, and PK.Assuming successful completion of this study, we anticipate the next step in clinical development will be a randomized,double-blind, placebo-controlled Phase 2 POC clinical trial in patients with moderate-to-severe CD. We are developing PTG-200 in collaboration with Janssen. See Item 7. “Management’s Discussion and Analysis – Overview”13 Table of Contentsand Note 3 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additionalinformation.PTG‑300: AN INJECTABLE HEPCIDIN MIMETIC PTG‑300 was discovered through our peptide technology platform and is being developed as a novel mimetic of thehormone hepcidin to potentially treat anemia due to ineffective erythropoiesis in certain rare blood disorders with an initialfocus on beta-thalassemia. In these diseases, excessive quantities of iron in the bone marrow inhibit the production of redblood cells, causing anemia. In healthy individuals, hepcidin regulates iron levels in the serum and the bone marrow.Because of stability issues complexity of synthesis and solubility limitations, direct hepcidin replacement is not a practicaltherapeutic approach. We designed PTG‑300 as a stable, soluble, manufacturable hepcidin mimetic that can treat anemia withweekly or less frequent subcutaneous delivery.Mechanism of Action and Rationale The molecular target of hepcidin is the cellular trans-membrane protein ferroportin, which functions as an exportchannel for intracellular iron in macrophages, liver hepatocytes, and duodenal enterocytes. By binding to the extracellulardomain of ferroportin, hepcidin prevents the release of iron from cells. It can thus inhibit iron absorption from the GI tract byinteracting with duodenal enterocytes and limit the release of iron in the bone marrow by interacting withmacrophages. Excessive quantities of iron in the bone marrow induce ineffective erythropoiesis resulting in anemia. Bymimicking hepcidin, PTG-300 may restore normal levels of iron in the bone marrow allowing for sufficient production of redblood cells. In addition, by limiting the release of iron into the blood, PTG-300 may inhibit the damage caused by excessiveabsorption of iron by vital organs.Overview of Beta-Thalassemia and Current TherapiesWe anticipate our initial clinical indication for PTG-300 will be the treatment of anemia in beta‑thalassemia. Beta-thalassemia patients frequently have elevated levels of iron in the blood serum and in the bone marrow. Elevated levels ofiron in the serum can cause damage to vital organs in the form of cardiomyopathy or liver fibrosis and can make the patientmore vulnerable to infections. In the bone marrow, elevated levels of iron can prevent red blood cells from fully developing,resulting in anemia. In addition, the resulting immature red blood cells can aggregate in the spleen and enlarge it to such anextent that it must be surgically removed. The elevated iron levels seen in beta-thalassemia patients are often caused bydisease-related suppression of hepcidin production.Existing treatment options for hepcidin related anemia and iron overload are limited. Erythropoietic-stimulatingagents, such as erythropoietin, are commonly used. However, these agents are often insufficient to treat the patient’s anemiaand do not address the issues related to excess serum levels of iron. Red blood cell transfusions can treat a patient’s anemiabut exacerbate the patient’s iron overload and are burdensome. The iron overload caused by transfusions will often betreated with chelating agents. However, these agents work very slowly and have significant kidney and liver toxicity issues.We believe that PTG-300 may be able to restore iron homeostasis to the bone marrow as well as reduce excesscirculating iron. We anticipate that restoration of iron homeostasis in the bone marrow – and the resulting increase in redblood cell production – will result in the correction or amelioration anemia as measured by hemoglobin levels. In addition,may beta-thalassemia patients require regular transfusions to treat their anemia. For these patients, treatment with PTG-300may reduce or eliminate the need for transfusions and related chelation treatments.Beta-thalassemia is most prevalent in people of Mediterranean descent, such as Italians, Greeks and Turks, and is alsofound in people from the Arabian Peninsula, Iran, Africa, Southeast Asia and southern China. Globally, the prevalence ofbeta-thalassemia was estimated to be approximately 300,000 patients in 2008 according to the Centers for DiseaseControl. The disease is rarer in the United States where Decision Resources Group (“DRG”) estimates there areapproximately 3,000 patients. In the major markets of the United States, Italy, Germany, UK, Spain, and France, DRGestimates there are approximately 16,000 diagnosed patients. Most patients with beta-thalassemia suffer from anemia14 Table of Contentscaused by hepcidin deficiency and a significant number are dependent on transfusions and chelating agents, which can costbetween $50,000 to $70,000 per year in the United States.PTG‑300’s Pre-clinical Proof-of-Concept Studies In pre-clinical studies, we demonstrated that PTG‑300 can lower serum iron more effectively than hepcidin andmaintain such lowered serum iron levels for at least 24 hours following a single subcutaneous injection (Figure 4). We havealso demonstrated that PTG‑300 in a dose dependent manner can reduce serum iron in healthy mice, rats, and cyno.Figure 4: Significant Difference Between PTG-300 and Synthetic Hepcidin in Lowering Serum Iron in Healthy MicePTG‑300 was also able to address the underlying anemia present in a mouse genetic model of beta-thalassemia, asshown most prominently by the significant increase in red blood cell number (RBC) and hemoglobin (HGB) with thecorresponding decrease in reticulocyte content (Figure 5). As a consequence we also observed a significant reduction in thepathological increases in spleen weight (splenomegaly) by addressing the underlying ineffective erythropoiesis.Furthermore, PTG‑300 was effective in reducing the increase in liver iron content. In contrast the oral iron chelatordeferiprone (DFP) did not correct the anemia or the splenomegaly.15 Table of ContentsFigure 5: PTG‑300 Addresses Ineffective Erythropoiesis in Mouse Beta-thalassemia 16 Table of ContentsPTG‑300’s Phase 1 Clinical Trial Overview We completed IND-enabling studies during the first half of 2017 and completed a Phase 1 clinical trial during thefourth quarter of 2017. The Phase 1 randomized, placebo-controlled single ascending- and repeat-dose study was conductedto evaluate the safety, tolerability, pharmacokinetics and pharmacodynamics of PTG-300 in 62 normal healthy malevolunteers. The Phase 1 study demonstrated that PTG-300 induces dose-related reductions in serum iron, which persist beyond 72hours at higher dose levels. These results were consistent with known activities of hepcidin and pre-clinical studies of PTG-300. In the study, PTG-300 produced dose-dependent increases in blood exposure, and was well tolerated, with no seriousadverse events or dose-limiting toxicities. The most common adverse event was a transient and self-limited erythema(redness) at the injection site in some subjects which was largely dose-related. The study provided a pharmacodynamic proofof concept and established a range of doses that could be evaluated in the treatment of beta-thalassemia. PTG‑300’s Development Program In 2018, we anticipate filing an IND as well as ex-U.S. clinical trial applications and initiating a Phase 2 study of PTG-300 in patients with beta-thalassemia. In addition to the potential treatment of anemia in rare blood disorders, such as beta-thalassemia and myelodysplastic syndromes, PTG-300 therapy may also have potential benefit in other diseases such ashereditary hemochromatosis, polycythemia vera, siderophilic infections, and liver fibrosis and we are evaluating potentialdevelopment pathways for those indications. PTG-300 has received orphan drug designation for the treatment of beta-thalassemia from the FDA.OUR PEPTIDE TECHNOLOGY PLATFORM Our proprietary technology platform has been successfully applied to a diverse set of biological targets that has led toseveral pre-clinical and clinical-stage peptide-based NCEs, including our clinical-stage product candidates PTG‑100,PTG‑200 and PTG‑300, for a variety of clinical indications. Our platform is comprised of a series of tools and methods,including a combination of molecular design, phage display, oral stability, medicinal chemistry, and in vivo pharmacologyapproaches.The platform is used to develop potential drug candidates: (i) using the structure of a target, when available, (ii) whenno target structure exists, or (iii) from publicly disclosed peptide starting points. In a structure-based approach, ourproprietary molecular design software and structural database of several thousand constrained peptides, termed Vectrix™, arescreened to identify suitable scaffolds which form the basis of designing and constructing the first set of phage or chemicallibraries. The initial hits are identified by either panning or screening such libraries, respectively. When structuralinformation is unavailable for a target, hits are identified by panning a set of 34 proprietary cluster-based phage librariesconsisting of millions of constrained peptides. Once the hits are identified, they are optimized using a set of peptide, peptidemimetic and medicinal chemistry techniques that include the incorporation of new or manipulation of existing cyclization-constraints, as well as natural or unnatural amino acids and chemical conjugation or acylation techniques. These techniquesare applied to optimize potency, selectivity, stability, exposure and ultimately efficacy. For oral stability, a series of in vitroand ex vivo oral-stability assays that portray the chemical and metabolic barriers a peptide will encounter as it transits the GItract are used to identify metabolically labile spots in the peptides. Such sites form the focus of medicinal-chemistry basedoptimization to engineer oral stability. Finally, various in vivo pharmacology tools are then used to quantify peptideexposure in relevant GI organs and tissues. The data can then be used to optimize required GI exposure and ultimately in vivoefficacy.The key foundations of the platform include:Molecular design tools and large database of constrained scaffolds Through advances in genomics, molecular biology and structural genomic initiatives there has been an explosion inthe number of known structures of potential new drug targets, including PPI targets. In particular, constrained peptides17 Table of Contentshave the required surface complexity to match or complement the large flat surfaces of PPI targets to provide potent andselective drug candidates. We believe existing commercial molecular design software is not suitable, as it has beendeveloped to identify small molecules that plug cavities of enzymes and do not bind to PPI targets.We have developed a database of all known structures of a sub-class of constrained peptides, known as disulfide-richpeptides (“DRPs”). We have collected approximately 4,500 DRP scaffolds that are found throughout nature, ranging fromsingle cell organisms to humans. We have created a proprietary molecular design environment, called Vectrix™. A patternmatching algorithm within Vectrix™ allows the selection of an appropriately stable DRP scaffold using the structure of thetarget of interest. This molecular design process is used to identify constrained peptides as starting points for hit discovery,which are ultimately optimized into potent, selective peptides against targets which are not amenable to small molecule drugdiscovery.Phage display techniques and cluster libraries Phage display may be used to discover the original hit based on Vectrix™-derived scaffolds, optimize existing hits, orto identify hits against those targets in which no structural information exists. For the latter targets, a series of pre-existingphage libraries, termed cluster libraries, are used for hit discovery. This includes 20 proprietary libraries of structurallydiverse DRPs that sample greater than 85% of their known structural diversity and 14 proprietary libraries that sampledifferent protein loop geometries. Collectively these libraries provide immense potential for discovering hits at diversetargets as they are based on natural-DRP scaffolds with these characteristics.Oral stability and in vitro and ex vivo assays The GI tract provides a set of chemical and metabolic barriers that hinder the development of oral therapeutic agents.We have developed numerous in vitro and ex vivo systems that profile peptide candidates for their stability features neededfor oral delivery, GI restriction, and transit through the entire GI tract. This includes profiling for chemical stability,specifically pH and redox stability, and metabolic stability against proteases and other enzymes that are either of human ormicrobial origin.These in vitro assays identify metabolic weak spots of peptides, which can then be stabilized by peptidic andpeptidomimetic modifications without losing potency.Medicinal peptide chemistry We have significant expertise in optimizing potency, selectivity, oral stability and exposure of constrained peptidesusing a combination of peptide-cyclization, natural and unnatural amino acids, and various conjugation and acylationtechniques. With respect to PTG‑300, hit discovery and optimization relies exclusively on medicinal chemistry, with nophage display, to develop potent and selective injectable candidates with enhanced exposure in blood. For other targets,such as the discovery of PTG‑100 and PTG‑200, phage display is tightly coupled to medicinal chemistry and oral stabilitytechniques to develop potent, selective and oral molecules that are GI-restricted.In vivo pharmacology tools for GI restriction When developing oral, GI-restricted constrained peptides, we correlate efficacy with potency and level of GI tissuecompartment exposure. We have developed the required expertise and know-how to build PK and PD relationships tooptimize physicochemical features of constrained peptides such that they are minimally absorbed and have the requireddegree of GI tissue compartment exposure over the required duration of time to achieve efficacy. This involves examiningconstrained peptide concentrations in various GI tissue compartments, blood, urine, and feces when delivered orally inrodents. In this fashion, we can understand the degree of tissue targeting, GI restriction and oral stability that is required toachieve efficacy.Future Applications of our Platform 18 Table of ContentsWe believe we have built a versatile, well-validated and unique discovery platform. For example, this peptidetechnology platform has been used to develop product candidates for diverse target classes including G-protein-coupledreceptors (“GPCRs”), ion channels, transporters and cytokines for a variety of therapeutic areas. In the future we may tackleother GI diseases and expand our delivery techniques to include other organ/tissue systems, such as the lung and eye, whichwill provide potential opportunities to pursue a variety of diseases. In addition, the gut may communicate with the immune,central nervous, and endocrine systems, providing the potential of our GI-restricted approach to treat metabolic, cancer andcardiovascular diseases. Lastly, we intend to progress our platform to achieve systemic bioavailability with peptides, therebyenabling us to address systemic diseases.Material Agreements Janssen License and Collaboration Agreement In May 2017, we and Janssen entered into an exclusive license and collaboration agreement (the “Janssen License andCollaboration Agreement”) for the development, manufacture and commercialization of PTG-200 worldwide for thetreatment of CD and UC. The Janssen License and Collaboration Agreement became effective on July 13, 2017. Upon theeffectiveness of the agreement, we received a non-refundable, upfront cash payment of $50.0 million from Janssen. See “Item7. Management’s Discussion and Analysis – Overview” and Note 3 to the Consolidated Financial Statements includedelsewhere in this Annual Report on Form 10-K for additional information.Research Collaboration and License Agreement with Zealand Pharma A/S In June 2012, we entered into a Research Collaboration and License Agreement with Zealand Pharma A/S (“Zealand”)to identify, optimize and develop novel DRPs to discover a hepcidin mimetic. Under the terms of the agreement, Zealandmade an upfront payment and also funded the collaboration. See “Item 7. Management’s Discussion and Analysis –Contractual Obligations and Other Commitments” and Note 6 to the Consolidated Financial Statements included elsewherein this Annual Report on Form 10-K for additional information.CompetitionThe biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significanttechnological change. While we believe that our product candidates, technology, knowledge and experience provide us withcompetitive advantages, we face competition from established and emerging pharmaceutical and biotechnology companies,academic institutions, governmental agencies and public and private research institutions, among others. There are noapproved oral peptide-based α4β7 integrins and IL‑23 based product candidates for IBD.We believe our principal competition in the treatment of IBD will come from companies with approved agents in thefollowing therapeutic classes, among others:·Infused a4ß7 antibody: Takeda Pharmaceutical Company·Infused IL‑23 and IL‑12 antibody: Johnson & Johnson·Injectable or infused anti-TNFα therapy: AbbVie, Johnson & Johnson, Amgen, Pfizer, UCB S.A.,Boehringer Ingelheim, MerckWe are also aware of several companies developing therapeutic product candidates for the treatment of IBD, including,but not limited to AbbVie, Allergan, Atlantic Healthcare Plc, Aprogen (biosimilar TNF-α antibody in Phase 3) ArenaPharmaceuticals, Inc., AstraZeneca, Biogen, Boehringer Ingelheim (adalimumab biosimilar in Pre-Registration), Bristol-Myers Squibb, Celgene (mongersen sodium and ozanimod hydrochloride in Phase 3 clinical trials), Eli Lilly and Company,Galapagos/Gilead (filgotinib in Phase 3), Lycera Corp., Mitsubishi Tanabe Pharma Corporation, Pfizer (tofacitinib citrate inPre-Registration), Roche/Genentech (etrolizumab in Phase 3), Samsung Bioepis (adalimumab biosimilar in Pre-Registration),Sandoz (adalimumab biosimilar in Phase 3), Shire/Pfizer (PF-00547659), and UCB S.A.19 Table of ContentsWe believe our principal competition in the treatment of chronic iron overload disorders, such as beta-thalassemiaand MDS will come from products being developed by companies such as Acceleron (luspatercept in Phase 3), bluebird bio(LentiGlobin in Phase 3), Bristol-Myers Squibb, Emmaus Medical (glutamine in pre-registration), Gilead, Global BloodTherapeutics, Inc., La Jolla Pharmaceutical and Novartis AG, among others. We believe competition will also includeapproved iron chelation therapies that have been developed by Novartis AG and Apotex, among others.Intellectual Property We strive to protect and enhance the proprietary technology, inventions, and improvements that are commerciallyimportant to the development of our business, including seeking, maintaining, and defending patent rights, whetherdeveloped internally or licensed from third parties. We also rely on trade secrets relating to our proprietary technologyplatform and on know-how, and continuing technological innovation to develop, strengthen, and maintain our proprietaryposition in the field of peptide-based therapeutics that may be important for the development of our business. We will alsotake advantage of regulatory protection afforded through data exclusivity, market exclusivity and patent term extensionswhere available.Our commercial success may depend in part on our ability to obtain and maintain patent and other proprietaryprotection for commercially important technology, inventions and know-how related to our business; defend and enforce ourpatents; preserve the confidentiality of our trade secrets; and operate without infringing the valid enforceable patents andproprietary rights of third parties. Our ability to stop third parties from making, using, selling, offering to sell or importingour products may depend on the extent to which we have rights under valid and enforceable patents or trade secrets thatcover these activities. We cannot be sure that patents will be granted with respect to any of our pending patent applicationsor with respect to any patent applications filed by us in the future, nor can we be sure that any of our existing patents or anypatents that may be granted to us in the future will be commercially useful in protecting our commercial products andmethods of manufacturing the same. For more information, please see “Item 1A Risk Factors—Risks Related to OurIntellectual Property.”We have six issued patents and numerous patent applications related to our clinical-stage product candidates andpossess substantial know-how and trade secrets relating to the development and commercialization of peptide basedtherapeutic products. Our proprietary intellectual property, including patent and non-patent intellectual property, isgenerally directed to, for example, peptide-based therapeutic compositions, methods of using these peptide-basedtherapeutic compositions to treat or prevent disease, methods of manufacturing peptide-based therapeutic compositions, andother proprietary technologies and processes related to our lead product development candidates. As of February 15, 2018,our patent portfolio includes the following:·four issued patents and more than 50 patent applications that we exclusively own related to α4β7 integrinpeptide antagonists;·one issued patent and more than 50 patent applications that we exclusively own related to IL‑23Rantagonist peptides;·one issued patent and approximately 25 patent applications that we exclusively own related to hepcidinanalogues; and·other patent applications that we license or exclusively own related to our core technologies, includingmethods of peptide modification and characterization.Our objective is to continue to expand our portfolio of patents and patent applications in order to protect our productcandidates and related peptide-based drug technologies. Examples of the products and technology areas covered by ourintellectual property portfolio are described below.α4β7 Integrin Antagonist Peptides 20 Table of ContentsThe α4β7 integrin antagonist peptide patent portfolio includes four issued U.S. patents and more than 50 pendingpatent applications directed to compositions of α4β7 integrin peptide monomers and dimers cyclized through intramolecularbonds and containing amino acid modifications conferring increased stability, potency and/or selectivity, as well as methodsof synthesizing and using these antagonist peptides to treat inflammatory disorders. Applications are currently pending inthe United States and other major jurisdictions, including Australia, Canada, China, Japan, and Europe. Patent applicationsdirected to PTG‑100 composition of matter and uses thereof, if issued from the pending patent applications and if theappropriate maintenance, renewal, annuity or other governmental fees are paid, are expected to expire in October 2035(worldwide, excluding possible patent term extensions). We expect other patent applications in this portfolio, if issued, and ifthe appropriate maintenance, renewal, annuity, or other governmental fees are paid, to result in patents that would expirefrom October 2033 to March 2037 (worldwide, excluding possible patent term extensions).IL‑23R Antagonist Peptides The IL‑23R antagonist peptide patent portfolio includes one issued U.S. patent and more than 50 pending patentapplications directed to compositions of IL‑23R antagonist peptides cyclized through intramolecular bonds and containingamino acid modifications conferring increased stability, potency and/or selectivity, as well as methods of synthesizing andusing these antagonist peptides to treat inflammatory disorders. Applications are currently pending in the United States andinternationally. Patent applications directed to PTG‑200 composition of matter and uses thereof, if issued from the pendingpatent applications and if the appropriate maintenance, renewal, annuity or other governmental fees are paid, are expected toexpire in July 2035 (worldwide, excluding possible patent term extensions). We expect other patents and patent applicationsin this portfolio, if issued, and if the appropriate maintenance, renewal, annuity, or other governmental fees are paid, to expirefrom July 2035 to April 2038 (worldwide, excluding possible patent term extensions).Hepcidin Mimetics Analogues The hepcidin peptide analogues patent portfolio includes one issued U.S. patent and approximately 25 pending patentapplications directed to compositions of hepcidin peptide analogues cyclized through intramolecular bonds and containingamino acid modifications conferring increased stability, potency and/or selectivity, as well as methods of synthesizing andusing these hepcidin peptide analogues to treat iron-related disorders. Applications are currently pending in the UnitedStates and other major jurisdictions, including Australia, Canada, China, Japan, and Europe. Patent applications directed toPTG‑300 composition of matter and uses thereof, if issued from the pending patent applications and if the appropriatemaintenance, renewal, annuity or other governmental fees are paid, are expected to expire in March 2034 (worldwide,excluding possible patent term extensions). We expect other patents and patent applications in this portfolio, if issued, and ifthe appropriate maintenance, renewal, annuity, or other governmental fees are paid, to expire from March 2034 to February2039 (worldwide, excluding possible patent term extensions).Other We also license patents and patent applications directed to processes and methods related to our technology platform.These patents have issued in the United States and other major jurisdictions, including Australia and Europe and areexpected to expire between September 2019 and February 2023. Material aspects of our technology platform are protectedby trade secrets and confidentiality agreements.In addition to the above, we have established expertise and development capabilities focused in the areas of pre-clinical research and development, manufacturing and manufacturing process scale-up, quality control, quality assurance,regulatory affairs and clinical trial design and implementation. We believe that our focus and expertise will help us developproducts based on our proprietary intellectual property.The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained.In most countries in which we file, the patent term is 20 years from the date of filing the non-provisional application. In theUnited States, a patent’s term may be lengthened by patent term adjustment, which compensates a21 Table of Contentspatentee for administrative delays by the U.S. Patent and Trademark Office in granting a patent or may be shortened if apatent is terminally disclaimed over an earlier-filed patent.The term of a patent that covers an FDA approved drug may also be eligible for patent term extension, which permitspatent term restoration of a U.S. patent as compensation for the patent term lost during the FDA regulatory review process.The Hatch-Waxman Act permits a patent term extension of up to five years beyond the expiration of the patent. The length ofthe patent term extension is related to the length of time the drug is under regulatory review. A patent term extension cannotextend the remaining term of a patent beyond a total of 14 years from the date of product approval and only one patentapplicable to an approved drug may be extended. Moreover, a patent can only be extended once, and thus, if a single patentis applicable to multiple products, it can only be extended based on one product. Similar provisions are available in Europeand other foreign jurisdictions to extend the term of a patent that covers an approved drug. When possible, depending uponthe length of clinical trials and other factors involved in the filing of a new drug application (“NDA”), we expect to apply forpatent term extensions for patents covering our product candidates and their methods of use.Trade SecretsWe rely on trade secrets to protect certain aspects of our technology, particularly in relation to our technology platform.However, trade secrets can be difficult to protect. We seek to protect our proprietary technology and processes, in part, byentering into confidentiality agreements with our employees, consultants, scientific advisors and contractors. We also seek topreserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises andphysical and electronic security of our information technology systems. While we have confidence in these individuals,organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies forany breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. Tothe extent that our consultants, contractors or collaborators use intellectual property owned by others in their work for us,disputes may arise as to the rights in related or resulting know-how and inventions. For more information, please see“Item 1A Risk Factors—Risks Related to Our Intellectual Property.”Manufacturing We contract with third parties for the manufacturing of all of our product candidates, including PTG‑100, PTG‑200, andPTG‑300, for pre-clinical and clinical studies, and intend to continue to do so in the future. We do not own or operate anymanufacturing facilities and we have no plans to build any owned clinical or commercial scale manufacturing capabilities.We believe that the use of contract manufacturing organization (“CMOs”) eliminates the need for us to directly invest inmanufacturing facilities, equipment and additional staff. Although we rely on contract manufacturers, our personnel andconsultants have extensive manufacturing and quality control experience overseeing CMOs. We regularly consider secondsource or back-up manufacturers for both active pharmaceutical ingredient and drug product manufacturing. To date, ourthird-party manufacturers have met the manufacturing requirements for the product candidates in a timely manner. We expectthird-party manufacturers to be capable of providing sufficient quantities of our product candidates to meet anticipated full-scale commercial demands, but we have not assessed these capabilities beyond the supply of clinical materials to date. Wecurrently engage CMOs on a “fee for services” basis based on our current development plans. We plan to identify CMOs andenter into longer term contracts or commitments as we move our product candidates into Phase 3 clinical trials. We believethere are alternate sources of manufacturing that have been and could be engaged and enabled to satisfy its clinical andcommercial requirements, however we cannot guarantee that identifying and establishing alternative relationships with suchsources will be successful, cost effective, or completed on a timely basis without significant delay in the development orcommercialization of our product candidates.Government Regulation The FDA and comparable regulatory authorities in state and local jurisdictions and in other countries imposesubstantial and burdensome requirements upon companies involved in the clinical development, manufacture, marketingand distribution of drugs, such as those we are developing. These agencies and other federal, state and local entities regulate,among other things, the research and development, testing, manufacture, quality control, safety, effectiveness,22 Table of Contentslabeling, storage, record keeping, approval, advertising and promotion, distribution, post-approval monitoring and reporting,sampling and export and import of our product candidates.U.S. Government Regulation In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act (“FDCA”) and itsimplementing regulations. The process of obtaining regulatory approvals and the subsequent compliance with applicablefederal, state, local and foreign statutes and regulations requires the expenditure of substantial time and financial resources.Failure to comply with the applicable U.S. requirements at any time during the product development process, approvalprocess or after approval, may subject an applicant to a variety of administrative or judicial sanctions, such as the FDA’srefusal to approve pending NDAs, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters,product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals ofgovernment contracts, restitution, disgorgement or civil or criminal penalties.The process required by the FDA before a drug may be marketed in the United States generally involves the following:·completion of pre-clinical laboratory tests, animal studies and formulation studies in compliance with theFDA’s GLP regulations;·submission to the FDA of an IND application, which must become effective before human clinical trialsmay begin;·approval by an independent institutional review board (“IRB”) at each clinical site before each trial may beinitiated;·performance of adequate and well-controlled human clinical trials in accordance with good clinicalpractice (“GCP”) requirements to establish the safety and efficacy of the proposed drug product for eachindication;·submission to the FDA of an NDA;·satisfactory completion of an FDA advisory committee review, if applicable;·satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the productis produced to assess compliance with cGMP requirements and to assure that the facilities, methods andcontrols are adequate to preserve the drug’s identity, strength, quality and purity; and·FDA review and approval of the NDA.Pre-clinical Studies Pre-clinical studies include laboratory evaluation of product chemistry, toxicity and formulation, as well as animalstudies to assess potential safety and efficacy. An IND sponsor must submit the results of the pre-clinical tests, together withmanufacturing information, analytical data and any available clinical data or literature, among other things, to the FDA aspart of an IND. Some pre-clinical testing may continue even after the IND is submitted. An IND automatically becomeseffective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to one or moreproposed clinical trials and places the clinical trial on a clinical hold. In such a case, the IND sponsor and the FDA mustresolve any outstanding concerns before the clinical trial can begin. As a result, submission of an IND may not result in theFDA allowing clinical trials to commence.Clinical Trials 23 Table of ContentsClinical trials involve the administration of the investigational new drug to human subjects under the supervision ofqualified investigators in accordance with GCP requirements, which include the requirement that all research subjectsprovide their informed consent in writing for their participation in any clinical trial. Clinical trials are conducted underprotocols detailing, among other things, the objectives of the trial, the parameters to be used in monitoring safety, and theeffectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent protocol amendments must besubmitted to the FDA as part of the IND (or equivalent submission ex-US). In addition, an IRB or ethics committee (“EC”) ateach institution participating in the clinical trial must review and approve the plan for any clinical trial before it commencesat that institution. Information about certain clinical trials must be submitted within specific timeframes to the NationalInstitutes of Health (“NIH”) for public dissemination on their www.clinicaltrials.gov website.Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined:·Phase 1: The drug is initially introduced into healthy human subjects or patients with the target disease orcondition and tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, ifpossible, to gain an early indication of its effectiveness.·Phase 2: The drug is administered to a limited patient population to identify possible adverse effects andsafety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and todetermine dosage tolerance and optimal dosage.·Phase 3: The drug is administered to an expanded patient population, generally at geographically dispersedclinical trial sites, in well-controlled clinical trials to generate enough data to statistically evaluate theefficacy and safety of the product for approval, to establish the overall risk-benefit profile of the product,and to provide adequate information for the labeling of the product.Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and morefrequently if serious adverse events occur. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfullywithin any specified period, or at all. Furthermore, the FDA or the sponsor may suspend or terminate a clinical trial at anytime on various grounds, including a finding that the research subjects are being exposed to an unacceptable health risk.Similarly, an IRB or EC can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not beingconducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm topatients.Marketing Approval Assuming successful completion of the required clinical testing, the results of the pre-clinical and clinical studies,together with detailed information relating to the product’s chemistry, manufacture, controls and proposed labeling, amongother things, are submitted to the FDA as part of an NDA requesting approval to market the product for one or moreindications. In most cases, the submission of an NDA is subject to a substantial application user fee. Under the PrescriptionDrug User Fee Act (“PDUFA”) guidelines that are currently in effect, the FDA has a goal of ten months from the date of“filing” of a standard NDA for a new molecular entity to review and act on the submission. This review typically takestwelve months from the date the NDA is submitted to FDA because the FDA has approximately two months to make a“filing” decision.In addition, under the Pediatric Research Equity Act of 2003 (“PREA”), as amended and reauthorized, certain NDAs orsupplements to an NDA must contain data that are adequate to assess the safety and effectiveness of the drug for the claimedindications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatricsubpopulation for which the product is safe and effective. The FDA may, on its own initiative or at the request of theapplicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, orfull or partial waivers from the pediatric data requirements.The FDA also may require submission of a risk evaluation and mitigation strategy (“REMS”), plan to ensure that thebenefits of the drug outweigh its risks. The REMS plan could include medication guides, physician communication24 Table of Contentsplans, assessment plans, and/or elements to assure safe use, such as restricted distribution methods, patient registries, or otherrisk minimization tools.The FDA conducts a preliminary review of all NDAs within the first 60 days after submission, before accepting them forfiling, to determine whether they are sufficiently complete to permit substantive review. The FDA may request additionalinformation rather than accept an NDA for filing. In this event, the application must be resubmitted with the additionalinformation. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission isaccepted for filing, the FDA begins an in-depth substantive review. The FDA reviews an NDA to determine, among otherthings, whether the drug is safe and effective and whether the facility in which it is manufactured, processed, packaged orheld meets standards designed to assure the product’s continued safety, quality and purity.The FDA may refer an application for a novel drug to an advisory committee. An advisory committee is a panel ofindependent experts, including clinicians and other scientific experts, that reviews, evaluates and provides arecommendation as to whether the application should be approved and under what conditions. The FDA is not bound by therecommendations of an advisory committee, but it considers such recommendations carefully when making decisions.Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is manufactured.The FDA will not approve an application unless it determines that the manufacturing processes and facilities are incompliance with cGMP requirements and adequate to assure consistent production of the product within requiredspecifications. Additionally, before approving an NDA, the FDA may inspect one or more clinical trial sites to assurecompliance with GCP requirements.After evaluating the NDA and all related information, including the advisory committee recommendation, if any, andinspection reports regarding the manufacturing facilities and clinical trial sites, the FDA may issue an approval letter, or, insome cases, a complete response letter. A complete response letter generally contains a statement of specific conditions thatmust be met in order to secure final approval of the NDA and may require additional clinical or pre-clinical testing in orderfor FDA to reconsider the application. Even with submission of this additional information, the FDA ultimately may decidethat the application does not satisfy the regulatory criteria for approval. If and when those conditions have been met to theFDA’s satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of thedrug with specific prescribing information for specific indications.Even if the FDA approves a product, it may limit the approved indications for use of the product, require thatcontraindications, warnings or precautions be included in the product labeling, require that post-approval studies, includingPhase 4 clinical trials, be conducted to further assess a drug’s safety after approval, require testing and surveillance programsto monitor the product after commercialization, or impose other conditions, including distribution and use restrictions orother risk management mechanisms under a REMS, which can materially affect the potential market and profitability of theproduct. The FDA may prevent or limit further marketing of a product based on the results of post-marketing studies orsurveillance programs. After approval, some types of changes to the approved product, such as adding new indications,manufacturing changes and additional labeling claims, are subject to further testing requirements and FDA review andapproval.Orphan Designation The FDA may grant orphan designation to drugs or biologics intended to treat a rare disease or condition that affectsfewer than 200,000 individuals in the United States, or if it affects more than 200,000 individuals in the United States, thereis no reasonable expectation that the cost of developing and marketing the product for this type of disease or condition willbe recovered from sales in the United States. Orphan designation must be requested before submitting a NDA or BiologicsLicense Application (“BLA”). After the FDA grants orphan designation, the identity of the therapeutic agent and its potentialorphan use are disclosed publicly by the FDA. Orphan designation does not convey any advantage in or shorten the durationof the regulatory review and approval process.25 Table of ContentsIn the United States, orphan designation entitles a party to financial incentives such as opportunities for grant fundingtowards clinical trial costs, tax advantages and user-fee waivers. In addition, if a product receives the first FDA approval forthe indication for which it has orphan designation, the product is entitled to orphan exclusivity, which means the FDA maynot approve any other application to market the same product for the same indication for a period of seven years, except inlimited circumstances, such as a showing of clinical superiority over the product with orphan exclusivity or where themanufacturer 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 hasexclusivity or obtain approval for the same product but for a different indication for which the orphan product hasexclusivity. Orphan product exclusivity also could block the approval of one of our products for seven years if a competitorobtains approval of the same biological product as defined by the FDA or if our product candidate is determined to becontained within the competitor’s product for the same indication or disease. If a drug or biological product designated as anorphan product receives marketing approval for an indication broader than what is designated, it may not be entitled toorphan product exclusivity.Post-Approval Requirements Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by theFDA, including, among other things, requirements relating to recordkeeping, periodic reporting, product sampling anddistribution, advertising and promotion and reporting of adverse experiences with the product. After approval, most changesto the approved product, such as adding new indications or other labeling claims are subject to prior FDA review andapproval. There also are continuing, annual program user fee requirements for any marketed products, as well as applicationfees for supplemental applications with clinical data.The FDA may impose a number of post-approval requirements as a condition of approval of an NDA. For example, theFDA may require post-marketing testing, including Phase 4 clinical trials, and surveillance to further assess and monitor theproduct’s safety and effectiveness after commercialization.In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs arerequired to register their establishments with the FDA and state agencies and are subject to periodic unannouncedinspections by the FDA and these state agencies for compliance with cGMP requirements. Changes to the manufacturingprocess are strictly regulated and often require prior FDA approval before being implemented. FDA regulations also requireinvestigation and correction of any deviations from cGMP requirements and impose reporting and documentationrequirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly,manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintaincGMP compliance.Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements andstandards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknownproblems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes,or failure to comply with regulatory requirements, may result in mandatory revisions to the approved labeling to add newsafety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distributionor other restrictions under a REMS program. Other potential consequences include, among other things:·restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from themarket or product recalls;·fines, warning letters or holds on post-approval clinical trials;·refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension orrevocation of product approvals;·product seizure or detention, or refusal to permit the import or export of products; or26 Table of Contents·injunctions or the imposition of civil or criminal penalties.The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market.Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label. TheFDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a companythat is found to have improperly promoted off-label uses may be subject to significant liability.Coverage and Reimbursement Sales of our product candidates, if approved, will depend, in part, on the extent to which the cost of such products willbe covered and adequately reimbursed by third-party payors, such as government healthcare programs, commercial insuranceand managed health care organizations. These third-party payors are increasingly limiting coverage and/or reducingreimbursements for medical products and services by challenging the prices and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. If these third-party payors do notconsider our products to be cost-effective compared to other therapies, they may not cover our products after approval as abenefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on aprofitable basis.There is no uniform policy requirement for coverage and reimbursement for drug products exists among third-partypayors in the United States. Therefore, coverage and reimbursement for drug products can differ significantly from payor topayor. The coverage determination process can be a time-consuming and costly process that may require us to providescientific and clinical support for the use of our products to each payor separately, with no assurance that coverage andadequate reimbursement will be obtained or applied consistently. Even if reimbursement is provided, market acceptance ofour products may be adversely affected if the amount of payment for our products proves to be unprofitable for health careproviders or less profitable than alternative treatments, or if administrative burdens make our products less desirable to use.In addition, the U.S. government, state legislatures and foreign governments have continued implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of genericproducts. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies injurisdictions with existing controls and measures, could further limit our net revenue and results. Decreases in third-partyreimbursement for our product candidates or a decision by a third-party payor to not cover our product candidates couldreduce physician usage of our products candidates, once approved, and have a material adverse effect on our sales, results ofoperations and financial condition.The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of2010, collectively referred to as the ACA, enacted in March 2010, has had and is expected to continue to have a significantimpact on the health care industry. The ACA, among other things, imposes a significant annual fee on certain companies thatmanufacture or import branded prescription drug products. The ACA also increased the Medicaid rebate rate and expandedthe rebate program to include Medicaid managed care organizations. It also contains substantial new provisions intended tobroaden access to health insurance, reduce or constrain the growth of health care spending, enhance remedies against healthcare fraud and abuse, add new transparency requirements for the health care industry, impose new taxes and fees onpharmaceutical manufacturers, and impose additional health policy reforms, any or all of which may affect our business.Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA, as well asefforts by the current administration to repeal or replace certain aspects of the ACA. For example, since January 2017, thePresident has signed two Executive Orders and other directives designed to delay, circumvent, or loosen certain requirementsmandated by the ACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or partof the ACA. While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation ofcertain taxes under the ACA were signed into law. The Tax Cuts and Jobs Act of 2017 (the “Tax Act”) includes a provisionrepealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individualswho fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individualmandate”. Additionally, on January 22, 2018, the President signed a continuing resolution27 Table of Contentson appropriations for fiscal year 2018 that delayed the implementation of certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain healthinsurance providers based on market share, and the medical device excise tax on non-exempt medical devices. Further , theBipartisan Budget Act of 2018, or the BBA, among other things, amends the ACA, effective January 1, 2019, to close thecoverage gap in most Medicare drug plans, commonly referred to as the “donut hole”, and increase from 50% to 70% thepoint-of-sale discount that is owed by pharmaceutical manufacturers who participate in the Medicare Part D program. Theremay be additional challenges and amendments to the ACA in the future. The ACA is likely to continue the downwardpressure on pharmaceutical pricing and may also increase our regulatory burdens and operating costs.Other legislative changes have also been proposed and adopted since the ACA was enacted. For example, the BudgetControl Act of 2011 resulted in aggregate reductions in Medicare payments to providers of 2% per fiscal year, which wentinto effect in 2013 and, following passage of subsequent legislation, including the BBA, will stay in effect through 2027unless additional Congressional action is taken. Additionally, the American Taxpayer Relief Act of 2012, among otherthings, reduced Medicare payments to several types of providers and increased the statute of limitations period for thegovernment to recover overpayments to providers from three to five years. These new laws may result in additionalreductions in Medicare and other health care funding.Further, there has been heightened governmental scrutiny over the manner in which manufacturers set prices for theirmarketed products. Such scrutiny has resulted in several recent Congressional inquiries and proposed and enacted federaland state legislation designed to, among other things, bring more transparency to product pricing, review the relationshipbetween pricing and manufacturer patient programs, and reform government program reimbursement methodologies forproducts. At the federal level, the current administration’s budget proposal for fiscal year 2019 contains further drug pricecontrol measures that could be enacted during the 2019 budget process or in other future legislation, including, for example,measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some statesto negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. While anyproposed measures will require authorization through additional legislation to become effective, Congress and the currentadministration have both stated that they will continue to seek new legislative and/or administrative measures to controldrug costs. At the state level, legislatures have become increasingly aggressive in passing legislation and implementingregulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursementconstraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, insome cases, designed to encourage importation from other countries and bulk purchasing.It is uncertain whether and how future legislation, whether domestic or foreign, could affect prospects for our productcandidates or what actions foreign, federal, state, or private payors for health care treatment and services may take in responseto any such health care reform proposals or legislation. Adoption of price controls and other cost-containment measures, andadoption of more restrictive policies in jurisdictions with existing controls and measures reforms may prevent or limit ourability to generate revenue, attain profitability or commercialize our product candidates.Other Health Care Laws and Compliance Requirements We will also be subject to health care regulation and enforcement by the federal government and the states and foreigngovernments in which we will conduct our business once our products are approved. The laws that may affect our ability tooperate include, but are not limited to, the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), asamended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certainelectronic health care transactions and protects the security and privacy of protected health information; the criminal healthcare fraud statutes under HIPAA also prohibits persons and entities from knowingly and willfully executing a scheme todefraud any health care benefit program, including private payors, or knowingly and willfully falsifying, concealing orcovering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the deliveryof or payment for health care benefits, items or services; the federal health care programs’ Anti-Kickback Statute, whichprohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration,directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order orrecommendation of, any good or service for which payment28 Table of Contentsmay be made under federal health care programs such as the Medicare and Medicaid programs; federal false claims laws andcivil monetary penalties laws that prohibit, among other things, any person or entity from knowingly presenting, or causingto be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a falsestatement to have a false claim paid; and the Physician Payments Sunshine Act, which requires certain manufacturers ofdrugs, devices, biologics, and medical supplies for which payment is available under Medicare, Medicaid, or Children’sHealth Insurance Program to report annually to the U.S. Department of Health and Human Services information related topayments and other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists andchiropractors) and teaching hospitals, and ownership and investment interests held by physicians and their immediate familymembers.The majority of states also have statutes or regulations similar to the aforementioned federal anti-kickback and falseclaims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states,apply regardless of the payor. We may be subject to state laws governing the privacy and security of health information incertain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thuscomplicating compliance efforts. In addition, we may be subject to reporting requirements under state transparency laws, aswell as state laws that require pharmaceutical companies to comply with the industry’s voluntary compliance guidelines andthe applicable compliance guidance promulgated by the federal government that otherwise restricts certain payments thatmay be made to health care providers and entities.Because of the breadth of these laws and the narrowness of available statutory and regulatory exceptions, it is possiblethat some of our business activities could be subject to challenge under one or more of such laws. If we or our operations arefound to be in violation of any of the laws described above or any other governmental regulations that apply to us, we maybe subject to penalties, including civil and criminal penalties, damages, fines, individual imprisonment, disgorgement,additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreementto resolve allegations of non-compliance with these laws, exclusion of products from reimbursement under U.S. federal orstate health care programs, and the curtailment or restructuring of our operations.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 jurisdictionsgoverning, among other things, clinical studies and any commercial sales and distribution of our products.Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatoryauthorities in foreign countries prior to the commencement of clinical studies 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 studyapplication much like the IND prior to the commencement of human clinical studies.The requirements and process governing the conduct of clinical studies, product licensing, pricing and reimbursementvary from country to country. In all cases, the clinical studies are conducted in accordance with GCP and the applicableregulatory 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 criminalprosecution.The requirements for conducting clinical trials in Australia, where we conducted Phase 1 trials for PTG-100 and PTG-300 and are conducting a Phase 1 trial for PTG‑200, are as follows:Conducting clinical trials for therapeutic drug candidates in Australia is subject to regulation by Australiangovernmental entities. Approval for inclusion in the Australian Register of Therapeutic Goods (“ARTG”) is required before apharmaceutical drug product may be marketed in Australia.29 Table of ContentsTypically, the process of obtaining approval of a new therapeutic drug product for inclusion in the ARTG requirescompilation of clinical trial data. Clinical trials conducted using “unapproved therapeutic goods” in Australia, being thosewhich have not yet been evaluated by the Therapeutic Goods Administration (“TGA”) for quality, safety and efficacy mustoccur pursuant to either the CTN or Clinical Trial Exemption (“CTX”), process.The CTN process broadly involves:·completion of pre-clinical laboratory and animal testing;·submission to a Human Research Ethics Committee (“HREC”) of all material relating to the proposedclinical trial, including the trial protocol. The TGA does not review any data relating to the clinical trial;·final approval for the conduct of the clinical trial by the institution or organization at which the clinicaltrial will be conducted (“Approving Authority”), having due regard to the advice from the HREC; and·notification of the clinical trial to the TGA.The CTX process broadly involves:·submission of an application to conduct a clinical trial to the TGA for evaluation and comment;·a sponsor cannot commence a CTX trial until written advice has been received from the TGA regarding theapplication and approval for the conduct of the trial has been obtained from an ethics committee and theinstitution at which the trial will be conducted; and·receipt of written advice from the TGA regarding the application.·receipt of approval for the conduct of the trial from an ethics committee and the institution at which thetrial will be conducted.In each case, it is required that:·adequate and well-controlled clinical trials demonstrate the quality, safety and efficacy of the therapeuticproduct;·evidence is compiled which demonstrates that the manufacture of the therapeutic drug product complieswith the principles of cGMP;·manufacturing and clinical data is derived to submit to the Australian Committee on PrescriptionMedicines, which makes recommendations to the TGA as to whether or not to grant approval to include thetherapeutic drug product in the ARTG; and·an ultimate decision is made by the TGA whether to include the therapeutic drug product in the ARTG.Pre-clinical studies include laboratory evaluation of the therapeutic drug product as well as animal studies to assess thepotential safety and efficacy of the drug. The results of the pre-clinical studies form part of the materials submitted to theHREC in the case of a CTN trial and part of the application to the TGA in the case of a CTX trial.Clinical trials involve administering the investigational product to healthy volunteers or patients under the supervisionof a qualified principal investigator. The TGA has developed guidelines for a CTN. Under the CTN process, all materialrelating to the proposed trial is submitted directly to the HREC of each institution at which the trial is to be30 Table of Contentsconducted. An HREC is an independent review committee set up under guidelines of the Australian National Health andMedical Research Council. The role of an HREC is to ensure the protection of rights, safety and wellbeing of human subjectsinvolved in a clinical trial by, among other things, reviewing, approving and providing continuing review of trial protocolsand amendments, and of the methods and material to be used in obtaining and documenting informed consent of the trialsubjects. The TGA is formally notified by submission of a CTN application but does not review the safety of the drug or anyaspect of the proposed clinical trial. The approving authority of each institution gives the final approval for the conduct ofthe clinical trial, having due regard to advice from the HREC. Following approval, responsibility for all aspects of the trialconducted under a CTN application remains with the HREC of each investigator’s institution.The standards for clinical research in Australia are set by the TGA and the National Health and Medical ResearchCouncil, and compliance with GCP is mandatory. Guidelines, such as those promulgated by the International Conference onHarmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use (“ICH”), are required across allfields, including those related to pharmaceutical quality, nonclinical and clinical data requirements and study designs. Thebasic requirements for preclinical data to support a first-in-human study under ICH guidelines are applicable in Australia.Requirements related to adverse event reporting in Australia are similar to those required in other major jurisdictions.Employees As of December 31, 2017, we had 55 full-time employees, 44 of whom were in research and development, of which 4hold an M.D. and 14 hold Ph.D. degrees. The remaining 11 employees worked in finance, business development, humanresources and administrative support, of which 2 hold a Ph.D. None of our employees are represented by a labor union orcovered by a collective bargaining agreement. We consider our relationship with our employees to be good.Corporate and Other Information Protagonist Pty Limited (“Protagonist Australia”) was incorporated in Australia in September 2001. We wereincorporated as a Delaware corporation in 2006, under the name Protagonist Therapeutics, Inc., and became the parent ofProtagonist Australia pursuant to a transaction in which all of the issued and outstanding capital stock of ProtagonistAustralia was exchanged for shares of our common stock and Series A preferred stock. Our principal executive offices arelocated at 7707 Gateway Boulevard, Suite 140, Newark, California 94560. Our telephone number is (510) 474‑0170. Ourwebsite address is www.protagonist-inc.com. References to our website address do not constitute incorporation by referenceof the information contained on the website, and the information contained on the website is not part of this document.We make available, free of charge on our corporate website, copies of our Annual Reports on Form 10‑K, QuarterlyReports on Form 10‑Q, Current Reports on Form 8‑K, Proxy Statements, and all amendments to these reports, as soon asreasonably practicable after such material is electronically filed with or furnished to the Securities and ExchangeCommission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act. We also show detail about stock trading bycorporate insiders by providing access to SEC Forms 3, 4 and 5. This information may also be obtained from the SEC’s on-line database, which is located at www.sec.gov. Our common stock is traded on the Nasdaq Stock Market under the symbol“PTGX.”31 Table of ContentsWe are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012. As such, we areeligible for exemptions from various reporting requirements applicable to other public companies that are not emerginggrowth companies, including, but not limited to, not being required to comply with the auditor attestation requirements ofSection 404 of the Sarbanes-Oxley Act of 2002 and reduced disclosure obligations regarding executive compensation. Wewill remain an emerging growth company until the earlier of (1) December 31, 2021, (2) the last day of the first fiscal year inwhich our annual gross revenues are $1.0 billion or more, (3) the date on which we have, during the previous rolling three-year period, issued more than $1.0 billion in non-convertible debt securities, and (4) the date on which we are deemed to be a“large accelerated filer” as defined in the Securities Exchange Act of 1934, as amended (Exchange Act). Item 1A.Risk Factors We have identified the following risks and uncertainties that may have a material adverse effect on our business,financial condition or results of operations. Investors should carefully consider the risks described below before making aninvestment decision. Our business faces significant risks and the risks described below may not be the only risks we face.Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair ourbusiness operations. If any of these risks occur, our business, results of operations or financial condition could suffer, themarket price of our common stock could decline and you could lose all or part of your investment in our common stock.Risks Related to Our Financial Position and Capital RequirementsWe have incurred significant losses since our inception and anticipate that we will continue to incur significant losses forthe foreseeable future. We have never generated any revenue from product sales and may never be profitable.We have incurred significant operating losses since our inception. Our net loss for the years ended December 31, 2017and 2016 was approximately $37.0 million and $37.2 million, respectively. As of December 31, 2017, we had anaccumulated deficit of $101.6 million. Our prior losses, combined with expected future losses, have had and will continue tohave an adverse effect on our stockholders’ equity and working capital. We expect to continue to incur significant research,development and other expenses related to our ongoing operations and product development, including clinicaldevelopment activities under our exclusive license and collaboration agreement (the “Janssen License and CollaborationAgreement”) with Janssen Biotech, Inc., a Pennsylvania corporation (“Janssen”), and as a result, we expect to continue toincur losses in the future as we continue our development of, and seek regulatory approvals for, our peptide-based productcandidates.We do not anticipate generating revenue from sales of products for the foreseeable future, if ever, and we do notcurrently have any product candidates in registration or pivotal clinical trials. If any of our peptide-based product candidatesfail in clinical trials or do not gain regulatory approval, or even if approved, fail to achieve market acceptance, we may neverbecome profitable. Furthermore, any revenues generated from the Janssen License and Collaboration Agreement may not besufficient alone to sustain our operations as there can be no assurance that we will receive any opt-in election fees,development, regulatory, or sales milestone payments, or royalties from Janssen in the future pursuant to the Janssen Licenseand Collaboration Agreement. Even if we do achieve profitability, we may not be able to sustain or increase profitability on aquarterly or annual basis. Failure to become and remain profitable may adversely affect the market price of our common stockand our ability to raise capital and continue operations.If one or more of our peptide-based product candidates is approved for commercial sale and we retain commercialrights, we anticipate incurring significant costs associated with manufacturing and commercializing such approved peptide-based product candidate. Therefore, even if we are able to generate revenue from the sale of any approved product, we maynever become profitable.32 Table of ContentsWe are an early clinical-stage biopharmaceutical company with no approved products and no historical product revenue,which makes it difficult to assess our future prospects and financial results.We are an early clinical-stage biopharmaceutical company with a limited operating history. Biopharmaceutical productdevelopment is a highly speculative undertaking and involves a substantial degree of uncertainty. Our operations to datehave been limited to developing our technology, undertaking pre-clinical studies and clinical trials of our pipelinecandidates, PTG-100, PTG-200 and PTG-300, and conducting research to identify additional product candidates. Wesuccessfully filed Clinical Trial Notifications in Australia to support our completed Phase 1 clinical trials of PTG-100 andPTG-300 and our ongoing Phase 1 clinical trial of PTG-200. We successfully filed a U.S. IND application, and regulatorysubmissions in other countries as well, to support our ongoing global Phase 2b study of PTG-100 in ulcerative colitis (“UC”).As an early clinical-stage company, we have not yet demonstrated an ability to generate revenue or successfully overcomemany of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields such asbiopharmaceutical drug discovery and development. Consequently, the ability to accurately assess our future operatingresults or business prospects is significantly more limited than if we had a longer operating history or approved products onthe market.We expect that our financial condition and operating results will fluctuate significantly from period to period due to avariety of factors, many of which are beyond our control, including, but not limited to:·the clinical outcomes from the continued development of our product candidates;·potential side effects of our product candidates that could delay or prevent approval or cause an approved drug tobe taken off the market;·our ability to obtain, as well as the timeliness of obtaining, additional funding to develop and potentiallymanufacture and commercialize our product candidates, including payments, if any, under the Janssen License andCollaboration Agreement;·competition from existing products directed against the same biological target or therapeutic indications of ourproduct candidates as well as new products that may receive marketing approval;·the entry of generic versions of products that compete with our product candidates;·the timing of regulatory review and approval of our product candidates;·market acceptance of our product candidates that receive regulatory approval, if any;·our ability to establish an effective sales and marketing infrastructure directly or through collaborations with thirdparties;·the ability of patients or healthcare providers to obtain coverage or sufficient reimbursement for our products;·the ability of third party manufacturers to manufacture in accordance with current good manufacturing practices(“cGMP”) our product candidates for the conduct of clinical trials and, if approved, for successfulcommercialization;·our ability as well as the ability of any third-party collaborators, to obtain, maintain and protect intellectualproperty rights covering our product candidates and technologies, and our ability to develop, manufacture andcommercialize our product candidates without infringing on the intellectual property rights of others;·our ability to add infrastructure and manage adequately our future growth; and33 Table of Contents·our ability to attract and retain key personnel with appropriate expertise and experience to manage our businesseffectively.Accordingly, the likelihood of our success must be evaluated in light of many potential challenges and variablesassociated with an early clinical-stage biopharmaceutical company, many of which are outside of our control, and pastresults, including operating or financial results, should not be relied on as an indication of future results.We will require substantial additional funding, which may not be available to us on acceptable terms, or at all. Our operations have consumed substantial amounts of cash since inception. We conducted a Phase 1 clinical trial ofPTG-100 and PTG-300 in healthy volunteers, we have initiated a global Phase 2b clinical trial of PTG-100 in patients withmoderate-to-severe UC and we have initiated a Phase 1 clinical study of PTG-200. Developing pharmaceutical productcandidates, including conducting pre-clinical studies and clinical trials, is expensive. We will require substantial additionalfuture capital in order to complete clinical development and, if we are successful, to commercialize any of our currentproduct candidates. If the U.S. Food and Drug Administration (“FDA”) or any foreign regulatory agency, such as theEuropean Medicines Agency (“EMA”), requires that we perform studies or trials in addition to those that we currentlyanticipate with respect to the development of PTG-100, PTG-200, PTG-300 or any of our other product candidates, or repeatstudies or trials, our expenses would further increase beyond what we currently expect, and any delay resulting from suchfurther or repeat studies or trials could also result in the need for additional financing.Further, in the event our Janssen License and Collaboration Agreement is terminated, we may not receive anydevelopment fees, milestone payments, or royalties under the Janssen License and Collaboration Agreement, and we wouldbe required to fund all clinical development, manufacturing, and commercial activities for PTG-200, which would require usto raise additional capital or establish alternative collaborations with third-party collaboration partners, which may not bepossible.As of December 31, 2017, we had cash, cash equivalents and available-for-sale securities of $155.5 million. Based uponour current operating plan and expected expenditures, we believe that our existing cash, cash equivalents, and available-for-sale securities will be sufficient to fund our operations for at least the next 12 months. Our existing capital resources will notbe sufficient to enable us to initiate any pivotal clinical trials. Accordingly, we expect that we will need to raise substantialadditional funds in the future in order to complete clinical development or commercialize any of our product candidates. Ourfunding requirements and the timing of our need for additional capital are subject to change based on a number of factors,including:·the rate of progress and the cost of our studies of PTG-100, PTG-200, and PTG-300 and any other productcandidates;·the number of product candidates that we intend to develop using our technology platform;·the costs of research and pre-clinical studies to support the advancement of other product candidates into clinicaldevelopment;·the timing of, and costs involved in, seeking and obtaining approvals from the FDA and comparable foreignregulatory authorities, including the potential by the FDA or comparable regulatory authorities to require that weperform more studies than those that we currently expect;·the achievement of development, regulatory, and sales milestones resulting in the payment to us from Janssenunder the Janssen License and Collaboration Agreement and the timing of receipt of such payments, if any;·changes or delays in our and/or Janssen’s development plans for PTG-200;·the costs of preparing to manufacture PTG-100, PTG-200 or PTG-300 on a scale sufficient to enable large-scaleclinical trials and commercial supply;34 Table of Contents·the timing and cost of transitioning our product formulations into the formulations we intend to use in registrationtrials and commercialize;·the costs of commercialization activities if PTG-100, PTG-300 or any future product candidate is approved,including the formation of a sales force;·Janssen’s ability to successfully market and sell PTG-200, upon regulatory approval and clearance, in the UnitedStates and other countries;·the timing, receipt and amount of royalties under the Janssen License and Collaboration Agreement on worldwidenet sales of PTG-200, upon regulatory approval and clearance, if any;·the sales price and availability of adequate third-party reimbursement for our product candidates that may receiveregulatory approval, if any;·the degree and rate of market acceptance of any products launched by us or our partners;·the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;·our need and ability to hire and retain additional personnel;·our ability to enter into additional collaboration, licensing, commercialization or other arrangements and the termsand timing of such arrangements; and·the emergence of competing technologies or other adverse market developments.If our existing capital resources, future interest income, upfront payment and potential opt-in election fees, milestonepayments, and royalties under the Janssen License and Collaboration Agreement are insufficient to meet future capitalrequirements, and if we are unable to obtain additional funding from equity offerings or debt financings, including on atimely basis, we may be required to:·seek collaborators for one or more of our peptide-based product candidates at an earlier stage than otherwise wouldbe desirable or on terms that are less favorable than might otherwise be available;·relinquish or license on unfavorable terms our rights to technologies or peptide-based product candidates that weotherwise would seek to develop or commercialize ourselves; or·significantly curtail one or more of our research or development programs or cease operations altogether.Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us torelinquish rights to our peptide-based product candidates or technologies.We may seek additional funding through a combination of equity offerings, debt financings, collaborations and/orlicensing arrangements. Additional funding may not be available to us on acceptable terms, or at all. To the extent that weraise additional capital through the sale of equity securities, including any sale of up to $50.0 million worth of shares of ourcommon stock pursuant to our Sales Agreement with Cantor Fitzgerald & Co. (the “Sales Agreement”), or convertible debtsecurities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adverselyaffect your rights as a stockholder. The incurrence of indebtedness and/or the issuance of certain equity securities couldresult in fixed payment obligations and could also result in certain additional restrictive covenants, such as limitations onour ability to incur debt and/or issue additional equity, limitations on our ability to acquire or license intellectual propertyrights and other operating restrictions that could adversely impact our ability to conduct our business. In addition, theissuance of additional equity securities by us, or the possibility of such issuance,35 Table of Contentsmay cause the market price of our common stock to decline. In the event that we enter into collaborations and/or licensingarrangements in order to raise capital, we may be required to accept unfavorable terms, including relinquishing or licensingto a third party on unfavorable terms our rights to our proprietary technology platform or peptide-based product candidatesthat we otherwise would seek to develop or commercialize ourselves or potentially reserve for future potential arrangementswhen we might be able to achieve more favorable terms.Risks Related to Our Business and IndustryWe are heavily dependent on the success of our lead product candidates, PTG-100, PTG-200 and PTG-300, which are inearly-stage clinical development, and if any of these products fail to receive regulatory approval or are not successfullycommercialized, our business would be adversely affected.We currently have no product candidates that are in registration or pivotal clinical trials or are approved for commercialsale, and we may never be able to develop a marketable product. We expect that a substantial portion of our efforts andexpenditures over the next few years will be devoted to our lead product candidates, PTG-100 and PTG-200 targetinginflammatory bowel disease (“IBD”) and PTG-300 which targets anemia associated with certain rare blood disorders, and thedevelopment of other product candidates. We cannot be certain that PTG-100, PTG-200, PTG-300 or any other productcandidates will receive regulatory approval or, if approved, be successfully commercialized. The research, testing,manufacturing, labeling, approval, sale, marketing and distribution of PTG-100, PTG-200, and PTG-300 will remain subjectto extensive regulation by the FDA and other regulatory authorities in the United States and other countries, each of whichhas differing regulations. In addition, even if approved, our pricing and reimbursement will be subject to further review anddiscussions with payors. We are not permitted to market any product candidate in the United States until after approval of anew drug application (“NDA”) from the FDA, or in any foreign countries until after approval of a marketing application bycorresponding regulatory authorities. We completed a Phase 1 clinical trial for PTG-100 in June 2016 and have initiated aglobal Phase 2b clinical trial of PTG-100 in patients with moderate to severe UC. We also completed a Phase 1 clinical trialfor PTG-300 in December 2017 and initiated a Phase 1 clinical trial of PTG-200 in November 2017. We will need to conductlarger, more extensive clinical trials in the target patient populations to support a potential application for regulatoryapproval by the FDA or corresponding regulatory authorities, and we do not expect to be in a position to do so for the nearterm. We may not receive any preferential or expedited review of any application for regulatory approval by virtue of the factthat our product candidates target biological pathways that are also targeted by currently marketed injectable antibodydrugs, and our product candidates will be subject to the regulatory review processes applicable to completely new drugs.We have not previously submitted an NDA to the FDA, or similar drug approval filings to comparable foreignauthorities, for any product candidate, and we cannot be certain that any of our product candidates will be successful inclinical trial or receive regulatory approval. Filing an application and obtaining regulatory approval for a pharmaceuticalproduct candidate is an extensive, lengthy, expensive and inherently uncertain process, and the regulatory authorities maydelay, limit or deny approval of our product candidates for many reasons, including:·we may not be able to demonstrate that any of our product candidates are safe and effective to the satisfaction ofthe FDA or comparable foreign regulatory authorities;·the FDA or comparable foreign regulatory authorities may require additional pre-clinical studies or clinical trialsprior to granting approval, which would increase our costs and extend the pre-approval development process;·the results of our clinical trials may not meet the level of statistical or clinical significance required by the FDA orcomparable foreign regulatory authorities for approval;·the FDA may disagree with the number, design, size, conduct or statistical analysis of one or more of our clinicaltrials;·contract research organizations (“CROs”) that we retain to conduct clinical trials may take actions outside of ourcontrol that materially and adversely impact our clinical trials;36 Table of Contents·the FDA or comparable foreign regulatory authorities may disagree with, or not accept, our interpretation of datafrom our pre-clinical studies and clinical trials;·the FDA may require development of a costly and extensive risk evaluation and mitigation strategy (“REMS”), as acondition of approval;·the FDA or other regulatory authorities may require post-marketing studies as a condition of approval;·the FDA may identify deficiencies in our manufacturing processes or facilities or those of our third-partymanufacturers which would be required to be corrected prior to regulatory approval;·the success or further approval of competitor products approved in indications in which we undertake developmentof our product candidates may change the standard of care or change the standard for approval of our productcandidate in our proposed indications; and·the FDA or comparable foreign regulatory authorities may change their approval policies or adopt new regulations.Our peptide-based product candidates will require additional research, clinical development, manufacturing activities,regulatory approval in multiple jurisdictions (if regulatory approval can be obtained at all), securing sources of commercialmanufacturing supply and building of or partnering with a commercial organization. We cannot assure you that our clinicaltrials for PTG-100, PTG-200 or PTG-300 will be initiated or completed in a timely manner or successfully, or at all. Furtherwe cannot be certain that we plan to advance any other peptide-based product candidates into clinical trials. Moreover, anydelay or setback in the development of any product candidate, in particular PTG-100, PTG-200, or PTG-300, would beexpected to adversely affect our business and cause our stock price to fall.If Janssen does not elect to continue the development of PTG-200 through an Opt-In Election, our business and businessprospects would be significantly harmed.Under the terms of the Janssen Collaboration and License Agreement, Janssen is not obligated to make any additionalpayments to us as we have already received the upfront payment that was due in the third quarter of 2017 pursuant to theterms of the Janssen License and Collaboration Agreement, until such time as it affirmatively elects to continue to advancethe development of PTG-200 (the “First Opt-In Election”) within a period of time following completion date of the Phase 1studies and the Phase 2a portion of the CD Phase 2 clinical trial and any related activities set forth in a clinical developmentplan (“Phase 2a Activities”). The timing of Janssen’s First Opt-In Election and whether Janssen elects to continue furtherclinical development of PTG-200 also affects the timing and availability of potential future milestone and royalty payments,if any. If the Phase 1 clinical trial or Phase 2 activities are terminated early, suspended for an extended period of time, or areotherwise unsuccessful, Janssen may determine not to elect to continue further clinical development of PTG-200, in whichcase, the Janssen License and Collaboration Agreement would terminate and our business and business prospects would bematerially adversely affected.There may be disagreements between Janssen and Protagonist during the term of the Janssen License and CollaborationAgreement, and if they are not settled amicably or in the favor of Protagonist, the result may harm our business.We are subject to the risk of possible disagreements with Janssen, including those regarding the development,manufacture, and commercialization of PTG-200, interpretation of the Janssen License and Collaboration Agreement, andownership of proprietary rights. In addition, in certain circumstances, we may believe that a particular milestone has beenachieved and Janssen may disagree with our belief. In that case, receipt of that milestone payment may be delayed or maynever be received, which would adversely affect our financial condition and may require us to adjust our operating plans.37 Table of ContentsThe joint governance structure contemplated by the Janssen License and Collaboration Agreement will cease to havedecision-making authority once the development term ends, which will preclude our ability to participate in any furtherdecision-making for PTG-200. Reliance on a joint governance structure also subjects us to the risk that changes in keymanagement personnel who are members of the various joint committees may materially and adversely affect the functioningof these committees, which could significantly delay or preclude PTG-200 development and/or commercialization. As aresult of possible disagreements with Janssen, we also may become involved in litigation or arbitration, which would betime-consuming for our management and employees and expensive.The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming andinherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our product candidates, ourbusiness will be substantially harmed.Our business and future profitability is substantially dependent on our ability to successfully develop, obtainregulatory approval for and then successfully commercialize our most advanced peptide-based product candidates, PTG-100,which is in an ongoing global Phase 2b trial, PTG-300, which completed a Phase 1 clinical trial in December 2017, and PTG-200, which is in a Phase 1 clinical trial. We are not permitted to market or promote any of our peptide-based productcandidates before we receive regulatory approval from the FDA, the EMA or any other foreign regulatory authority, and wemay never receive such regulatory approval for any of our peptide-based product candidates. The time required to obtainapproval by the FDA and comparable foreign authorities is unpredictable, typically takes many years following thecommencement of clinical trials and depends upon numerous factors, including the substantial discretion of regulatoryauthorities. Approval policies, regulations and the types and amount of clinical and manufacturing data necessary to gainapproval may change during the course of clinical development and may vary among jurisdictions. We have not obtainedregulatory approval for any product candidate and it is possible that none of our existing product candidates or any productcandidates we have in development or may seek to develop in the future will ever obtain regulatory approval.Our product candidates could fail to receive regulatory approval for many reasons, including the following: the FDA orcomparable 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 or comparable foreign regulatory authorities that aproduct candidate is safe and effective for its proposed indication;·the results of clinical trials may fail to achieve the level of statistical significance required by the FDA orcomparable foreign regulatory authorities for approval;·we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;·the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data submitted insupport of regulatory approval;·the data collected from pre-clinical studies and clinical trials of our peptide-based product candidates may not besufficient to support the submission of an NDA, supplemental NDA, or other regulatory submissions necessary toobtain regulatory approval in the United States or elsewhere;·we or our contractors may not meet the GMP and other applicable requirements for manufacturing processes,procedures, documentation and facilities necessary for approval by the FDA or comparable foreign regulatoryauthorities; and·changes to the approval policies or regulations of the FDA or comparable foreign regulatory authorities withrespect to our product candidates may result in our clinical data becoming insufficient for approval.38 Table of ContentsThe lengthy regulatory approval process as well as the unpredictability of future clinical trial results may result in ourfailing to obtain regulatory approval to market PTG-100, PTG-200 and PTG-300, our lead product candidates, or any otherproduct candidate, which would harm our business, results of operations and prospects significantly.In addition, even if we were to obtain regulatory approval, regulatory authorities may approve our product candidatesfor fewer or more limited indications than what we requested approval for, may include safety warnings or other restrictionsthat may negatively impact the commercial viability of our product candidates, including the potential for a favorable priceor reimbursement at a level that we would otherwise intend to charge for our products. Likewise, regulatory authorities maygrant approval contingent on the performance of costly post-marketing clinical trials or the conduct of an expensive REMS,which could significantly reduce the potential for commercial success or viability of our product candidates. Any of theforegoing possibilities could materially harm the prospects for our product candidates and business and operations.We have not previously submitted an NDA, a Marketing Authorization Application (“MAA”), or any correspondingdrug approval filing to the FDA, the EMA or any comparable foreign authority for any peptide-based product candidate.Further, our product candidates may not receive regulatory approval even if we complete such filings. If we do not receiveregulatory approvals for our product candidates, we may not be able to continue our operations.Clinical development is a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trialsmay not be predictive of future trial results. Clinical failure can occur at any stage of clinical development. Further, wehave only recently initiated a Phase 2 clinical trial and have never conducted a Phase 3 clinical trial or submitted an NDA.Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure canoccur at any time during the clinical development process. The results of pre-clinical studies and early clinical trials of ourproduct candidates and studies and trials of other products may not be predictive of the results of later-stage clinical trials. Inaddition to our planned pre-clinical studies and clinical trials, we expect to have to complete at least two large scale, well-controlled clinical trials to demonstrate substantial evidence of efficacy and safety for each product candidate we intend tocommercialize. Further, given the patient populations for which we are developing therapeutics, we expect to have toevaluate long-term exposure to establish the safety of our therapeutics in a chronic dose setting. We have only recentlyinitiated a Phase 2 clinical trial and have never conducted a Phase 3 clinical trial or submitted an NDA, and as a result, wehave no history or track-record to rely on when entering these phases of the development cycle. For example, the resultsgenerated to date in pre-clinical studies and the Phase 1 clinical trial for PTG-100 do not ensure that the current Phase 2clinical trial or later clinical trials will have similar results or be successful. Product candidates in later stages of clinical trialsmay fail to show the desired safety and efficacy traits despite having progressed through pre-clinical studies and initialclinical trials. Clinical trial failures may result from a multitude of factors including, but not limited to, flaws in trial design,dose selection, placebo effect, patient enrollment criteria and failure to demonstrate favorable safety and/or efficacy traits ofthe product candidate. A number of companies in the biopharmaceutical industry have suffered significant setbacks inadvanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials.Based upon negative or inconclusive results, we may decide, or regulators may require us, to conduct additional clinicaltrials or pre-clinical studies.We may experience delays in ongoing clinical trials, and we do not know whether planned clinical trials will begin ontime, need to be redesigned, enroll patients on time or be completed on schedule, if at all. Clinical trials can be delayed for avariety of reasons, including delays related to:·obtaining regulatory approvals to commence a clinical trial;·reaching agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can besubject to extensive negotiation and may vary significantly among different CROs and trial sites;·fraud or negligence on the part of CROs, contract manufacturing organizations (“CMOs”), consultants orcontractors;39 Table of Contents·obtaining institutional review board (“IRB”) or ethics committee (“EC”), approval at each site;·recruiting suitable patients to participate in a clinical trial;·having patients complete a clinical trial or return for post-treatment follow-up;·clinical sites deviating from the clinical trial protocol or dropping out of a clinical trial;·adding new clinical trial sites; or·manufacturing sufficient quantities of product candidate for use in clinical trials.We could encounter delays if a clinical trial is modified, suspended or terminated by us, by the IRBs or ECs of theinstitutions in which such clinical trials are being conducted, by a Data Safety Monitoring Board, for such trial or by the FDAor other regulatory authorities. Such authorities may impose a modification, suspension or termination due to a number offactors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical trialprotocols, inspection of the clinical trial operations or clinical trial site by the FDA or other regulatory authorities resultingin the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit fromusing a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue theclinical trial. If we experience delays in the completion of, or termination of, any clinical trial of our product candidates, thecommercial prospects of our product candidates will be harmed and our ability to generate product revenue from any of theseproduct candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slowdown our product candidate development and approval process and jeopardize our ability to commence product sales andgenerate revenue. Any of these occurrences may harm our business, financial condition and prospects significantly. Inaddition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may alsoultimately lead to the denial of regulatory approval of our product candidates.In addition, data obtained from trials and studies are susceptible to varying interpretations, and regulators may notinterpret our data as favorably as we do, which may delay, limit or prevent regulatory approval.Enrollment and retention of patients in clinical trials is an expensive and time-consuming process and could be made moredifficult or rendered impossible by multiple factors outside our control.We may encounter delays in enrolling, be unable to enroll or maintain, a sufficient number of patients to complete anyof our clinical trials. Patient enrollment and retention in clinical trials is a significant factor in the timing of clinical trials anddepends on many factors, including the size and nature of the patient population, the nature of the trial protocol, the existingbody of safety and efficacy data with respect to the study drug, the number and nature of competing treatments and ongoingclinical trials of competing drugs for the same indication, the proximity of patients to clinical trial sites and the eligibilitycriteria for the clinical trial. There are a significant number of global clinical trials in ulcerative colitis that are currentlyongoing, especially in Phases 2 and 3, making it highly competitive and challenging to recruit subjects. Furthermore, anynegative results we may report in clinical trials of our product candidates may make it difficult or impossible to recruit andretain patients in other clinical trials of that same candidate. For example, we are aware of a number of therapies that arecommercialized or are being developed for IBD and we expect to face competition from these investigational drugs orapproved drugs for potential subjects in our clinical trials, which may delay the pace of enrollment in our planned clinicaltrials. Delays or failures in planned patient enrollment or retention may result in increased costs, program delays or both,which could have a harmful effect on our ability to develop our product candidates or could render further developmentimpossible.40 Table of ContentsAll of our peptide-based product candidates other than PTG-100, PTG-200 and PTG-300 are in research or pre-clinicaldevelopment and have not entered into clinical trials. If we are unable to develop, test and commercialize our peptide-based product candidates, our business will be adversely affected.As part of our strategy, we also seek to discover, develop and commercialize a portfolio of new peptide-based productcandidates in addition to PTG-100, PTG-200, and PTG-300. Research programs to identify appropriate biological targetspathways and product candidates require substantial scientific, technical, financial and human resources, whether or not anyproduct candidates are ultimately identified. Our research programs may initially show promise in identifying potentialproduct candidates, yet fail to yield product candidates for clinical development for many reasons, including:·our financial and internal resources are insufficient;·our research methodology used may not be successful in identifying potential product candidates;·competitors may develop alternatives that render our product candidates uncompetitive;·our other product candidates may be shown to have harmful side effects or other characteristics that indicate suchproduct candidate is unlikely to be effective or otherwise unlikely to achieve applicable regulatory approval;·our product candidates may not be capable of being produced in commercial quantities at an acceptable cost, or atall; or·a product candidate may not be accepted by patients, the medical community, healthcare providers or third-partypayors.Our research and development strategy for our lead product candidates relies in large part on clinical data and resultsobtained from antibody and small molecule products that are approved or in late-stage development that could ultimatelyprove to be inaccurate or unreliable for use with our peptide-based product candidate approach.As part of our strategy to mitigate clinical development risk for PTG-100 and PTG 200, we seek to develop peptide-based product candidates against validated biological targets and pathways that have been targeted by approved or laterstage products in development. While we utilize pre-clinical in vivo and in vitro models as well as clinical biomarkers toassess potential safety and efficacy early in the candidate selection and development process, this strategy necessarily reliesupon clinical data and other results obtained by third parties that may ultimately prove to be inaccurate or unreliable orotherwise not applicable to the indications in which we develop our peptide-based product candidates. We will have toconduct clinical trials to show the safety and efficacy of our peptide-based product candidates against the identifiedbiological targets and pathways to show that our peptide-based product candidates can address the identified mechanism ofaction shown by these third party results. For example, PTG-100 is an α4ß7 integrin antagonist that targets the same target asthe currently marketed injectable antibody drug, Entyvio®, approved for treatment in UC and CD, and PTG-200 targets theIL-23 biological pathway, which is a pathway targeted by the currently marketed injectable antibody drug, Stelara®,approved for treatment of psoriasis, psoriatic arthritis, and CD. If our interpretation of the third party clinical data and resultsfrom molecules directed against the same biological target or pathway or our pre-clinical in vivo and in vitro models proveinaccurate or our assumptions and conclusions about the applicability of our peptide-based product candidates against thesame biological targets or pathways are incorrect or inaccurate, then our development efforts may prove unsuccessful orlonger and more extensive and our research and development strategy and business and operations could be significantlyharmed.Our proprietary peptide platform may not result in any products of commercial value.We have developed a proprietary peptide technology platform to enable the identification, testing, design anddevelopment of new product candidates. We cannot assure you that our peptide platform will work, nor that any of these41 Table of Contentspotential targets or other aspects of our proprietary drug discovery and design platform will yield product candidates thatcould enter clinical development and, ultimately, be commercially valuable. Although we expect to continue to enhance thecapabilities of our proprietary platform by developing and integrating existing and new research technologies, we may notbe successful in any of our enhancement and development efforts. For example, we may not be able to enter into agreementson suitable terms to obtain technologies required to develop certain capabilities of our peptide platform. In addition, we maynot be successful in developing the conditions necessary to simulate specific tissue function from multiple species, orotherwise develop assays or cell cultures necessary to expand these capabilities. If our enhancement or development effortsare unsuccessful, we may not be able to advance our drug discovery capabilities as quickly as we expect or identify as manypotential drug candidates as we desire.Our product candidates may cause undesirable side effects or have other properties impacting safety that could delay orprevent their regulatory approval, limit the commercial profile of an approved label, or result in limiting the commercialopportunity for our product candidates if approved.Undesirable side effects that may be caused by our product candidates or caused by similar approved drugs or productcandidates in development by other companies, could cause us or regulatory authorities to interrupt, delay or halt clinicaltrials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparableforeign authorities. Results of our clinical trials could reveal a high and unacceptable severity and prevalence of side effectsor adverse events related to our product candidates. In such an event, our clinical trials could be suspended or terminated andthe FDA or comparable foreign regulatory authorities could order us to cease further development of our product candidatesfor any or all targeted indications. In addition, drug-related side effects could negatively affect patient recruitment or theability of enrolled patients to complete the trial and even if our clinical trials are completed and our product candidate isapproved, drug-related side effects could restrict the label or result in potential product liability claims. Any of theseoccurrences could significantly harm our business, financial condition and prospects significantly.Moreover, since our product candidates PTG-100 and PTG-200 are being developed for indications for whichinjectable antibody drugs have been approved, we expect that our clinical trials would need to show a risk/benefit profilethat is competitive with those existing products and product candidates in order to obtain regulatory approval or, ifapproved, a product label that is favorable for commercialization.Additionally, if one or more of our product candidates receives marketing approval and we or others later identifyundesirable side effects caused by such products, a number of potentially significant negative consequences could result,including:·regulatory authorities may withdraw approvals of such product;·regulatory authorities may require additional warnings on the label;·we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;·we could be sued and held liable for harm caused to patients; and·our reputation may suffer.Any of these events could prevent us from achieving or maintaining market acceptance of the particular peptide-basedproduct candidate which could significantly harm our business and prospects.42 Table of ContentsIf there are any safety or efficacy results that cause the benefit-risk profile of PTG-200 to become unacceptable, the clinicaldevelopment of PTG-200 would be delayed or halted, and as a result, Janssen may terminate the Janssen License andCollaboration Agreement, which would severely and adversely affect our business prospects, and may cause us to ceaseoperations.PTG-200 may prove to have undesirable or unintended side effects or other characteristics adversely affecting its safety,efficacy or cost effectiveness that could prevent or limit its approval for marketing and successful commercial use, or thatcould delay or prevent the commencement and/or completion of clinical trials for PTG-200. If regulatory submissionsrequesting approval to market PTG-200 are submitted, after reviewing the data in such submissions, the FDA and regulatoryagencies in other countries may conclude that the overall benefit-risk profile of PTG-200 treatment is unacceptable, and theclinical development of PTG-200 would be delayed or halted. Any of these events would severely harm our business andprospects.Clinical trials by their nature examine the effects of a potential therapy in a sample of the potential future patientpopulation. As such, clinical trials conducted with PTG-200 may not uncover all possible adverse events that patients treatedwith PTG-200 may experience. In collaboration with Janssen, we may in the future observe or report dose-limiting or othersafety issues in potential future clinical trials of PTG-200. If such toxicities or other safety issues in any clinical trial of PTG-200 result in an unacceptable benefit-risk profile, then:·the commencement and/or completion of any future clinical trials would likely be delayed or prevented; or·additional, unforeseen trials, or preclinical studies may be required to be conducted.The occurrence of any of these events may cause Janssen to abandon their development of PTG-200 entirely andterminate the Janssen License and Collaboration Agreement. Any termination of the Janssen License and CollaborationAgreement by Janssen would have a material adverse effect on our results of operations, financial condition, businessprospects and the future of PTG-200.We rely on third parties to conduct our pre-clinical studies and clinical trials. If these third parties do not successfullycarry out their contractual duties or do not meet regulatory requirements or expected deadlines, we may not be able toobtain timely regulatory approval for or commercialize our product candidates and our business could be substantiallyharmed.We have relied upon and plan to continue to rely upon third party CROs to monitor and manage clinical trials andcollect data for our pre-clinical studies and clinical programs. We rely on these parties for execution of our pre-clinicalstudies and clinical trials, and control only certain aspects of their activities. Nevertheless, we are responsible for ensuringthat their conduct meets regulatory requirements and that each of our studies and trials is conducted in accordance with theapplicable protocol, legal, regulatory and scientific standards, and our reliance on CROs does not relieve us of our regulatoryresponsibilities. Thus, we and our CROs are required to comply with good clinical practices (“GCPs”), which are regulationsand guidelines promulgated by the FDA, the EMA and comparable foreign regulatory authorities for all of our productcandidates 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 datagenerated in our clinical trials may be deemed unreliable and the FDA, EMA or comparable foreign regulatory authoritiesmay not accept the data or require us to perform additional clinical trials before considering our filing for regulatory approvalor approving our marketing application. We cannot assure you that upon inspection by a regulatory authority, suchregulatory authority will determine that any of our clinical trials complies with GCPs. While we have agreements governingactivities of our CROs, we may have limited influence over their actual performance and the qualifications of their personnelconducting work on our behalf. In addition, significant portions of the clinical studies for our peptide-based productcandidates are expected to be conducted outside of the United States, which will make it more difficult for us to monitorCROs and perform visits of our clinical trial sites and will force us to rely heavily on CROs to ensure the proper and timelyconduct of our clinical trials and compliance with applicable regulations, including GCPs. Failure to comply with applicableregulations in the conduct of the clinical studies for our peptide-based product candidates may require us to repeat clinicaltrials, which would delay the regulatory approval process.43 Table of ContentsSome of our CROs have an ability to terminate their respective agreements with us if it can be reasonably demonstratedthat the safety of the subjects participating in our clinical trials warrants such termination, if we make a general assignmentfor 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 withalternative CROs or do so on commercially reasonable terms. In addition, our CROs are not our employees, and except forremedies available to us under our agreements with such CROs, we cannot control whether or not they devote sufficient timeand resources to our pre-clinical and clinical programs. If CROs do not successfully carry out their contractual duties orobligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data theyobtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, ourclinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for orsuccessfully commercialize our peptide-based product candidates. As a result, our results of operations and the commercialprospects for our peptide-based product candidates would be harmed, our costs could increase substantially and our ability togenerate revenue could be delayed significantly.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 impactour ability to meet our desired clinical development timelines. Though we carefully manage our relationships with ourCROs, there can be no assurance that we will not encounter challenges or delays in the future or that these delays orchallenges will not have a material adverse impact on our business, financial condition and prospects.We face a variety of manufacturing risks and rely on third parties to manufacture our drug substance and clinical drugproduct and we intend to rely on third parties to produce commercial supplies of any approved peptide-based productcandidate.Our clinical trials must be conducted with product manufactured under current good manufacturing practices and forEurope and other major countries, International Council for Harmonisation of Technical Requirements for Registration ofPharmaceuticals for Human Use (“ICH”) guidelines, and we rely on contract manufactures to manufacture and provideproduct for us that meet these requirements. We do not currently have nor do we plan to acquire the infrastructure orcapability internally to manufacture our pre-clinical and clinical drug supplies and we lack the resources and the capabilityto manufacture any of our peptide-based product candidates on a clinical or commercial scale. We expect to continue todepend on contract manufacturers for the foreseeable future. In particular, as we proceed with the development and potentialcommercialization of PTG-100, we will need to increase the scale at which the drug is manufactured which will require thedevelopment of new manufacturing processes to potentially reduce the cost of goods. We will rely on our internal processresearch and development efforts and those of contract manufacturers to develop the GMP manufacturing processes requiredfor cost-effective and large scale production. If these efforts are not successful in developing cost-effective processes and ifthe contract manufacturers are not successful in converting it to commercial scale manufacturing, then our developmentand/or commercialization of PTG-100 could be materially adversely affected. In addition, we have no control over the abilityof our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. Moreover, ourcontract manufacturers are the sole source of supply for our clinical product candidates, including PTG-100. If we were toexperience an unexpected loss of supply for any reason, whether as a result of manufacturing, supply or storage issues orotherwise, we could experience delays, disruptions, suspensions or termination of our clinical study and planneddevelopment program, or be required to restart or repeat, any ongoing clinical trials.We also rely on our contract manufacturers to purchase from third party suppliers the materials necessary to produce ourpeptide-based product candidates for our clinical trials. There are a limited number of suppliers for raw materials that we useto manufacture our drugs and there may be a need to assess alternate suppliers to prevent a possible disruption of themanufacture of the materials necessary to produce our peptide-based product candidates for our clinical trials, and ifapproved, for commercial sale. We do not have any control over the process or timing of the acquisition of these rawmaterials by our manufacturers. Moreover, we currently do not have any agreements for the commercial production of theseraw materials. Although we generally do not begin a clinical trial unless we believe we have a sufficient supply of a peptide-based product candidate to complete the clinical trial, any significant delay in the supply of44 Table of Contentsa peptide-based product candidate, or the raw material components thereof, for an ongoing clinical trial due to the need toreplace a contract manufacturer or other third party manufacturer could considerably delay completion of our clinical trials,product testing and potential regulatory approval of our peptide-based product candidates. If our contract manufacturers orwe are unable to purchase these raw materials after regulatory approval has been obtained for our peptide-based productcandidates, the commercial launch of our peptide-based product candidates would be delayed or there would be a shortage insupply, which would impair our ability to generate revenue from the sale of our peptide-based product candidates.If we submit an application for regulatory approval of any of our product candidates, the facilities used by our contractmanufacturers to manufacture our product candidates will be subject to inspection and approval by the FDA or otherregulatory authorities. If our contract manufacturers cannot successfully manufacture material that conforms to ourspecifications and the strict regulatory requirements of the FDA or others, they will not be able to secure and/or maintainregulatory approval for their manufacturing facilities. If the FDA or a comparable foreign regulatory authority does notapprove these facilities for the manufacture of our peptide-based product candidates or if it withdraws any such approval inthe future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop,obtain regulatory approval for or market our peptide-based product candidates, if approved.We may fail to obtain orphan drug designations from the FDA for our product candidates, as applicable, and even if weobtain such designations, we may be unable to maintain the benefits associated with orphan drug designation, includingthe potential for market exclusivity. Our strategy includes filing for orphan drug designation where available for our product candidates. Under the OrphanDrug Act, the FDA may grant orphan drug designation to a drug or biologic intended to treat a rare disease or condition,which is defined as one occurring in a patient population of fewer than 200,000 in the United States, or a patient populationgreater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug orbiologic will be recovered from sales in the United States. In the United States, orphan drug designation entitles a party tofinancial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee waivers.In addition, if a product that has orphan drug designation subsequently receives the first FDA approval for the disease forwhich it has such designation, the product is entitled to orphan drug exclusivity, which means that the FDA may not approveany other applications, including a full NDA or BLA, to market the same drug or biologic for the same indication for sevenyears, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivityor where the manufacturer is unable to assure sufficient product quantity.In March 2018, we were granted orphan drug designation in the United States by the FDA for PTG-300 for the treatmentof patients with beta-thalassemia. Despite this designation, we may be unable to maintain the benefits associated with orphandrug designation status, including market exclusivity. If PTG-100 or PTG-200 is developed for the treatment of pouchitis,pediatric IBD or an alternate orphan indication, we may file for orphan drug designation with respect to such indication. Wemay not be the first to obtain regulatory approval of a product candidate for the beta-thalassemia or any other orphan-designated indication that we may pursue due to the uncertainties associated with developing pharmaceutical products. Inaddition, exclusive marketing rights in the United States may be limited if we seek approval for an indication broader thanthe orphan-designated indication or may be lost if the FDA later determines that the request for designation was materiallydefective or if we are unable to assure sufficient quantities of the product to meet the needs of patients with the orphan-designated disease or condition. Further, even if we obtain orphan drug designation exclusivity for a product, thatexclusivity may not effectively protect the product from competition because different drugs with different active moietiesmay receive and be approved for the same condition, and only the first applicant to receive approval will receive the benefitsof marketing exclusivity. Even after an orphan-designated product is approved, the FDA can subsequently approve a laterdrug with the same active moiety for the same condition if the FDA concludes that the later drug is clinically superior if it isshown to be safer, more effective or makes a major contribution to patient care. Orphan drug designation neither shortens thedevelopment time or regulatory review time of a drug, nor gives the drug any advantage in the regulatory review or approvalprocess. In addition, while we may seek orphan drug designation for our product candidates, we may never receive suchdesignations.45 Table of ContentsWe may not be successful in obtaining or maintaining development and commercialization collaborations, and anypotential partner may not devote sufficient resources to the development or commercialization of our product candidatesor may otherwise fail in development or commercialization efforts, which could adversely affect our ability to developcertain of our product candidates and our financial condition and operating results.Other than our Janssen License and Collaboration Agreement, we have no current collaborations for any of our productcandidates. Even if we are able to establish other collaboration arrangements, any such collaboration, including the JanssenLicense and Collaboration Agreement, may not ultimately be successful, which could have a negative impact on ourbusiness, results of operations, financial condition and growth prospects. While we currently plan to enter into collaborationsthat are limited to certain identified territories, there can be no assurance that we would maintain significant rights or controlof future development and commercialization of such product candidate. Accordingly, if we collaborate with a third party fordevelopment and commercialization of a product candidate, we may relinquish some or all of the control over the futuresuccess of that product candidate to the third party, and that partner may not devote sufficient resources to the developmentor commercialization of our product candidate or may otherwise fail in development or commercialization efforts, in whichevent the development and commercialization of the product candidate in the collaboration could be delayed or terminatedand our business could be substantially harmed. In addition, the terms of any potential collaboration or other arrangementthat we may establish may not be favorable to us or may not be perceived as favorable, which may negatively impact theprice of our common stock. In some cases, we may be responsible for continuing development of a product candidate orresearch program under a collaboration, and the payments we receive from our partner may be insufficient to cover the cost ofthis development or may result in a dispute between the parties. Moreover, collaborations and sales and marketingarrangements are complex and time consuming to negotiate, document and implement, and they may require substantialresources to maintain, which may be detrimental to the development of our other product candidates.We are subject to a number of additional risks associated with our dependence on collaborations with third parties, theoccurrence of which could cause our collaboration arrangements to fail. Conflicts may arise between us and partners, such asconflicts concerning the implementation of development plans, efforts and resources dedicated to the product candidate,interpretation of clinical data, the achievement of milestones, the interpretation of financial provisions or the ownership ofintellectual property developed during the collaboration. If any such conflicts arise, a collaborator could act in its own self-interest, which may be adverse to our interests. Any such disagreement between us and a partner could result in one or moreof the following, each of which could delay or prevent the development or commercialization of our product candidates, andin turn prevent us from generating sufficient revenue to achieve or maintain profitability:·reductions in the payment of royalties or other payments we believe are due pursuant to the applicablecollaboration arrangement;·actions taken by a partner inside or outside our collaboration which could negatively impact our rights or benefitsunder our collaboration; or·unwillingness on the part of a partner to keep us informed regarding the progress of its development andcommercialization activities or to permit public disclosure of the results of those activities.In addition, the termination of a collaboration may limit our ability to obtain rights to the product or intellectualproperty developed by our collaborator under terms that would be sufficiently favorable for us to consider furtherdevelopment or investment in the terminated collaboration product candidate, even if it were returned to us.We face significant competition from other biotechnology and pharmaceutical companies, and our operating results willsuffer if we fail to compete effectively.The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significanttechnological change. We have competitors worldwide, including major multinational pharmaceutical companies,biotechnology companies, specialty pharmaceutical and generic pharmaceutical companies as well as universities and otherresearch institutions.46 Table of ContentsMany of our competitors have substantially greater financial, technical and other resources, such as larger research anddevelopment staff, and experienced marketing and manufacturing organizations. Mergers and acquisitions in our industrymay result in even more resources being concentrated in our competitors. As a result, these companies may obtain regulatoryapproval more rapidly than we are able and may be more effective in selling and marketing their products. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large,established companies. Competition may increase further as a result of advances in the commercial applicability of newertechnologies and greater availability of capital for investment in these industries. Our competitors may succeed indeveloping, acquiring or licensing, on an exclusive basis, pharmaceutical products that are easier to develop, more effectiveor less costly than any product candidates that we are currently developing or that we may develop. If approved, our productcandidates are expected to face competition from commercially available drugs as well as drugs that are in the developmentpipelines of our competitors.Pharmaceutical companies may invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make our product candidates less competitive. In addition, any new product thatcompetes with an approved product must demonstrate advantages in efficacy, convenience, tolerability or safety in order toovercome price competition and to be commercially successful. If our competitors succeed in obtaining FDA, EMA or otherregulatory approval or discovering, developing and commercializing drugs before we do or develop blocking intellectualproperty to which we do not have a license, there would be a material adverse impact on the future prospects for our productcandidates and business.We believe our principal competition in the treatment of IBD is from companies with approved agents in the followingtherapeutic classes, among others:·Infused α4ß7 antibody: Takeda Pharmaceutical Company·Infused IL-23 and IL-12 antibody: Johnson & Johnson·Injectable or infused anti-TNFα therapy: AbbVie, Johnson & Johnson, Amgen, Pfizer, UCB S.A., BoehringerIngelheim, MerckWe are also aware of several companies developing therapeutic product candidates for the treatment of IBD, including,but not limited to AbbVie, Allergan, Atlantic Healthcare Plc, Aprogen (biosimilar TNF-α antibody in Phase 3) ArenaPharmaceuticals, Inc., AstraZeneca, Biogen, Boehringer Ingelheim (adalimumab biosimilar in Pre-Registration), Bristol-Myers Squibb, Celgene (mongersen sodium and ozanimod hydrochloride in Phase 3 clinical trials), Eli Lilly and Company,Galapagos/Gilead (filgotinib in Phase 3), Lycera Corp., Mitsubishi Tanabe Pharma Corporation, Pfizer (tofacitinib citrate inPre-Registration), Roche/Genentech (etrolizumab in Phase 3), Samsung Bioepis (adalimumab biosimilar in Pre-Registration),Sandoz (adalimumab biosimilar in Phase 3), Shire/Pfizer (PF-00547659), and UCB S.A.We believe our principal competition in the treatment of chronic iron overload disorders, such as beta-thalassemia,myelodysplastic syndromes will come from other pipeline products being developed by companies such as Acceleron(luspatercept in Phase 3), bluebird bio (LentiGlobin in Phase 3), Bristol-Myers Squibb, Emmaus Medical (glutamine in pre-registration), Gilead, Global Blood Therapeutics, Inc., La Jolla Pharmaceutical and Novartis AG, among others. We believecompetition will also include approved iron chelation therapies that have been developed by Novartis AG and Apotex,among others.We believe that our ability to successfully compete will depend on, among other things:·the efficacy and safety of our product candidates, in particular compared to marketed products and products in late-stage development;·the time it takes for our product candidates to complete clinical development and receive regulatory approval, if atall;47 Table of Contents·the ability to commercialize and market any of our product candidates that receive regulatory approval;·the price of our products, including in comparison to branded or generic competitors;·whether coverage and adequate levels of reimbursement are available under private and governmental healthinsurance plans, including Medicare;·the ability to protect intellectual property rights related to our product candidates;·the ability to manufacture and sell commercial quantities of any of our product candidates that receive regulatoryapproval; and·acceptance of any of our approved product candidates by physicians, payors and other healthcare providers.Because our research approach depends on our proprietary technology platform, it may be difficult for us to continue tosuccessfully compete in the face of rapid changes in technology. If we fail to continue to advance our technology platform,technological change may impair our ability to compete effectively and technological advances or products developed byour competitors may render our technologies or product candidates obsolete, less competitive or not economical.We have not yet negotiated our agreement with Janssen specifying all of the terms of our Co-Detailing Option and wouldneed to develop our own internal sales force.Pursuant to the Janssen License and Collaboration Agreement, we have a co-detailing option, which, if PTG-200 isapproved for commercial sale, allows us to elect to provide up to 30% of the PTG-200 selling effort in the United States withsales force personnel (the “Co-Detailing Option”). While the Janssen License and Collaboration Agreement includes thematerial terms of our Co-Detailing Option, Janssen and we mutually agreed to negotiate a separate agreement specifying thedetailed activities and responsibilities in respect of the marketing and co-promotion of PTG-200 following our election toexercise our Co-Detailing Option. We will need to negotiate this separate agreement with Janssen and, as a result, Janssenmay place restrictions or additional obligations on us, including financial obligations. Any restrictions or additionalobligations may restrict our co-detailing activities or involve more significant financial or other obligations than wecurrently anticipate. In addition, we have no sales experience as a company. There are risks involved with establishing ourown sales force capabilities. Developing an internal sales force and function will require substantial expenditures and will betime-consuming, may expose us to unforeseen costs and expenses, and we may not be able to effectively recruit, train orretain sales personnel. Accordingly, we may be unable to establish our own sales force which could effectively preclude ourability to take any advantage of participating in co-detailing PTG-200 in the United States. In addition, any sales force weestablish may not be effective, or may be less effective than the any sales force that Janssen utilizes to promote PTG-200. Insuch event, the commercialization of PTG-200 may be adversely affected, which could materially and adversely affect anysales milestone payments or royalties we may receive under the Janssen License and Collaboration Agreement.We currently have no marketing and sales organization. To the extent any of our peptide-based product candidates forwhich we maintain commercial rights is approved for marketing, if we are unable to establish marketing and salescapabilities or enter into agreements with third parties to market and sell our peptide-based product candidates, we maynot be able to effectively market and sell any peptide-based product candidates, or generate product revenue.We currently do not have a marketing or sales organization for the marketing, sales and distribution of pharmaceuticalproducts. In order to commercialize any peptide-based product candidates that receive marketing approval, we would have tobuild marketing, sales, distribution, managerial and other non-technical capabilities or make arrangements with third partiesto perform these services, and we may not be successful in doing so. In the event of successful development of any of ourproduct candidates, we may elect to build a targeted specialty sales force which will be expensive and time consuming. Anyfailure or delay in the development of our internal sales, marketing and distribution capabilities would adversely impact thecommercialization of these products. With respect to our peptide-48 Table of Contentsbased product candidates, we may choose to partner with third parties that have direct sales forces and establisheddistribution systems, either to augment our own sales force and distribution systems or in lieu of our own sales force anddistribution systems, and in the case of the Janssen License and Collaboration Agreement, we may elect to exercise our Co-Detailing Option, which would require us to establish a U.S. sales team. If we are unable to enter into collaborations withthird parties for the commercialization of approved products, if any, on acceptable terms or at all, or if any such partner doesnot devote sufficient resources to the commercialization of our product or otherwise fails in commercialization efforts, wemay not be able to successfully commercialize any of our peptide-based product candidates that receive regulatory approval.If we are not successful in commercializing our peptide-based product candidates, either on our own or throughcollaborations with one or more third parties, our future revenue will be materially and adversely impacted.Even if our peptide-based product candidates receive marketing approval, they may fail to achieve market acceptance byphysicians, patients, government payors (including Medicare and Medicaid programs), private insurers, and other third-party payors, or others in the medical community necessary for commercial success.If any of our peptide-based product candidates receive marketing approval, they may nonetheless fail to gain sufficientmarket acceptance by physicians, patients, government payors, other third-party payors and other healthcare providers. If anyof our approved peptide-based products fail to achieve an adequate level of acceptance, we may not generate significantrevenue to become profitable. The degree of market acceptance, if approved for commercial sale, will depend on a number offactors, including but not limited to:·the efficacy and potential advantages compared to alternative treatments;·effectiveness of sales and marketing efforts;·the cost of treatment in relation to alternative treatments;·our ability to offer our peptide-based product candidates for sale at competitive prices;·the convenience and ease of administration compared to alternative treatments;·the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;·the willingness of the medical community to offer customers our peptide-based product candidates in addition to orin the place of current injectable therapies;·the strength of marketing and distribution support;·the availability of government and third-party coverage and adequate reimbursement;·the prevalence and severity of any side effects; and·any restrictions on the use of our product candidates together with other medications.Because we expect sales of our peptide-based product candidates, if approved, to generate revenue for us to achieveprofitability, the failure of our peptide-based product candidates to achieve market acceptance would harm our business andcould require us to seek collaborations or undertake additional financings sooner than we would otherwise plan.49 Table of ContentsWe have focused our limited resources to pursue particular product candidates and indications, and consequently, we mayfail to capitalize on product candidates or indications that may be more profitable or for which there is a greaterlikelihood of success.Because we have limited financial and managerial resources, we have focused on research programs and productcandidates on the discovery and development of PTG-100 and PTG-200, GI-restricted drugs that target the same biologicalpathways as currently marketed injectable antibody drugs for the treatment of IBD and the development of PTG-300 fortreatment of anemia associated with certain rare blood disorders. As a result, we may forego or delay pursuit of opportunitieswith other product candidates or for other indications that later prove to have greater commercial potential. Our resourceallocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Ourspending on current and future research and development programs and product candidates for specific indications may notyield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for aparticular product candidate, we may relinquish valuable rights to that product candidate through collaboration partnerships,licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain soledevelopment and commercialization rights to such product candidate.Even if we obtain and maintain approval for any of our product candidates from the FDA, we may never obtain approvalfor our product candidates outside of the United States, which would limit our market opportunities and adversely affectour business.Sales of our product candidates outside of the United States will be subject to foreign regulatory requirementsgoverning clinical trials and marketing approval and, to the extent that we retain commercial rights following clinicaldevelopment, we would plan to seek regulatory approval to commercialize our peptide-based product candidates in theUnited States, the EU and additional foreign countries. Even if the FDA grants marketing approval for a product candidate,comparable regulatory authorities of foreign countries must also approve the manufacturing and marketing of the productcandidates in those countries. Approval procedures vary among jurisdictions and can involve requirements andadministrative review periods different from, and greater than, those in the US, including additional pre-clinical studies orclinical trials. In many countries outside the US, a product candidate must be approved for reimbursement before it can beapproved for sale in that country. In some cases, the price that we intend to charge for our products is also subject toapproval. We may decide to submit an MAA to the EMA for approval in the EEA. As with the FDA, obtaining approval of anMAA from the EMA is a similarly lengthy and expensive process and the EMA has its own procedures for approval ofpeptide-based product candidates. Even if a product is approved, the FDA or the EMA, as the case may be, may limit theindications for which the product may be marketed, require extensive warnings on the product labeling or require expensiveand time-consuming clinical trials or reporting as conditions of approval. Regulatory authorities in countries outside of theUS and the EEA also have requirements for approval of drug candidates with which we must comply prior to marketing inthose countries. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result insignificant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certaincountries. Further, clinical trials conducted in one country may not be accepted by regulatory authorities in other countriesand regulatory approval in one country does not ensure approval in any other country, while a failure or delay in obtainingregulatory approval in one country may have a negative effect on the regulatory approval process in others. Also, regulatoryapproval for any of our peptide-based product candidates may be withdrawn. If we fail to comply with the regulatoryrequirements in international markets and or receive applicable marketing approvals, our target market will be reduced andour ability to realize the full market potential of our peptide-based product candidates will be harmed and our business willbe adversely affected.If we fail to comply with state and federal healthcare regulatory laws, we could face substantial penalties, damages, fines,disgorgement, exclusion from participation in governmental healthcare programs, and the curtailment of our operations,any of which could adversely affect our business, operations, and financial condition.Healthcare providers, physicians and third-party payors will play a primary role in the recommendation andprescription of any future product candidates we may develop or any product candidates for which we obtain marketingapproval. Our arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse andother healthcare laws and regulations that may affect the business or financial arrangements and relationships through whichwe would market, sell and distribute our products. Even though we do not and will not control referrals of50 Table of Contentshealthcare services or bill directly to Medicare, Medicaid or other third-party payors, federal and state healthcare laws andregulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our business. The laws that mayaffect our ability to operate include, but are not limited to:·the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly andwillfully soliciting, receiving, offering, or paying remuneration, directly or indirectly, in cash or in kind, inexchange for or to induce 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 a federal healthcareprogram such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of this statuteor specific intent to violate it in order to have committed a violation;·the federal false claims laws, including the False Claims Act, which impose criminal and civil penalties, includingthrough civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causingto be presented, to the federal government, claims for payment that are false, fictitious, or fraudulent; knowinglymaking, using, or causing to be made or used, a false record or statement to get a false or fraudulent claim paid orapproved by the government; or knowingly making, using, or causing to be made or used, a false record orstatement to avoid, decrease or conceal an obligation to pay money to the federal government; in addition, thegovernment may assert that a claim including items and services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act;·the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which imposes additionalcriminal and civil liability for, among other things, willfully executing, or attempting to execute, a scheme todefraud any healthcare benefit program or making false or fraudulent statements relating to healthcare matters;similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of thestatute or specific intent to violate it in order to have committed a violation;·HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and theirimplementing regulations, which also imposes obligations, including mandatory contractual terms, on HIPAA-covered entities and their business associates with respect to safeguarding the privacy, security and transmission ofindividually identifiable health information;·the federal civil monetary penalties statute, which prohibits, among other things, the offering or giving ofremuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influencethe beneficiary’s selection of a particular supplier of items or services reimbursable by a Federal or stategovernmental program;·the federal Physician Payments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics andmedical supplies for which payment is available under Medicare, Medicaid or the Children’s Health InsuranceProgram (with certain exceptions) to report annually to the government information related to certain payments andother “transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists andchiropractors) and teaching hospitals, and requires applicable manufacturers to report annually to the governmentownership and investment interests held by the physicians described above and their immediate family membersand payments or other “transfers of value” to such physician owners; and·analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which mayapply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by anythird-party payor, including commercial insurers; state laws that require pharmaceutical companies to comply withthe pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgatedby the federal government, or otherwise restrict payments that may be made to healthcare providers and otherpotential referral sources; state laws that require drug manufacturers to report information related to payments andother transfers of value to physicians and other healthcare providers or marketing expenditures; and state andforeign laws governing the privacy and security of health information in some51 Table of Contentscircumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA,thus complicating compliance efforts.Further, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education ReconciliationAct (collectively, the “ACA”), among other things, amended the intent requirements of the federal Anti-Kickback Statute andcertain criminal statutes governing healthcare fraud. A person or entity can now be found guilty of violating the statutewithout actual knowledge of the statute or specific intent to violate it. In addition, ACA provided that the government mayassert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes afalse or fraudulent claim for purposes of the False Claims Act. Moreover, while we do not submit claims and our customersmake the ultimate decision on how to submit claims, from time to time, we may provide reimbursement guidance to ourcustomers. If a government authority were to conclude that we provided improper advice to our customers or encouraged thesubmission of false claims for reimbursement, we could face action against us by government authorities. Any violations ofthese laws, or any action against us for violation of these laws, even if we successfully defend against it, could result in amaterial adverse effect on our reputation, business, results of operations and financial condition.We have entered into consulting and scientific advisory board arrangements with physicians and other healthcareproviders, including some who could influence the use of our product candidates, if approved. While we have worked tostructure our arrangements to comply with applicable laws, because of the complex and far-reaching nature of these laws,regulatory agencies may view these transactions as prohibited arrangements that must be restructured, or discontinued, or forwhich we could be subject to other significant penalties. We could be adversely affected if regulatory agencies interpret ourfinancial relationships with providers who may influence the ordering of and use our product candidates, if approved, to bein violation of applicable laws.The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment ofhealthcare reform, especially in light of the lack of applicable precedent and regulations. Federal and state enforcementbodies have recently increased their scrutiny of interactions between healthcare companies and healthcare providers, whichhas led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Responding toinvestigations can be time-and resource-consuming and can divert management’s attention from the business. Additionally,as a result of these investigations, healthcare providers and entities may have to agree to additional onerous compliance andreporting requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlementcould increase our costs or otherwise have an adverse effect on our business.If our operations are found to be in violation of any of these laws or any other governmental laws and regulations thatmay apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, disgorgement,imprisonment, integrity oversight and reporting obligations, exclusion from government funded healthcare programs, such asMedicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and the curtailment orrestructuring of our operations. If, and to the extent that, Janssen or we are unable to comply with these regulations, ourability to earn potential royalties from worldwide net sales of PTG-200 would be materially and adversely impacted. If any ofthe physicians or other healthcare providers or entities with whom we expect to do business is found to be not in compliancewith applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions fromgovernment funded healthcare programs. The imposition of any of these penalties or other commercial limitations couldnegatively impact our collaboration with Janssen or cause Janssen to terminate the Janssen License and CollaborationAgreement, either of which would materially and adversely affect our business, financial condition and results of operations.Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of andcommercialize our product candidates and affect the prices we may obtain.In the United States and some foreign jurisdictions, there have been, and we expect there will continue to be, a numberof legislative and regulatory changes and proposed changes regarding the healthcare system that could, among other things,prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect ourability to profitably sell any peptide-based product candidates for which we obtain marketing approval.52 Table of ContentsFor example, in the United States in March 2010, the ACA was enacted to increase access to health insurance, reduce orconstrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirementsfor health care and the health insurance industries, impose new taxes and fees on the health industry and impose additionalhealth policy reforms. The law has continued the downward pressure on pharmaceutical pricing, especially under theMedicare program, and increased the industry’s regulatory burdens and operating costs. Among the provisions of the ACA ofimportance to our potential peptide-based product candidates are the following:·an annual, non-tax deductible fee payable by any entity that manufactures or imports specified brandedprescription drugs and biologic agents payable to the federal government based on each company’s market share ofprior year total sales of branded products to certain federal healthcare programs;·an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;·a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program arecalculated for drugs that are inhaled, infused, instilled, implanted or injected;·extension of manufacturers’ Medicaid rebate liability to individuals enrolled in Medicaid managed careorganizations;·expansion of eligibility criteria for Medicaid programs in certain states;·a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% (70%commencing January 1, 2019) point-of-sale discounts off negotiated prices of applicable brand drugs to eligiblebeneficiaries under their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be coveredunder Medicare Part D;·expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;·a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; and·a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparativeclinical effectiveness research, along with funding for such research.The financial impact of the ACA over the next few years will depend on a number of factors including but not limitedto the policies reflected in implementing regulations and guidance and changes in sales volumes for products affected by thenew system of rebates, discounts and fees. Some of the provisions of the ACA have yet to be implemented, and there have been judicial and Congressionalchallenges to certain aspects of the ACA, as well as recent efforts by the current administration to repeal or replace certainaspects of the ACA. Since January 2017, the President has signed two Executive Orders and other directives designed todelay the implementation of any certain provisions of the ACA or otherwise circumvent some of the requirements for healthinsurance mandated by the ACA. Concurrently, Congress has considered legislation that would repeal or repeal and replaceall or part of the ACA. While Congress has not passed comprehensive repeal legislation, two bills affecting theimplementation of certain taxes under the ACA have been enacted. The Tax Cuts and Jobs Act of 2017 (the “Tax Act”)includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACAon certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to asthe “individual mandate.” Additionally, on January 22, 2018, the President signed a continuing resolution on appropriationsfor fiscal year 2018 that delayed the implementation of certain fees mandated fees under the ACA, including the so-called“Cadillac” tax on certain high cost employer-sponsored insurance plans, the53 Table of Contentsannual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices. Congress may consider other legislation to repeal or replace other elements of the ACAIn addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted.These changes included aggregate reductions to Medicare payments to providers of 2% per fiscal year, which went into effectin April 2013 and, due to subsequent legislative amendments to the statute, including the BBA, will remain in effect through2027 unless additional action is taken by Congress. In January 2013, the American Taxpayer Relief Act of 2012 was signedinto law, which, among other things, further reduced Medicare payments to several types of providers and increased thestatute of limitations period in which the government may recover overpayments to providers from three to five years. Inaddition, recently there has been heightened governmental scrutiny over the manner in which drug manufacturers set pricesfor their commercial products. The implementation of cost containment measures or other healthcare reforms may prevent usfrom being able to generate revenue, attain profitability, or commercialize our product candidates, if approved.Further, there has been heightened governmental scrutiny over the manner in which manufacturers set prices for theirmarketed products. Such scrutiny has resulted in several recent Congressional inquiries and proposed and enacted federaland state legislation designed to, among other things, bring more transparency to product pricing, review the relationshipbetween pricing and manufacturer patient programs, and reform government program reimbursement methodologies forproducts. At the federal level, the current administration’s budget proposal for fiscal year 2019 contains further drug pricecontrol measures that could be enacted during the 2019 budget process or in other future legislation, including, for example,measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some statesto negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. While anyproposed measures will require authorization through additional legislation to become effective, Congress and the currentadministration have both stated that they will continue to seek new legislative and/or administrative measures to controldrug costs. At the state level, legislatures have become increasingly aggressive in passing legislation and implementingregulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursementconstraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, insome cases, designed to encourage importation from other countries and bulk purchasing.We expect that additional state and federal healthcare reform measures will be adopted in the future, any of whichcould limit the amounts that federal and state governments will pay for healthcare therapies, which could result in reduceddemand for our peptide-based product candidates or additional pricing pressures.Legislative and regulatory proposals have also been made to expand post-approval requirements and restrict sales andpromotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes will beenacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes onthe marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of theFDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringentproduct labeling and post-marketing testing and other requirements. Governments outside the United States tend to impose strict price controls, which may adversely affect our revenues, if any.In some countries, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries,pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for aproduct candidate. In addition, there can be considerable pressure by governments and other stakeholders on prices andreimbursement levels, including as part of cost containment measures. Political, economic and regulatory developments mayfurther complicate pricing negotiations, and pricing negotiations may continue after coverage and reimbursement have beenobtained. Reference pricing used by various countries and parallel distribution or arbitrage between low-priced and high-priced countries, can further reduce prices. To obtain reimbursement or pricing approval in some countries, we may berequired to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies,which is time-consuming and costly. If coverage and reimbursement of our54 Table of Contentsproduct candidates are unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our businesscould be harmed, possibly materially.Our future success depends on our ability to retain our executive officers and to attract, retain and motivate qualifiedpersonnel. If we are not successful in attracting and retaining highly qualified personnel, we may not be able tosuccessfully implement our business strategy.Our industry has experienced a high rate of turnover of management personnel in recent years. Our ability to competein the highly competitive biotechnology and pharmaceuticals industries depends upon our ability to attract and retainhighly qualified managerial, scientific, medical and regulatory personnel. We are highly dependent on our existing seniormanagement team, especially Dinesh V. Patel, Ph.D., our President and Chief Executive Officer, David Y. Liu, Ph.D., ourChief Scientific Officer and Head of Research and Development, Richard S. Shames, M.D., our Chief Medical Officer, andTom O’Neil, our Chief Financial Officer. In order to induce valuable employees to continue their employment with us, wehave provided stock options that vest over time. The value to employees of stock options that vest over time is significantlyaffected by movements in our stock price that are beyond our control and may at any time be insufficient to maintainretention incentives or counteract more lucrative offers from other companies. All of our employees may terminate theiremployment with us at any time, with or without notice. The loss of the services of any of our executive officers or other keyemployees and our inability to find suitable replacements would harm our research and development efforts, ourcollaboration efforts, as well as our business, financial condition and prospects. Our success also depends on our ability tocontinue to attract, retain and motivate highly skilled and experienced personnel with scientific, medical, regulatory,manufacturing and management training and skills.We may not be able to attract or retain qualified personnel in the future due to the intense competition for a limitednumber of qualified personnel among biopharmaceutical, biotechnology, pharmaceutical and other businesses. Many of theother biopharmaceutical and pharmaceutical companies that we compete against for qualified personnel have greaterfinancial and other resources, different risk profiles and a longer history in the industry than we do. Our competitors mayprovide higher compensation or more diverse opportunities and better opportunities for career advancement. Any or all ofthese competing factors may limit our ability to continue to attract and retain high quality personnel, which could negativelyaffect our ability to successfully develop and commercialize peptide-based product candidates and to grow our business andoperations as currently contemplated.We will need to expand the size of our organization, and we may experience difficulties in managing this growth.As of December 31, 2017, we had 55 full-time employees, including 44 employees engaged in research anddevelopment. As our development and commercialization plans and strategies develop and operate as a public company, weexpect to need additional managerial, operational, scientific, sales, marketing, development, regulatory, manufacturing,financial and other resources. Future growth would impose significant added responsibilities on members of management,including:·designing and managing our clinical trials effectively;·identifying, recruiting, maintaining, motivating and integrating additional employees;·managing our manufacturing and development efforts effectively;·improving our managerial, development, operational and financial systems and controls; and·expanding our facilities.As our operations expand, we expect that we will need to manage relationships with strategic collaborators, CROs,contract manufacturers, suppliers, vendors and other third parties. Our future financial performance and our ability to developand commercialize our peptide-based product candidates and to compete effectively will depend, in part, on our55 Table of Contentsability to manage any future growth effectively. We may not be successful in accomplishing these tasks in growing ourcompany, and our failure to accomplish any of them could adversely affect our business and operations.Significant disruptions of information technology systems or breaches of data security could adversely affect our business.Our business is increasingly dependent on critical, complex and interdependent information technology systems,including Internet-based systems, to support business processes as well as internal and external communications. The sizeand complexity of our internal computer systems and those of our CROs, contract manufacturers, collaboration partner, andother third parties on which we rely may make them potentially vulnerable to breakdown, telecommunications and electricalfailures, malicious intrusion and computer viruses that may result in the impairment of key business processes. In addition,our systems are potentially vulnerable to data security breaches-whether by employees or others-that may expose sensitivedata to unauthorized persons. Such data security breaches could lead to the loss of trade secrets or other intellectual propertyor could lead to the public exposure of personally identifiable information (including sensitive personal information) of ouremployees, collaborators, clinical trial patients, and others. A data security breach or privacy violation that leads todisclosure or modification of or prevents access to patient information, including personally identifiable information orprotected health information, could harm our reputation, compel us to comply with federal and/or state breach notificationlaws, subject us to mandatory corrective action, require us to verify the correctness of database contents and otherwisesubject us to liability under laws and regulations that protect personal data, resulting in increased costs or loss of revenue. Ifwe are unable to prevent such data security breaches or privacy violations or implement satisfactory remedial measures, ouroperations could be disrupted, and we may suffer loss of reputation, financial loss and other regulatory penalties because oflost or misappropriated information, including sensitive patient data. In addition, these breaches and other inappropriateaccess can be difficult to detect, and any delay in identifying them may lead to increased harm of the type described above.Moreover, the prevalent use of mobile devices that access confidential information increases the risk of data securitybreaches, which could lead to the loss of confidential information, trade secrets or other intellectual property. While we haveimplemented security measures to protect our data security and information technology systems, such measures may notprevent such events. Any such disruptions and breaches of security could have a material adverse effect on the developmentof our product candidates as well as our business and financial condition.Our insurance policies are expensive and only protect us from some business risks, which will leave us exposed tosignificant uninsured liabilities.We do not carry insurance for all categories of risk that our business may encounter. Some of the policies we currentlymaintain include general liability, employment practices liability, property, cyber, auto liability, workers’ compensation,clinical trial, products liability and directors’ and officers’ insurance. We do not know, however, if we will be able tomaintain insurance with adequate levels of coverage to insure risks which could arise from our operations. Any significantuninsured losses or liabilities may require us to pay substantial amounts from corporate cash intended to fund operations,which would adversely affect our financial position and results of operations.If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines orpenalties or incur costs that could have a material adverse effect on the success of our business.We are subject to numerous environmental, health and safety laws and regulations, including those governinglaboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Ouroperations involve the use of hazardous and flammable materials, including chemicals and biological materials. Ouroperations also produce hazardous waste products. We generally contract with third parties for the disposal of these materialsand wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination orinjury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liabilitycould exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties.If we, or our contractors or agents are unable to comply with federal, state and county environmental and safety lawsand regulations, including those governing laboratory procedures and the handling of biohazardous materials,56 Table of Contentschemicals and various radioactive compounds, considerable additional costs or liabilities could be assessed that would havea material adverse effect on our financial condition. We, our collaborators, contractors or agents may be required to incursignificant costs to comply with current or future environmental laws and regulations and may be adversely affected by thecost of compliance with these laws and regulations.Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuriesto our employees resulting from the use of hazardous materials or other work-related injuries, this insurance may not provideadequate coverage against potential liabilities. In addition, we may incur substantial costs in order to comply with current orfuture environmental, health and safety laws and regulations. These current or future laws and regulations may impair ourresearch, development or production efforts. Failure to comply with these laws and regulations also may result in substantialfines, penalties or other sanctions.Our employees, independent contractors, principal investigators, consultants and vendors may engage in misconduct orother improper activities, including noncompliance with regulatory standards and requirements, which could have amaterial adverse effect on our business.We are exposed to the risk that our employees, independent contractors, principal investigators, consultants andvendors may engage in fraudulent conduct or other illegal activity. Misconduct by these parties could include intentional,reckless and/or negligent conduct or disclosure of unauthorized activities to us that violates: (i) FDA laws and regulations orthose of comparable foreign regulatory authorities, including those laws that require the reporting of true, complete andaccurate information to the FDA, (ii) manufacturing standards, (iii) federal and state data privacy, security, fraud and abuseand other healthcare laws and regulations established and enforced by comparable foreign regulatory authorities, or (iv) lawsthat require the true, complete and accurate reporting of financial information or data. Activities subject to these laws alsoinvolve the improper use or misrepresentation of information obtained in the course of clinical trials, creating fraudulent datain our pre-clinical studies or clinical trials or illegal misappropriation of drug product, which could result in regulatorysanctions and cause serious harm to our reputation. It is not always possible to identify and deter misconduct by employeesand third-parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknownor unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming froma failure to be in compliance with such laws or regulations. Additionally, we are subject to the risk that a person orgovernment 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 ourbusiness and results of operations, including the imposition of significant fines or other sanctions.If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limitcommercialization of any of our peptide-based product candidates, if approved.We face an inherent risk of product liability as a result of the clinical testing of our peptide-based product candidatesand will face an even greater risk if we commercialize any products. For example, we may be sued if any product we developallegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Anysuch product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn ofdangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted understate consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incursubstantial liabilities or be required to stop development or, if approved, limit commercialization of our peptide-basedproduct candidates.Even successful defense would require significant financial and management resources. Regardless of the merits oreventual outcome, liability claims may result in:·delay or termination of clinical studies;·injury to our reputation;·withdrawal of clinical trial participants;57 Table of Contents·initiation of investigations by regulators;·costs to defend the related litigation;·a diversion of management’s time and our resources;·substantial monetary awards to trial participants or patients;·decreased demand for our peptide-based product candidates;·product recalls, withdrawals or labeling, marketing or promotional restrictions;·loss of revenue from product sales; and·the inability to commercialize any our peptide-based product candidates, if approved.Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potentialproduct liability claims could prevent or inhibit the development or commercialization of our peptide-based productcandidates. We currently carry clinical trial liability insurance for our clinical trials. Although we maintain such insurance,any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, inwhole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also havevarious exclusions, and we may be subject to a product liability claim for which we have no coverage. We will have to payany amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered byour insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.We currently conduct, and intend to continue to conduct, a substantial portion of the clinical trials for our productcandidates outside of the United States. If approved, we may commercialize our product candidates abroad. We will thusbe subject to the risks of doing business outside of the United States.We currently conduct, and intend to continue to conduct, a substantial portion of our clinical trials outside of theUnited States and, if approved, we intend to also market our peptide-based product candidates outside of the United States.We are thus subject to risks associated with doing business outside of the United States. With respect to our peptide-basedproduct candidates, we may choose to partner with third parties that have direct sales forces and established distributionsystems, either to augment our own sales force and distribution systems outside of the United States or in lieu of our ownsales force and distribution systems, which would indirectly expose us to these risks. Our business and financial results in thefuture could be adversely affected due to a variety of factors associated with conducting development and marketing of ourpeptide-based product candidates, if approved, outside of the United States, including:·Medical standard of care and diagnostic criteria may differ in foreign jurisdictions, which may impact our ability toenroll and successfully complete trials designed for U.S. marketing;·efforts to develop an international sales, marketing and distribution organization may increase our expenses, divertour management’s attention from the acquisition or development of peptide-based product candidates or cause usto forgo profitable licensing opportunities in these geographies;·changes in a specific country’s or region’s political and cultural climate or economic condition;·unexpected changes in foreign laws and regulatory requirements;·difficulty of effective enforcement of contractual provisions in local jurisdictions;58 Table of Contents·inadequate intellectual property protection in foreign countries;·trade-protection measures, import or export licensing requirements such as Export Administration Regulationspromulgated by the US Department of Commerce and fines, penalties or suspension or revocation of exportprivileges;·regulations under the U.S. Foreign Corrupt Practices Act and similar foreign anti-corruption laws;·the effects of applicable foreign tax structures and potentially adverse tax consequences; and·significant adverse changes in foreign currency exchange rates which could make the cost of our clinical trials, tothe extent conducted outside of the US, more expensive.Our headquarters and certain of our data storage facilities are located near known earthquake fault zones. The occurrenceof an earthquake, fire or any other catastrophic event could disrupt our operations or the operations of third parties whoprovide vital support functions to us, which could have a material adverse effect on our business and financial condition.We and some of the third party service providers on which we depend for various support functions, such as datastorage, are vulnerable to damage from catastrophic events, such as power loss, natural disasters, terrorism and similarunforeseen events beyond our control. Our corporate headquarters and other facilities are located in the San Francisco BayArea, which in the past has experienced severe earthquakes and fires.We do not carry earthquake insurance. Earthquakes or other natural disasters could severely disrupt our operations, andhave a material adverse effect on our business, results of operations, financial condition and prospects.If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of ourheadquarters, damaged critical infrastructure, such as our data storage facilities or financial systems, or that otherwisedisrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial periodof time. We do not have a disaster recovery and business continuity plan in place. We may incur substantial expenses as aresult of the absence or limited nature of our internal or third party service provider disaster recovery and business continuityplans, which, particularly when taken together with our lack of earthquake insurance, could have a material adverse effect onour business. Furthermore, integral parties in our supply chain are operating from single sites, increasing their vulnerabilityto natural disasters or other sudden, unforeseen and severe adverse events. If such an event were to affect our supply chain, itcould have a material adverse effect on our development plans and business.The insurance coverage and reimbursement status of newly-approved products is uncertain. Failure to obtain or maintainadequate coverage and reimbursement for our peptide-based product candidates could limit our ability to generaterevenue.The availability and extent of reimbursement by governmental and private payors is essential for most patients to beable to afford medications and therapies. Sales of any of our peptide-based product candidates that receive marketingapproval will depend substantially, both in the United States and internationally, on the extent to which the costs of ourpeptide-based product candidates will be paid by health maintenance, managed care, pharmacy benefit and similarhealthcare management organizations, or reimbursed by government health administration authorities, private healthcoverage insurers and other third-party payors. If reimbursement is not available, or is available only to limited levels, wemay not be able to successfully commercialize our product candidates. Even if coverage is provided, the approvedreimbursement amount may not be high enough to allow us to establish or maintain adequate pricing that will allow us torealize a sufficient return on our investment.There is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. Inthe United States, the principal decisions about reimbursement for new products are typically made by the Centers for59 Table of ContentsMedicare & Medicaid Services (“CMS”), an agency within the United States Department of Health and Human Services.CMS decides whether and to what extent a new product will be covered and reimbursed under Medicare. Private payors tendto follow CMS to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement for novelproducts such as ours since there is no body of established practices and precedents for these new products. Reimbursementagencies in Europe may be more conservative than CMS.Outside the United States, international operations are generally subject to extensive governmental price controls andother market regulations, and we believe the increasing emphasis on cost-containment initiatives in Europe, Canada andother countries may cause us to price our tablet vaccine candidates on less favorable terms than we currently anticipate. Inmany countries, particularly the countries of the European Union, the prices of medical products are subject to varying pricecontrol mechanisms as part of national health systems. In these countries, pricing negotiations with governmental authoritiescan take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approvalin some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our peptide-basedproduct candidates to other available therapies. In general, the prices of products under such systems are substantially lowerthan in the United States. Other countries allow companies to fix their own prices for products but monitor and controlcompany profits. Additional foreign price controls or other changes in pricing regulation could restrict the amount that weare able to charge for our peptide-based product candidates. Accordingly, in markets outside the United States, thereimbursement for our products may be reduced compared with the United States and may be insufficient to generatecommercially reasonable revenues and profits.Moreover, increasing efforts by governmental and third-party payors, in the United States and internationally, to cap orreduce healthcare costs may cause such organizations to limit both coverage and level of reimbursement for new productsapproved and, as a result, they may not cover or provide adequate payment for our product candidates. We expect toexperience pricing pressures in connection with the sale of any of our tablet vaccine candidates due to the trend towardmanaged healthcare, the increasing influence of health maintenance organizations and additional legislative changes. Thedownward pressure on healthcare costs in general, particularly prescription drugs and surgical procedures and othertreatments, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products intothe healthcare market.Risks Related to Our Intellectual PropertyIf we are unable to obtain or protect intellectual property rights related to our product candidates and technologies, wemay not be able to compete effectively in our markets.We rely upon a combination of patent protection, trade secret protection and confidentiality agreements to protect theintellectual property related to our product candidates and technologies. The strength of patents in the biotechnology andpharmaceutical field involves complex legal and scientific questions and can be uncertain. The patent prosecution process isexpensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications ata reasonable cost, in a timely manner, or in all jurisdictions. The patent applications that we own or license may fail to resultin issued patents in the United States or in other foreign countries, or they may fail to result in issued patents with claims thatcover our product candidates or technologies in the United States or in other foreign countries. There is no assurance that allthe potentially relevant prior art relating to our patent and patent applications has been found, which can invalidate a patentor prevent a patent from issuing from a pending patent application. Even if patents have been issued, or do successfully issue,from our patent applications, third parties may challenge the validity, enforceability or scope thereof, which may result insuch patents being narrowed, invalidated or held unenforceable. Furthermore, even if they are unchallenged, our patent andpatent applications may not adequately protect our intellectual property, provide exclusivity for our product candidates andtechnologies, or prevent others from designing around our claims.If the breadth or strength of protection provided by the patent and patent applications we hold, obtain or pursue withrespect to our product candidates and technologies is challenged, or if they fail to provide meaningful exclusivity for ourproduct candidates and technologies, it could threaten our ability to commercialize our product candidates and technologies.Several patent applications covering our product candidates and technologies have been filed. We cannot offer anyassurances about which, if any, patents will issue, the breadth of any such patent, or whether any issued patents60 Table of Contentswill be found invalid and unenforceable or will be threatened by third parties. Any successful opposition or other challengeto these patents or any other patents owned by or, if applicable in the future, licensed to us could deprive us of rightsnecessary for the successful commercialization of any product candidates and technologies that we may develop. Further, ifwe encounter delays in our clinical trials or in gaining regulatory approval, the period of time during which we could marketany of our product candidates under patent protection, if approved, would be reduced. Since patent applications in theUnited States and most other countries are confidential for a period of time after filing, we cannot be certain that we or ourlicensors were the first to file any patent application related to our product candidates and technologies. Furthermore, aninterference proceeding can be provoked by a third party or instituted by the U.S. Patent and Trademark Office (the “PTO”) todetermine who was the first to invent any of the subject matter covered by the patent claims of our applications. In addition,patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after it is filed.Various extensions may be available however the life of a patent, and the protection it affords, is limited. Even if patentscovering our product candidates are obtained, once the patent life has expired for a product, we may be open to competitionfrom generic medications.If, in the future, we obtain licenses from third parties, in some circumstances, we may not have the right to control thepreparation, filing and prosecution of patent applications or to maintain any patents, covering technology that we licensefrom third parties. We may also require the cooperation of our licensors to enforce any licensed patent rights, and suchcooperation may not be provided. Therefore, these patents and applications may not be prosecuted and enforced in a mannerconsistent with the best interests of our business. Moreover, if we do obtain necessary licenses, we will likely haveobligations under those licenses, and any failure to satisfy those obligations could give our licensor the right to terminate thelicense. Termination of a necessary license could have a material adverse impact on our business.If we are unable to protect the confidentiality of our trade secrets and proprietary know-how or if competitorsindependently develop viable competing products, our business and competitive position may be harmed.While we hold issued patents and have filed patent applications to protect certain aspects of our product candidates, wealso rely on trade secret protection and confidentiality agreements to protect proprietary scientific, business and technicalinformation and know-how that is not or may not be patentable or that we elect not to patent. For example, we primarily relyon trade secrets and confidentiality agreements to protect our peptide therapeutics technology platform. Any disclosure to ormisappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicateor surpass our technological achievements, thus eroding our competitive position in our market.We seek to protect our proprietary information, data and processes, in part, by confidentiality agreements and inventionassignment agreements with our employees, consultants, scientific advisors, contractors and partners. Although theseagreements are designed to protect our proprietary information, we cannot be certain that our trade secrets and otherconfidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our tradesecrets or independently develop substantially equivalent information and techniques. Although we require all of ouremployees to assign their inventions to us, and endeavor to execute confidentiality agreements with all of our employees,consultants, advisors and any third parties who have access to our proprietary know-how and other confidential informationrelated to such technology, we cannot be certain that we have executed such agreements with all third parties who may havehelped to develop our intellectual property or who had access to our proprietary information, nor can be we certain that ouragreements will not be breached. If any of the parties to these confidentiality agreements breaches or violates the terms ofsuch agreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets asa result.We also seek to preserve the integrity and confidentiality of our data, trade secrets and know-how by maintainingphysical security of our premises and physical and electronic security of our information technology systems. Monitoringunauthorized uses and disclosures is difficult, and we do not know whether the steps we have taken to protect our proprietarytechnologies will be effective. We cannot guarantee that our trade secrets and other proprietary and confidential informationwill not be disclosed or that competitors will not otherwise gain access to our trade secrets.Enforcing a claim that a third party illegally obtained and is using our trade secrets, like patent litigation, is expensiveand time-consuming, and the outcome is unpredictable. Further, the laws of some foreign countries do not61 Table of Contentsprotect proprietary rights to the same extent or in the same manner as the laws of the United States. The enforceability ofconfidentiality agreements may vary from jurisdiction to jurisdiction. As a result, we may encounter significant problems inprotecting and defending our intellectual property both in the United States and abroad. Additionally, if the steps taken tomaintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties formisappropriating the trade secret. We cannot guarantee that our employees, former employees or consultants will not filepatent applications claiming our inventions. Because of the “first-to-file” laws in the United States, such unauthorized patentapplication filings may defeat our attempts to obtain patents on our own inventions.Trade secrets and know-how can be difficult to protect as trade secrets and know-how will over time be disseminatedwithin the industry through independent development, the publication of journal articles, and the movement of personnelskilled in the art from company to company or academic to industry scientific positions. If any of our trade secrets were to belawfully obtained or independently developed by a competitor, we would have no right to prevent such competitor fromusing that technology or information to compete with us, which could harm our competitive position. If we are unable toprevent material disclosure of the intellectual property related to our technologies to third parties, we will not be able toestablish or maintain a competitive advantage in our market, which could materially adversely affect our business, results ofoperations and financial condition.Even if we are able to adequately protect our trade secrets and proprietary information, our trade secrets could otherwisebecome known or could be independently discovered by our competitors. Competitors could purchase our products andattempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe ourintellectual property rights, design around our protected technology or develop their own competitive technologies that falloutside of our intellectual property rights. If any of our trade secrets were to be lawfully obtained or independentlydeveloped by a competitor, in the absence of patent protection, we would have no right to prevent them, or those to whomthey communicate, from using that technology or information to compete with us. If our trade secrets are not adequatelyprotected so as to protect our market against competitors’ products, others may be able to exploit our proprietary peptideproduct candidate discovery technologies to identify and develop competing product candidates, and thus our competitiveposition could be adversely affected, as could our business.We may be involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time consumingand unsuccessful.Competitors may infringe our issued patents or any patents issued as a result of our pending or future patentapplications. To counter infringement or unauthorized use, we may be required to file infringement claims, which can beexpensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is notvalid or is unenforceable or may refuse to stop the other party in such infringement proceeding from using the technology atissue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defenseproceedings could put one or more of our patents at risk of being invalidated, held unenforceable or interpreted narrowly,and could put any of our patent applications at risk of not yielding an issued patent.Interference or derivation proceedings provoked by third parties or brought by us, the PTO or any foreign patentauthority may be necessary to determine the priority or ownership of inventions with respect to our patent or patentapplications. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights toit from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commerciallyreasonable terms, if any license is offered at all. Our defense of litigation, interference or derivation proceedings may fail and,even if successful, may result in substantial costs and distract our management and other employees.We may not be able to prevent misappropriation of our intellectual property, trade secrets or confidential information,particularly in countries where the laws may not protect those rights as fully as in the United States. Furthermore, because ofthe substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some ofour confidential information could be compromised by disclosure during this type of litigation. In addition, there could bepublic announcements of the results of hearings, motions or other interim proceedings or developments. If securities analystsor investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.62 Table of ContentsAny issued patents covering our product candidates, including any patent that may issue as a result of our pending orfuture patent applications, could be found invalid or unenforceable if challenged in court in the United States or abroad.If we initiate legal proceedings against a third party to enforce a patent covering our product candidates ortechnologies, the defendant could counterclaim that such patent is invalid or unenforceable. In patent litigation in theUnited States, defendant counterclaims alleging invalidity or unenforceability are commonplace, and there are numerousgrounds upon which a third party can assert invalidity or unenforceability of a patent. Grounds for a validity challenge couldbe an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution ofthe patent withheld relevant information from the PTO, or made a misleading statement, during prosecution. Third partiesmay also raise similar claims before administrative bodies in the United States or abroad, even outside the context oflitigation. Such mechanisms include re-examination, inter parties review, post grant review, and equivalent proceedings inforeign jurisdictions, such as opposition or derivation proceedings. Such proceedings could result in revocation oramendment to our patents in such a way that they no longer cover and protect our product candidates or technologies. Theoutcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity of ourpatents, for example, we cannot be certain that there is no invalidating prior art of which we, our patent counsel, and thepatent examiner were unaware of during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/orunenforceability, we would lose at least part, and perhaps all, of the patent protection on our product candidates. Such a lossof patent protection could have a material adverse impact on our business.As more groups become engaged in scientific research and product development in fields related to our productcandidates, such as the IL-23 receptor, the risk of our patents, or patents that we have in-licensed, being challenged throughpatent interferences, derivation proceedings, oppositions, re-examinations, litigation or other means will likely increase.Challenges to our patents through these procedures can be extremely expensive and time-consuming, even if the outcome isfavorable to us. An adverse outcome in a patent dispute could have a material adverse effect on our business by:·causing us to lose patent rights in the relevant jurisdiction(s);·subjecting us to litigation, or otherwise preventing Janssen or us from commercializing PTG-200 or other productcandidates in the relevant jurisdiction(s);·requiring Janssen or us to obtain licenses to the disputed patents;·forcing Janssen or us to cease using the disputed technology; or·requiring Janssen or us to develop or obtain alternative technologies.An adverse outcome in a patent dispute could severely harm our collaboration with Janssen or cause Janssen toterminate the Janssen License and Collaboration Agreement. Additionally, if patent protection is not available on anypatents we have licensed to Janssen in one or more countries, our potential royalties obtained in those countries from Janssenmay be non-existent or lower than we currently expect and could be reduced in accordance to the terms of the JanssenLicense and Collaboration Agreement.The lives of any patents issued as a result of our pending or future patent applications may not be sufficient to effectivelyprotect our products and business.Patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after its firsteffective filing date. Although various extensions may be available, the life of a patent, and the protection it affords, islimited. Even if patents covering our product candidates are obtained, once the patent life has expired for a product, we maybe open to competition from generic medications. For example, our granted U.S. patents covering PTG-100 and PTG-200expire in 2035, and our granted U.S. patent covering PTG-300 expires in 2034. In addition, although upon issuance in theUnited States the life of a patent can be increased based on certain delays caused by the USPTO, this63 Table of Contentsincrease can be reduced or eliminated based on certain delays caused by the patent applicant during patent prosecution. If wedo not have sufficient patent life to protect our products, our business and results of operations will be adversely affected.Competitors could enter the market with generic versions of our product candidates, which may result in a material declinein sales of our product candidates.Under the Hatch-Waxman Act, a pharmaceutical manufacturer may file an abbreviated new drug application (“ANDA”),seeking approval of a generic copy of an approved innovator product. Under the Hatch-Waxman Act, a manufacturer mayalso submit an NDA under section 505(b)(2) that references the FDA’s finding of safety and effectiveness of a previouslyapproved drug. A 505(b)(2) NDA product may be for a new or improved version of the original innovator product. Innovativesmall molecule drugs may be eligible for certain periods of regulatory exclusivity (e.g., five years for new chemical entities,three years for changes to an approved drug requiring a new clinical study, seven years for orphan drugs), which precludeFDA approval (or in some circumstances, FDA filing and review of) an ANDA or 505(b)(2) NDA relying on the FDA’s findingof safety and effectiveness for the innovative drug. In addition to the benefits of regulatory exclusivity, an innovator NDAholder may have patents claiming the active ingredient, product formulation or an approved use of the drug, which would belisted with the product in the FDA publication, “Approved Drug Products with Therapeutic Equivalence Evaluations,”known as the “Orange Book.” If there are patents listed in the Orange Book, a generic applicant that seeks to market itsproduct before expiration of the patents must include in the ANDA or 505(b)(2) what is known as a “Paragraph IVcertification,” challenging the validity or enforceability of, or claiming non-infringement of, the listed patent or patents.Notice of the certification must be given to the innovator, too, and if within 45 days of receiving notice the innovator sues toprotect its patents, approval of the ANDA is stayed for 30 months, or as lengthened or shortened by the court.Accordingly, if our product candidates are approved, competitors could file ANDAs for generic versions of our productcandidates, or 505(b)(2) NDAs that reference our product candidates. If there are patents listed for our product candidates inthe Orange Book, those ANDAs and 505(b)(2) NDAs would be required to include a certification as to each listed patentindicating whether the ANDA applicant does or does not intend to challenge the patent. We cannot predict whether anypatents issuing from our pending patent applications will be eligible for listing in the Orange Book, how any genericcompetitor would address such patents, whether we would sue on any such patents, or the outcome of any such suit.We may not be successful in securing or maintaining proprietary patent protection for products and technologies wedevelop or license. Moreover, if any patents that are granted and listed in the Orange Book are successfully challenged byway of a Paragraph IV certification and subsequent litigation, the affected product could more immediately face genericcompetition and its sales would likely decline materially. Should sales decline, we may have to write off a portion or all ofthe intangible assets associated with the affected product and our results of operations and cash flows could be materially andadversely affected.Third party claims of intellectual property infringement may prevent or delay our drug discovery and development efforts.Our commercial success depends in part on our ability to develop, manufacture, market and sell our drug candidatesand use our proprietary technologies without infringing or otherwise violating the patents and proprietary rights of thirdparties. There is a substantial amount of litigation involving patent and other intellectual property rights in thebiotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, derivation proceedings,post grant reviews, inter partes reviews, and reexamination proceedings before the PTO or oppositions and other comparableproceedings in foreign jurisdictions. Numerous U.S. and foreign issued patents and pending patent applications, which areowned by third parties, exist in the fields in which we are developing product candidates, and there may be third-partypatents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatmentrelated to the use or manufacture of our product candidates and technologies. Third parties, including our competitors, mayinitiate legal proceedings against us alleging that we are infringing or otherwise violating their patent or other intellectualproperty rights. Given the vast number of patents in our field of technology, we cannot assure you that marketing of ourproduct candidates or practice of our technologies will not infringe existing patents or64 Table of Contentspatents that may be granted in the future. Because patent applications can take many years to issue and may be confidentialfor 18 months or more after filing, and because pending patent claims can be revised before issuance, there may beapplications now pending of which we are unaware that may later result in issued patents that may be infringed by thepractice of our peptide therapeutics technology platform or the manufacture, use or sale of our product candidates. If a patentholder believes our product candidates or technologies infringe on its patent, the patent holder may sue us even if we havereceived patent protection for our product candidates and technologies. In addition, third parties may obtain patents in thefuture and claim that our product candidates or technologies infringe upon these patents. If any third-party patents were heldby a court of competent jurisdiction to cover the manufacturing process of any of our product candidates, any moleculesformed during the manufacturing process or any final product or formulation itself, the holders of any such patents may beable to block our ability to commercialize such product candidate unless we obtained a license under the applicable patents,or until such patents expire. As the biotechnology and pharmaceutical industries expand and more patents are issued, the riskincreases that our product candidates or technologies may give rise to claims of infringement of the patent rights of others.Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block ourability to further practice our technologies or develop and commercialize one or more of our product candidates. Defense ofthese claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion ofemployee resources from our business. Even if we are successful in defending against any infringement claims, litigation isexpensive and time-consuming and is likely to divert management’s attention and substantial resources from our corebusiness, which could harm our business. In the event of a successful claim of infringement against us, we may have to paysubstantial damages, including treble damages and attorneys’ fees for willful infringement (which may include situations inwhich we had knowledge of an issued patent but nonetheless proceeded with activity which infringed such patent), limit ouruses, pay royalties or redesign our infringing product candidates, which may be impossible or require substantial time andmonetary expenditure. We may choose to seek, or may be required to seek, a license from the third-party patent holder andwould most likely be required to pay license fees or royalties or both, each of which could be substantial. These licenses maynot be available on commercially reasonable terms, however, or at all. Even if we were able to obtain a license, the rights weobtain may be nonexclusive, which would provide our competitors access to the same intellectual property rights uponwhich we are forced to rely. Furthermore, even in the absence of litigation, we may need to obtain licenses from third partiesto advance our research or allow commercialization of our product candidates, and we have done so from time to time. Wemay fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In such an event, we would beunable to further practice our technologies or develop and commercialize any of our product candidates at issue, which couldharm our business significantly.On September 26, 2017, Medical Diagnostic Laboratories, LLC (“MDL”) filed a lawsuit for alleged infringement ofU.S. Patent No. 8,946,150 (“the ’150 patent”) by Protagonist’s polypeptide PTG-200 (the “Complaint”). We have licensedPTG-200 to Janssen Biotech, Inc. for clinical development. On December 1, 2017, we filed a motion to dismiss the case,urging that all of our activities, as described in the Complaint, fall within the safe harbor of 35 U.S.C. 271(e)(1) – precludinginfringement for FDA-research related activities. On February 7, 2018, our motion to dismiss the case was granted by the U.S.District Court for the Northern District of California. This case is described in further detail below in Item 3. “LegalProceedings”. If further actions occur and we fail in defending any such claims, in addition to paying monetary damages, wemay be enjoined from marketing PTG-200 and other IL-23 inhibitor compounds. Such an outcome could have a materialadverse effect on our business. Even if we are successful in defending against such claims, litigation could result insubstantial costs and be a distraction to management and other employees.We may not identify relevant third party patents or may incorrectly interpret the relevance, scope or expiration of a thirdparty patent which might adversely affect our ability to develop and market our products.We cannot guarantee that any of our patent searches or analyses, including the identification of relevant patents, thescope of patent claims or the expiration of relevant patents, are complete or thorough, nor can we be certain that we haveidentified each and every third party patent and pending application in the United States and abroad that is relevant to ornecessary for the commercialization of our product candidates in any jurisdiction.65 Table of ContentsThe scope of a patent claim is determined by an interpretation of the law, the written disclosure in a patent and thepatent’s prosecution history. Our interpretation of the relevance or the scope of a patent or a pending application may beincorrect, which may negatively impact our ability to market our products. We may incorrectly determine that our productsare not covered by a third party patent or may incorrectly predict whether a third party’s pending application will issue withclaims of relevant scope. Our determination of the expiration date of any patent in the United States or abroad that weconsider relevant may be incorrect, which may negatively impact our ability to develop and market our product candidates.Our failure to identify and correctly interpret relevant patents may negatively impact our ability to develop and market ourproducts.Because of the expense and uncertainty of litigation, we may not be in a position to enforce our intellectual property rightsagainst third parties.Because of the expense and uncertainty of litigation, we may conclude that even if a third party is infringing our issuedpatents, any patents that may be issued on as a result of our pending or future patent applications or other intellectualproperty rights, the risk-adjusted cost of bringing and enforcing such a claim or action may be too high or not in the bestinterest of our company or our shareholders. In such cases, we may decide that the more prudent course of action is to simplymonitor the situation or initiate or seek some other non-litigious action or solution.Intellectual property disputes could cause us to spend substantial resources and distract our personnel from their normalresponsibilities.Litigation or other legal proceedings relating to intellectual property claims, with or without merit, is unpredictableand generally expensive and time-consuming and, even if resolved in our favor, is likely to divert significant resources fromour core business, including distracting our technical and management personnel from their normal responsibilities. Inaddition, there could be public announcements of the results of hearings, motions or other interim proceedings ordevelopments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverseeffect on the market price of our common stock. Such litigation or proceedings could substantially increase our operatinglosses and reduce the resources available for development activities or any future sales, marketing or distribution activities.We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of ourcompetitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of theirgreater financial resources and more mature and developed intellectual property portfolios. Accordingly, despite our efforts,we may not be able to prevent third parties from infringing upon or misappropriating or from successfully challenging ourintellectual property rights. Uncertainties resulting from the initiation and continuation of patent litigation or otherproceedings could have a material adverse effect on our ability to compete in the marketplace.We may not be able to protect our intellectual property rights throughout the world.Filing, prosecuting and defending patents on all of our product candidates throughout the world would beprohibitively expensive, and our intellectual property rights in some countries outside the United States may be lessextensive than those in the United States. Many companies have encountered significant problems in protecting anddefending intellectual property rights in certain foreign jurisdictions. The requirements for patentability differ, in varyingdegrees, from country to country. The legal systems of some countries, particularly developing countries, do not favor theenforcement of patent and other intellectual property rights, especially those relating to life sciences. In addition, the laws ofsome foreign countries do not protect intellectual property rights, including trade secrets, to the same extent as federal andstate laws of the United States. This could make it difficult for us to stop the infringement of any patents we obtain or themisappropriation of our other intellectual property rights. In addition, many countries limit the enforceability of patentsagainst third parties, including government agencies or government contractors. In these countries, patents may providelimited or no benefit. Moreover, our ability to protect and enforce our intellectual property rights may be adversely affectedby unforeseen changes in foreign intellectual property laws.Proceedings to enforce our patent rights in foreign jurisdictions, regardless of whether successful, would result insubstantial costs and divert our efforts and attention from other aspects of our business. Furthermore, while we intend toprotect our intellectual property rights in our expected significant markets, we cannot ensure that we will be able to66 Table of Contentsinitiate or maintain similar efforts in all jurisdictions in which we may wish to market our product candidates. Accordingly,our efforts to protect our intellectual property rights in such countries may be inadequate, which may have an adverse effecton our ability to successfully commercialize our product candidates in all of our expected significant foreign markets.Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop theirown products and, further, may export otherwise infringing products to territories where we have patent protection butenforcement is not as strong as in the United States. These products may compete with our products in jurisdictions where wedo not have any issued patents and our patent claims or other intellectual property rights may not be effective or sufficient toprevent them from so competing.Many companies have encountered significant problems in protecting and defending intellectual property rights inforeign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor theenforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, whichcould make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of ourproprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costand divert our efforts and attention from other aspects of our business.Similarly, if our trade secrets are disclosed in a foreign jurisdiction, competitors worldwide could have access to ourproprietary information and we may be without satisfactory recourse. Such disclosure could have a material adverse effect onour business.Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, feepayment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced oreliminated for non-compliance with these requirements.The PTO and various non-U.S. governmental patent agencies require compliance with a number of procedural,documentary, fee payment and other similar provisions during the patent application process. Periodic maintenance fees,renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to thePTO and various governmental patent agencies outside of the United States in several stages over the lifetime of the patentsand/or applications. We employ reputable law firms and other professionals and rely on such third parties to help us complywith these requirements and effect payment of these fees with respect to the patent and patent applications that we own, andif we in-license intellectual property we may have to rely upon our licensors to comply with these requirements and effectpayment of these fees with respect to any patents and patent applications that we license. In many cases, an inadvertent lapsecan be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situationsin which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial orcomplete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter the marketand this circumstance would have a material adverse effect on our business.Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patentapplications and the enforcement or defense of our issued patents.On September 16, 2011, the Leahy-Smith America Invents Act (“Leahy-Smith Act”) was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law. These include provisions that affect the waypatent applications are prosecuted and may also affect patent litigation. The PTO has developed regulations and proceduresto govern administration of the Leahy-Smith Act, but many of the substantive changes to patent law associated with theLeahy-Smith Act, and in particular, the first to file provisions, did not become effective until March 2013, 18 months after itsenactment. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business.However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding theprosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have amaterial adverse effect on our business and financial condition.67 Table of ContentsRecent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances andweakened the rights of patent owners in certain situations. Depending on decisions by the U.S. Congress, the federal courts,and the PTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our abilityto obtain new patents or to enforce our existing patent and patents that we might obtain in the future.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 propertyrights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. Thefollowing examples are illustrative:·others may be able to make compounds that are similar to our product candidates but that are not covered by theclaims of our issued patents or any pending patent applications we may have;·we might not have been the first to make the inventions covered by the issued patents or pending patentapplications that we own;·we might not have been the first to file patent applications covering an invention;·others may independently develop similar or alternative technologies or duplicate any of our technologies withoutinfringing our intellectual property rights;·pending patent applications that we own or license may not lead to issued patents;·the issued patents that we own or any issued patents that we license may not provide us with any competitiveadvantages, 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 rightsand then use the information learned from such activities to develop competitive products for sale in our majorcommercial markets;·we may not develop or in-license additional proprietary technologies that are patentable; and·the patents of others may have an adverse effect on our business.Should any of these events occur, they could significantly harm our business, results of operations and prospects.We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosedconfidential information of third parties or that our employees have wrongfully used or disclosed alleged trade secrets offormer or other employers.Many of our employees and consultants, including our senior management and our scientific founders, have beenemployed or retained at universities or by other biotechnology or pharmaceutical companies, including potentialcompetitors. Some of our employees and consultants, including each member of our senior management and each of ourscientific founders, executed proprietary rights, non-disclosure and non-competition agreements in connection with suchprevious employment or retention. Although we try to ensure that our employees and consultants do not use the proprietaryinformation or know-how of others in their work for us, we may be subject to claims that we or these employees orconsultants have used or disclosed intellectual property, including trade secrets or other proprietary information, of any suchemployee’s or consultant’s former or other employer. We are not aware of any threatened or pending claims related to thesematters or concerning the agreements with our senior management or scientific founders, but in the future litigation may benecessary to defend against such claims. If we fail in defending any such claims, in addition to paying monetary damages, wemay lose valuable intellectual property rights or personnel. Even if we are68 Table of Contentssuccessful in defending against such claims, litigation could result in substantial costs and be a distraction to management.We may be subject to claims challenging the inventorship or ownership of our issued patents, any patents issued as a resultof our pending or future patent applications and other intellectual property.We may also be subject to claims that former employees, collaborators or other third parties have an ownership interestin our issued patents, any patents issued as a result of our pending or future applications or other intellectual property. Forexample, we work with third-party contractors in formulating and manufacturing our product candidates. While we believewe have all rights to any intellectual property related to our product candidates, a third party-contractor may claim they haveownership rights. We have had in the past, and we may also have in the future, ownership disputes arising, for example, fromconflicting obligations of consultants or others who are involved in developing our product candidates and technologies.For example, some of our consultants are employees of the University of Queensland. Litigation may be necessary to defendagainst these and other claims challenging inventorship or ownership.Our reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor willdiscover them or that our trade secrets will be misappropriated or disclosed.Because we expect to rely on third parties in the development and manufacture of our product candidates, we must, attimes, share trade secrets with them. We seek to protect our proprietary technology in part by entering into confidentialityagreements and, if applicable, material transfer agreements, consulting agreements or other similar agreements with ouradvisors, employees, third-party contractors and consultants prior to beginning research or disclosing proprietaryinformation. These agreements typically limit the rights of the third parties to use or disclose our confidential information,including our trade secrets. Despite the contractual provisions employed when working with third parties, the need to sharetrade secrets and other confidential information increases the risk that such trade secrets become known by our competitors,are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Giventhat our proprietary position is based, in part, on our know-how and trade secrets, a competitor’s discovery of our trade secretsor other unauthorized use or disclosure would impair our competitive position and may have an adverse effect on ourbusiness and results of operations.In addition, these agreements typically restrict the ability of our advisors, employees, third-party contractors andconsultants to publish data potentially relating to our trade secrets, although our agreements may contain certain limitedpublication rights. Despite our efforts to protect our trade secrets, our competitors may discover our trade secrets, eitherthrough breach of our agreements with third parties, independent development or publication of information by any of ourthird-party collaborators. A competitor’s discovery of our trade secrets would impair our competitive position and have anadverse impact on our business.We have not yet registered trademarks for a commercial trade name for our product candidates and failure to secure suchregistrations could adversely affect our business.We have not yet registered trademarks for a commercial trade name for our product candidates. During trademarkregistration proceedings, we may receive rejections. Although we would be given an opportunity to respond to thoserejections, we may be unable to overcome such rejections. In addition, in the PTO and in comparable agencies in manyforeign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancelregistered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks maynot survive such proceedings. Moreover, any name we propose to use with our product candidates in the United States mustbe approved by the FDA, regardless of whether we have registered it, or applied to register it, as a trademark. The FDAtypically conducts a review of proposed product names, including an evaluation of potential for confusion with otherproduct names. If the FDA objects to any of our proposed proprietary product names, we may be required to expendsignificant additional resources in an effort to identify a suitable substitute name that would qualify under applicabletrademark laws, not infringe the existing rights of third parties and be acceptable to the FDA.69 Table of ContentsWe may not be successful in obtaining or maintaining necessary rights to our product candidates through acquisitions andin-licenses.We may find that our programs require the use of proprietary rights held by third parties or the growth of our businessmay depend in part on our ability to acquire, in-license or use these proprietary rights. We may be unable to acquire or in-license compositions, methods of use, processes or other third party intellectual property rights from third parties that weidentify as necessary for our product candidates. The licensing and acquisition of third-party intellectual property rights is acompetitive area, and a number of more established companies are also pursuing strategies to license or acquire third-partyintellectual property rights that we may consider attractive. These established companies may have a competitive advantageover us due to their size, financial resources and greater clinical development and commercialization capabilities. Inaddition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may beunable to license or acquire third-party intellectual property rights on terms that would allow us to make an appropriatereturn on our investment. Even if we are able to obtain a license to intellectual property of interest, we may not be able tosecure exclusive rights, in which case others could use the same rights and compete with us.If we are unable to successfully obtain rights to required third party intellectual property rights or maintain the existingintellectual property rights we have, we may have to abandon development of that program and our business and financialcondition could suffer.Any collaboration arrangements that we may enter into in the future may not be successful, which could adverselyaffect our ability to develop and commercialize our product candidates.We may seek collaboration arrangements with pharmaceutical or biotechnology companies for the development orcommercialization of our product candidates depending on the merits of retaining commercialization rights for ourselves ascompared to entering into collaboration arrangements. We will face, to the extent that we decide to enter into collaborationagreements, significant competition in seeking appropriate collaborators. Moreover, collaboration arrangements are complexand time-consuming to negotiate, document, implement and maintain. We may not be successful in our efforts to establishand implement collaborations or other alternative arrangements should we so chose to enter into such arrangements. Theterms of any collaborations or other arrangements that we may establish may not be favorable to us.Any future collaborations that we enter into may not be successful. The success of our collaboration arrangements willdepend heavily on the efforts and activities of our collaborators. Collaborations are subject to numerous risks, which mayinclude that:·collaborators have significant discretion in determining the efforts and resources that they will apply tocollaborations;·collaborators may not pursue development and commercialization of our product candidates or may elect not tocontinue or renew development or commercialization programs based on clinical trial results, changes in theirstrategic focus due to the acquisition of competitive products, availability of funding or other external factors, suchas a business combination that diverts resources or creates competing priorities;·collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial,abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a productcandidate for clinical testing;·collaborators could independently develop, or develop with third parties, products that compete directly orindirectly with our products or product candidates;·a collaborator with marketing, manufacturing and distribution rights to one or more products may not commitsufficient resources to or otherwise not perform satisfactorily in carrying out these activities;70 Table of Contents·we could grant exclusive rights to our collaborators that would prevent us from collaborating with others;·collaborators may not properly maintain or defend our intellectual property rights or may use our intellectualproperty or proprietary information in a way that gives rise to actual or threatened litigation that could jeopardizeor invalidate our intellectual property or proprietary information or expose us to potential liability;·disputes may arise between us and a collaborator that causes the delay or termination of the research, developmentor commercialization of our current or future products or that results in costly litigation or arbitration that divertsmanagement attention and resources;·collaborations may be terminated, and, if terminated, may result in a need for additional capital to pursue furtherdevelopment or commercialization of the applicable current or future products;·collaborators may own or co-own intellectual property covering our products that results from our collaboratingwith them, and in such cases, we would not have the exclusive right to develop or commercialize such intellectualproperty; and·a collaborator’s sales and marketing activities or other operations may not be in compliance with applicable lawsresulting in civil or criminal proceedings.Risks Related to Ownership of our Common StockThe price of our stock may be volatile, and you could lose all or part of your investment.The trading price of our common stock has been, and is likely to be, highly volatile and could be subject to widefluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in these“Risk Factors” and elsewhere in this Annual Report on Form 10-K, these factors include, but are not limited to:··any delay in the commencement, enrollment and ultimate completion of clinical trials;··actual or anticipated results in our clinical trials or those of our competitors;··positive outcomes, or faster development results than expected, by parties developing peptide-based productcandidates that are competitive with our peptide-based product candidates, as well as approval of any suchcompetitive peptide-based product candidates;··failure to successfully develop commercial-scale manufacturing capabilities;··unanticipated serious safety concerns related to the use of any of our peptide-based product candidates;··failure to secure collaboration agreements for our peptide-based product candidates or actual or perceivedunfavorable terms of such agreements;··adverse regulatory decisions;··changes in the structure of healthcare payment systems;··changes in laws or regulations applicable to our product candidates, including but not limited to clinical trialrequirements for approvals;··disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability toobtain patent protection for our peptide-based product candidates;71 Table of Contents··our dependence on third parties, including CROs as well as manufacturers;··our failure to successfully commercialize any of our peptide-based product candidates, if approved;··additions or departures of key scientific or management personnel;··failure to meet or exceed any financial guidance or development timelines that we may provide to the public;··actual or anticipated variations in quarterly operating results;··failure to meet or exceed the estimates and projections of the investment community;··overall performance of the equity markets and other factors that may be unrelated to our operating performance orthe operating performance of our competitors, including changes in market valuations of similar companies;··conditions or trends in the biotechnology and biopharmaceutical industries;··announcements of significant acquisitions, strategic collaborations, joint ventures or capital commitments by us orour competitors;··our ability to maintain an adequate rate of growth and manage such growth;··issuances of debt or equity securities;··significant lawsuits, including patent or stockholder litigation;··sales of our common stock by us or our stockholders in the future;··trading volume of our common stock;··publication of research reports about us or our industry or positive or negative recommendations or withdrawal ofresearch coverage by securities analysts;··ineffectiveness of our internal controls;··general political and economic conditions; and··effects of natural or man-made catastrophic events.In addition, the stock market in general, and The Nasdaq Global Market and biotechnology companies in particular,have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operatingperformance of these companies. Broad market and industry factors may negatively affect the market price of our commonstock, regardless of our actual operating performance. The realization of any of the above risks or any of a broad range ofother risks, including those described in these “Risk Factors,” could have a dramatic and material adverse impact on themarket price of our common stock.Volatility in our share price could subject us to securities class action litigation.Securities class action litigations have often been brought against companies following a decline in the market price oftheir securities. This risk is especially relevant for us because pharmaceutical companies have experienced72 Table of Contentssignificant share price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversionof management’s attention and resources, which could harm our business.Our principal stockholders and management own a significant percentage of our stock and will be able to exert significantcontrol over matters subject to stockholder approval.Our executive officers, directors, holders of 5% or more of our capital stock and their respective together beneficiallyown a significant percentage of our stock. Therefore, these stockholders will have substantial influence and may be able todetermine all matters requiring stockholder approval. For example, these stockholders may be able to control elections ofdirectors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporatetransaction. This concentration of voting power could, among other things, delay or prevent an acquisition of our companyon terms that other stockholders may desire, which in turn could depress our stock price and may prevent attempts by ourstockholders to replace or remove the board of directors or management.We have identified material weaknesses in our internal control over financial reporting and may identify additionalmaterial weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result inmaterial misstatements of our financial statements or cause us to fail to meet our periodic reporting obligations.Prior to the IPO, we were a private company and had limited accounting and financial reporting personnel and otherresources with which to address our internal controls and procedures. In connection with the audit of our consolidatedfinancial statements for the years ended December 31, 2015 and 2014, we and our independent registered public accountingfirm identified two material weaknesses in our internal control over financial reporting. A material weakness is a deficiency,or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that amaterial misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.The first material weakness related to a deficiency in the operation of our internal controls over the accounting for non-routine, complex equity transactions, which resulted in material post-closing adjustments to the convertible preferred stock,additional paid-in capital, interest expense, and gain from modification of the redeemable convertible preferred stockbalances in the consolidated financial statements for the year ended December 31, 2013. Our lack of adequate accountingpersonnel has resulted in the identification of a second material weakness in our internal control over financial reporting forthe years ended December 31, 2015 and 2014. Specifically, we did not, and have not historically, appropriately designed andimplemented controls over the review and approval of manual journal entries and the related supporting journal entrycalculations.Neither we nor our independent registered public accounting firm has performed or was required to perform anevaluation of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Wehave taken steps to remediate the material weaknesses, including increasing the depth and experience within our accountingand finance organization, and implemented an approval process related to manual journal entries and the related supportingjournal entry calculations. In addition, we continued to work on designing and implementing additional improved processesand internal controls. We have completed the implementation of this plan as of December 31, 2017, and managementdetermined that we have remediated the material weaknesses as of December 31, 2017. We can give no assurance thatadditional material weaknesses or significant deficiencies in our internal control over financial reporting will not beidentified in the future. Our failure to implement and maintain effective internal controls over financial reporting could resultin errors in our financial statements that could result in a restatement of our financial statements and cause us to fail to meetour reporting obligations.We are obligated to develop and maintain proper and effective internal controls over financial reporting and any failure tomaintain the adequacy of these internal controls may adversely affect investor confidence in our company and, as a result,the value of our common stock.We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act (Section 404), to furnish a report bymanagement on the effectiveness of our internal control over financial reporting for the year ended December 31, 2017.73 Table of ContentsThis assessment will need to include disclosure of any material weaknesses identified by our management in our internalcontrol over financial reporting. Our independent registered public accounting firm will not be required to attest to theeffectiveness of our internal control over financial reporting until our first Annual Report required to be filed with the SECfollowing the date we are no longer an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of2012 (the “JOBS Act”). At such time as we are required to obtain auditor attestation, if we then have a material weakness, wewould receive an adverse opinion regarding our internal control over financial reporting from our independent registeredaccounting firm.We have begun the costly and challenging process of compiling the system and processing documentation necessary toperform the evaluation needed to comply with Section 404, and we may not be able to complete our evaluation, testing andany required remediation in a timely fashion. Our compliance with Section 404 will require that we incur substantialaccounting expense and expend significant management efforts. We currently do not have an internal audit group, and wewill need to hire additional accounting and financial staff with appropriate public company experience and technicalaccounting knowledge and compile the system and process documentation necessary to perform the evaluation needed tocomply with Section 404.During our evaluation of our internal control, if we identify one or more material weaknesses in our internal controlover financial reporting or fail to remediate our current material weaknesses, we will be unable to assert that our internalcontrol over financial reporting is effective. We cannot assure you that there will not be material weaknesses in our internalcontrol over financial reporting in the future. Any failure to maintain internal control over financial reporting could severelyinhibit our ability to accurately report our financial condition or results of operations. If we are unable to conclude that ourinternal control over financial reporting is effective, or if our independent registered public accounting firm determines wehave a material weakness in our internal control over financial reporting, we could lose investor confidence in the accuracyand completeness of our financial reports, the market price of our ordinary shares could decline, and we could be subject tosanctions or investigations by Nasdaq, the SEC or other regulatory authorities. Failure to remedy any material weakness inour internal control over financial reporting, or to implement or maintain other effective control systems required of publiccompanies, could also restrict our future access to the capital markets.We are an “emerging growth company” and as a result of the reduced disclosure and governance requirements applicableto emerging growth companies, our common stock may be less attractive to investors.We are an “emerging growth company” as defined in the JOBS Act, and we intend to take advantage of some of theexemptions from reporting requirements that are applicable to other public companies that are not emerging growthcompanies, including:··being permitted to provide only two years of audited financial statements, in addition to any required unauditedinterim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” disclosure;··not being required to comply with the auditor attestation requirements in the assessment of our internal controlover financial reporting;··not being required to comply with any requirement that may be adopted by the Public Company AccountingOversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providingadditional information about the audit and the financial statements;··reduced disclosure obligations regarding executive compensation; and··not being required to hold a nonbinding advisory vote on executive compensation and stockholder approval ofany golden parachute payments not previously approved.We will remain an emerging growth company, and thus may continue to rely on these exemptions, until the earlier of(1) the last day of the fiscal year (a) following the fifth anniversary of the completion of the IPO, (b) in which we have totalannual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which74 Table of Contentsmeans the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th,and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accountingstandards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselvesof this exemption, and, therefore, we will be subject to the same new or revised accounting standards as other publiccompanies that are not “emerging growth companies.”Future sales of our common stock may depress our share price.Sales of a substantial number of shares of our common stock in the public market, or the perception that these salesmight occur, could depress the market price of our common stock and could impair our ability to raise capital through thesale of additional equity securities. At December 31, 2017, we had outstanding a total of 21,088,306 shares of common stock,notwithstanding any potential exercises of outstanding options and issuance of shares under the employee stock purchaseplan.If additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, thetrading price of our common stock could decline.Any sales of securities by our stockholders could have an adverse effect on the trading price of our common stock. Inaddition, in the future we may issue common stock or other securities, including any sale of up to $50.0 million worth ofshares of our common stock pursuant to our sales agreement with Cantor Fitzgerald & Co. (the “Sales Agreement”). our SalesAgreement, if we need to raise additional capital. The number of shares of our new common stock issued in connection withraising additional capital could constitute a material portion of our then outstanding common stock.If we sell shares of our common stock in future financings, stockholders may experience immediate dilution and, as aresult, our stock price may decline.We may from time to time issue additional shares of common stock at a discount from the current trading price of ourcommon stock. As a result, our stockholders would experience immediate dilution upon the purchase of any shares of ourcommon stock sold at such discount. In addition, as opportunities present themselves, we may enter into financing or similararrangements in the future, including the issuance of debt securities, preferred stock or common stock. If we issue commonstock or securities convertible into common stock, including any sale of up to $50.0 million worth of shares of our commonstock pursuant to the Sales Agreement, our common stockholders would experience additional dilution and, as a result, ourstock price may decline.We have incurred and will continue to incur increased costs as a result of operating as a public company, and ourmanagement has been required and will continue to be required to devote substantial time to maintain compliance withour public company responsibilities and corporate governance practices.We have incurred and will continue to incur significant legal, accounting and other expenses as a public company,including costs resulting from public company reporting obligations under the Securities Exchange Act of 1934, as amended(the “Exchange Act”), and regulations regarding corporate governance practices. The listing requirements of The NasdaqGlobal Market require that we satisfy certain corporate governance requirements relating to director independence,distributing annual and interim reports, stockholder meetings, approvals and voting, soliciting proxies, conflicts of interestand a code of conduct. Our management and other personnel have devoted and will continue to need to devote a substantialamount of time to ensure that we comply with all of these requirements. Moreover, the reporting requirements, rules andregulations will increase our legal and financial compliance costs and will make some activities more time consuming andcostly. Any changes we make to comply with these obligations may not be sufficient to allow us to satisfy our obligations asa public company on a timely basis, or at all. These reporting requirements, rules and regulations, coupled with the increasein potential litigation exposure associated with being a public company, could also make it more difficult for us to attractand retain qualified persons to serve on our board of directors or board committees75 Table of Contentsor to serve as executive officers, or to obtain certain types of insurance, including directors’ and officers’ insurance, onacceptable terms.As a public company, and particularly after we are no longer an “emerging growth company,” we will incur significantlegal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of The Nasdaq Global Market and otherapplicable securities rules and regulations impose various requirements on public companies. Our management and otherpersonnel will need to devote a substantial amount of time to compliance with these requirements. Moreover, these rules andregulations will increase our legal and financial compliance costs and will make some activities more time-consuming andcostly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us toobtain directors’ and officers’ liability insurance, which could make it more difficult for us to attract and retain qualifiedmembers of our board of directors. We cannot predict or estimate the amount of additional costs we will incur as a publiccompany or the timing of such costs.Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed byus in reports we file or submit under the Exchange Act is accumulated and communicated to management, recorded,processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that anydisclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, canprovide only reasonable, not absolute, assurance that the objectives of the control system are met.These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdownscan occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of somepersons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of theinherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.During the course of our review and testing, we may identify deficiencies and be unable to remediate them before wemust provide the required reports. Furthermore, since we have material weaknesses in our internal controls over financialreporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We or ourindependent registered public accounting firm may not be able to conclude on an ongoing basis that we have effectiveinternal control over financial reporting, which could harm our operating results, cause investors to lose confidence in ourreported financial information and cause the trading price of our stock to fall. In addition, as a public company we will berequired to file accurate and timely quarterly and Annual Reports with the SEC under the Exchange Act. Any failure to reportour financial results on an accurate and timely basis could result in sanctions, lawsuits, delisting of our shares from TheNasdaq Global Market or other adverse consequences that would materially harm our business.Any changes to existing accounting pronouncements or taxation rules or practices may cause adverse fluctuations in ourreported results of operations or affect how we conduct our business.A change in accounting pronouncements or taxation rules or practices can have a significant effect on our reportedresults and may affect our reporting of transactions completed before the change is effective. New accountingpronouncements, taxation rules and varying interpretations of accounting pronouncements or taxation rules have occurred inthe past and may occur in the future. The change to existing rules, future changes, if any, or the need for us to modify acurrent tax or accounting position may adversely affect our reported financial results or the way we conduct our business.76 Table of ContentsNasdaq may delist our securities from its exchange, which could limit investors’ ability to make transactions in oursecurities and subject us to additional trading restrictions.Our common stock is listed on The Nasdaq Global Market. We cannot assure you that, in the future, our securities willmeet the continued listing requirements to be listed on The Nasdaq Global Market. If The Nasdaq Global Market delists ourcommon stock, we could face significant material adverse consequences, including:··a limited availability of market quotations for our securities;··a determination that our common stock is a “penny stock” which will require brokers trading in our common stockto adhere to more stringent rules and possibly resulting in a reduced level of trading activity in the secondarytrading market for our common stock;··a limited amount of news and analyst coverage for our company; and··a decreased ability to issue additional securities or obtain additional financing in the future.If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business,our stock price and trading volume could decline.The trading market for our common stock will be influenced by the research and reports that securities or industryanalysts publish about us or our business. In the event one or more of the analysts who cover us downgrade our stock orpublish inaccurate or unfavorable research about our business, our stock price could be adversely affected. If one or more ofthese analysts cease coverage of our company or fail to publish reports on us regularly, demand for our common stock coulddecrease, and we could lose visibility in the financial markets, which might cause our stock price and trading volume todecline.Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third partyclaims against us and may reduce the amount of money available to us generally.Our amended and restated certificate of incorporation provides that we will indemnify our directors and officers, in eachcase to the fullest extent permitted by Delaware law.In addition, as permitted by Section 145 of the Delaware General Corporation Law, our amended and restated bylawsand our indemnification agreements that we have entered into and will enter into with our directors and officers provide that:··we will indemnify our directors and officers for serving us in those capacities or for serving other businessenterprises at our request, to the fullest extent permitted by Delaware law. Delaware law provides that a corporationmay indemnify such person if such person acted in good faith and in a manner such person reasonably believed tobe in or not opposed to the best interests of the registrant and, with respect to any criminal proceeding, had noreasonable cause to believe such person’s conduct was unlawful;··we may, in our discretion, indemnify employees and agents in those circumstances where indemnification ispermitted by applicable law;··we are required to advance expenses, as incurred, to our directors and officers in connection with defending aproceeding, except that such directors or officers shall undertake to repay such advances if it is ultimatelydetermined that such person is not entitled to indemnification;··we will not be obligated pursuant to our bylaws to indemnify a person with respect to proceedings initiated by thatperson against us or our other indemnitees, except with respect to proceedings authorized by our board of directorsor brought to enforce a right to indemnification;77 Table of Contents··the rights conferred in our bylaws are not exclusive, and we are authorized to enter into indemnification agreementswith our directors, officers, employees and agents and to obtain insurance to indemnify such persons; and··we may not retroactively amend our bylaw provisions to reduce our indemnification obligations to directors,officers, employees and agents.As a result, if we are required to indemnify one or more of our directors or executive officers, it may reduce ouravailable funds to satisfy successful third party claims against us, may reduce the amount of money available to us and mayhave a material adverse effect on our business and financial condition.Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capitalappreciation, if any, would be your sole source of gain.We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retainfuture earnings for the development, operation and expansion of our business and do not anticipate declaring or paying anycash dividends for the foreseeable future. As a result, capital appreciation, if any, of our common stock would be your solesource of gain on an investment in our common stock for the foreseeable future.Provisions in our corporate charter documents could make an acquisition of us more difficult and may prevent attempts byour stockholders to replace or remove our current management.Provisions in our certificate of incorporation and our bylaws may discourage, delay or prevent a merger, acquisition orother change in control of us that stockholders may consider favorable, including transactions in which stockholders mightotherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing topay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, theseprovisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management bymaking it more difficult for stockholders to replace members of our board of directors. Because our board of directors isresponsible for appointing the members of our management team, these provisions could in turn affect any attempt by ourstockholders to replace current members of our management team.Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is theexclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ abilityto obtain a favorable judicial forum for disputes with us or our directors, officers or employees.Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware willbe the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach offiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, ouramended and restated certificate of incorporation or our bylaws; or any action asserting a claim against us that is governed bythe internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicialforum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage suchlawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forumprovision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in anaction, we may incur additional costs associated with resolving such action in other jurisdictions, which could adverselyaffect our business and financial condition.Our board of directors has certain characteristics which may delay or prevent a change of our management or a change incontrol.Our board of directors has the following characteristics which may delay or prevent a change of management or achange in control:78 Table of Contents··our board of directors has the right to elect directors to fill a vacancy created by the expansion of the board ofdirectors or the resignation, death or removal of a director, which prevents stockholders from being able to fillvacancies on our board of directors;··our stockholders may not act by written consent or call special stockholders’ meetings; as a result, a holder, orholders, controlling a majority of our capital stock would not be able to take certain actions other than at annualstockholders’ meetings or special stockholders’ meetings called by the board of directors, the chairman of the boardor the chief executive officer;··our certificate of incorporation does not provide for cumulative voting in the election of directors, which limits theability of minority stockholders to elect director candidates;··stockholders must provide advance notice and additional disclosures in order to nominate individuals for electionto the board of directors or to propose matters that can be acted upon at a stockholders’ meeting, which maydiscourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate ofdirectors or otherwise attempting to obtain control of our company; and··our board of directors may issue, without stockholder approval, shares of undesignated preferred stock; the abilityto issue undesignated preferred stock makes it possible for our board of directors to issue preferred stock withvoting or other rights or preferences that could impede the success of any attempt to acquire us.The recently passed comprehensive tax reform bill could adversely affect our business and financial condition.On December 22, 2017, new tax legislation (the “Tax Act”) was enacted which significantly changes the InternalRevenue Code, as amended (the “Code”). The Tax Act, among other things, contains significant changes to corporatetaxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%; limitation of thetax deduction for interest expense to 30% of adjusted earnings; for net operating losses generated after 2017, limitation ofthe deduction to 80% of current year taxable income, indefinite carryforward of net operating losses and elimination of netoperating loss carrybacks; changes in the treatment of offshore earnings regardless of whether they are repatriated; mandatorycapitalization of research and development expenses beginning in 2022; immediate deductions for certain new investmentsinstead of deductions for depreciation expense over time; further deduction limits on executive compensation; andmodifying, repealing and creating many other business deductions and credits, including the reduction in the orphan drugcredit from 50% to 25% of qualifying expenditures. We continue to examine the impact this tax reform legislation may haveon our business. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Act isuncertain and our business and financial condition could be adversely affected. The impact of this tax reform on holders ofour common stock is also uncertain and could be adverse. This annual report does not discuss any such tax legislation or themanner in which it might affect us or our stockholders in the future. We urge our stockholders to consult with their legal andtax advisors with respect to such legislation.Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited. We have incurred substantial losses during our history. We do not anticipate generating revenue from sales of productsfor the foreseeable future, if ever, and we may never achieve profitability. To the extent that we continue to generate taxablelosses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire. Under Section382 of the Code, if a corporation undergoes an “ownership change” (generally defined as a greater than 50 percentage pointschange (by value) in its equity ownership over a rolling three-year period), the corporation’s ability to use its pre-change netoperating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. Based on areview of our equity transactions since inception, we believe a portion of our net operating loss carryforwards and creditcarryforwards may be limited due to an equity financing that occurred in 2015. We may experience ownership changes in thefuture or subsequent shifts in our stock ownership, some of which are outside our control. As of December 31, 2017, we hadfederal net operating loss carryforwards of approximately $79.2 million that could be limited if we have experienced, or if inthe future we experience, an ownership change, which could have an adverse effect on our future results of operations.79 Table of ContentsProvisions under Delaware law and California law could make an acquisition of our company more difficult, limitattempts by our stockholders to replace or remove our current management and limit the market price of our commonstock.Because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware GeneralCorporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of businesscombinations with any holder of at least 15% of our capital stock for a period of three years following the date on which thestockholder acquired at least 15% of our common stock. Likewise, because our principal executive offices are located inCalifornia, the anti-takeover provisions of the California Corporations Code may apply to us under certain circumstancesnow or in the future. Item 1B.Unresolved Staff CommentsNone. Item 2.PropertiesWe lease approximately 42,877 square feet of office and laboratory space in Newark, California under a leaseagreement that expires in May 2024. We believe that our existing facilities are adequate to meet our business needs for atleast the next 12 months and that additional space will be available on commercially reasonable terms, if required. Item 3.Legal Proceedings We may become subject to litigation and claims arising in the ordinary course of business, including the matterdescribed below. On September 26, 2017, Medical Diagnostic Laboratories, LLC (“MDL”) filed a lawsuit for alleged infringement ofU.S. Patent No. 8,946,150 (“the ’150 patent”) by Protagonist’s polypeptide PTG-200 (the “Complaint”). We have licensedPTG-200 to Janssen Biotech, Inc. for clinical development. On December 1, 2017, we filed a motion to dismiss the case,urging that all of our activities, as described in the Complaint, fall within the safe harbor of 35 U.S.C. 271(e)(1) – precludinginfringement for FDA-research related activities. On February 7, 2018, our motion to dismiss the case was granted by the U.S.District Court for the Northern District of California. The Court dismissed the case without prejudice to MDL attempting toamend its Complaint within thirty days to attempt to allege new facts that would support a case or suing in the future whencommercial activity is imminent or concrete. Item 4.Mine Safety DisclosuresNot applicable.80 Table of Contents PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity SecuritiesMarket InformationOur common stock began trading on The Nasdaq Global Market on August 11, 2016 and trades under the symbol“PTGX.” Prior to such time, there was no public market for our common stock. The following table sets forth the range ofhigh and low quarterly sales prices per share of our common stock for the periods noted, as reported on The Nasdaq GlobalMarket: Prices High Low2017 First Quarter $22.50 $12.10Second Quarter $14.85 $8.00Third Quarter $18.37 $10.26Fourth Quarter $21.31 $14.10 2016 Third Quarter (from August 11, 2016) $22.56 $10.02Fourth Quarter $26.36 $17.45 On February 28, 2018, the last reported sale price on The Nasdaq Global Market for our common stock was $16.95. StockholdersAs of the close of business on February 28, 2018, there were 7 stockholders of record of our common stock. The numberof stockholders of record is based upon the actual number of stockholders registered at such date and does not includeholders of shares in “street names” or persons, partnerships, associates, or corporations, or other entities identified in securitylistings maintained by depositories.Dividend PolicyWe have never declared or paid any cash dividends. We currently expect to retain all future earnings, if any, for use inthe operation and expansion of our business, and therefore do not anticipate paying any cash dividends in the foreseeablefuture.Performance GraphThe following is not deemed “filed” with the Securities and Exchange Commission and is not to be incorporated byreference into any filing we make under the Securities Act of 1933, as amended, whether made before or after the date hereofand irrespective of any general incorporation by reference language in such filing. The graph below matches shows thecumulative total stockholder return assuming the investment on the date specified in each of our common stock, the NasdaqComposite Index, the Nasdaq Biotechnology Index, and the Nasdaq Pharmaceutical Index. The graph81 Table of Contentstracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends)from August 11, 2016 to December 31, 2017. 8/11/2016 9/30/2016 12/31/2016 3/31/2017 6/30/2017 9/30/2017 12/31/2017Protagonist Therapeutics, Inc. $100.00 $180.60 $187.95 $109.49 $96.67 $151.03 $177.78Nasdaq Composite $100.00 $102.96 $104.15 $114.76 $119.50 $126.54 $134.81Nasdaq Biotechnology $100.00 $99.61 $92.23 $101.02 $105.80 $114.25 $108.02Nasdaq Pharmaceutical $100.00 $98.65 $91.21 $98.28 $103.23 $111.19 $103.69 * The stock price performance included in this graph is not necessarily indicative of future stock price performance.Sale of Unregistered SecuritiesNone.Repurchases of Shares or of Company Equity SecuritiesNone.Use of Proceeds from our Public Offering of Common Stock On August 16, 2016, we closed our initial public offering (“IPO”) and issued and sold 7,500,000 shares of our commonstock at an initial offering price of $12.00 per share (File Nos. 333-212476 and 333-213071). We received an aggregate of$83.6 million in cash, net of underwriting discounts and commissions, after deducting offering costs. In addition, at theclosing of the IPO, all outstanding shares of the redeemable convertible preferred stock converted into82 Table of Contents8,577,571 shares of common stock. In September 2016, we issued and sold an additional 252,972 shares of our commonstock at a price of $12.00 per share following the underwriters’ exercise of their option to purchase additional shares. Leerink Partners LLC, Barclays Capital Inc. and BMO Capital Markets Corp. acted as the underwriters. Shares of theCompany’s common stock began trading on the Nasdaq Global Market on August 11, 2016. The shares were registered underthe Securities Act on registration statements on Form S-1 (File Nos. 333-212476 and 333-213071). There has been nomaterial change in the planned use of proceeds from the IPO from that described in the prospectus filed with the SECpursuant to Rule 424(b)(4) under the Securities Act on August 10, 2016. 83 Table of Contents Item 6.Selected Financial DataThe following selected consolidated statement of operations data for the years ended December 31, 2017, 2016, and2015 and the consolidated balance sheet data as of December 31, 2017 and 2016 are derived from our audited consolidatedfinancial statements that are included elsewhere in this report. The selected consolidated statement of operations data for theyear ended December 31, 2014 and the consolidated balance sheet data at December 31, 2015 and 2014 have been derivedfrom our audited consolidated financial statements which are not included in this report. The data set forth below is notnecessarily indicative of results of future operations and should be read in conjunction with “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements andSupplementary Data” included in this Annual Report on Form 10‑K to fully understand factors that may affect thecomparability of the information presented below: Year Ended December 31, 2017 2016 2015 2014 (In thousands, except for share and per share data)Consolidated Statement of Operations Data: License and collaboration revenue - related party $20,063 $ — $ — $ —Operating expenses: Research and development 46,181 25,705 11,831 7,459General and administrative 11,779 6,961 2,963 1,860Total operating expenses 57,960 32,666 14,794 9,319Loss from operations (37,897) (32,666) (14,794) (9,319)Interest income 940 242 19 16Change in fair value of redeemable convertible preferred stocktranche and warrant liabilities — (4,719) (83) (1,769)Other expense — (34) — —Net loss $(36,957) $(37,177) $(14,858) $(11,072)Net loss attributable to common stockholders $(36,957) $(37,735) $(14,933) $(11,218)Net loss per share attributable to common stockholders, basic anddiluted $(2.09) $(5.80) $(59.32) $(49.38)Weighted-average shares used to compute net loss per shareattributable to common stockholders, basic and diluted 17,694,505 6,501,796 251,717 227,197 December 31, 2017 2016 2015 2014 (In thousands)Consolidated Balance Sheet Data: Cash, cash equivalents and available-for-sale securities $155,459 $87,749 $11,923 $9,324Working capital 108,392 76,809 11,080 8,563Total assets 163,734 93,990 14,845 10,328Deferred revenue - related party 31,752 — — —Redeemable convertible preferred stock tranche liability — — 1,643 —Redeemable convertible preferred stock warrant liability — — 480 1,023Redeemable convertible preferred stock — — 36,996 20,576Accumulated deficit (101,550) (64,593) (27,416) (12,558)Total stockholders’ equity (deficit) 120,632 87,555 (27,400) (12,621) 84 Table of Contents Item 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsYou should read the following discussion and analysis of our financial condition and results of operations togetherwith “Item 6. Selected Financial Data” and the consolidated financial statements and related notes included elsewhere inthis Annual Report. This discussion contains forward-looking statements based upon current expectations that involve risksand uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as aresult of various factors, including those discussed in “Item 1A. Risk Factors” and in other parts of this Annual Report. Overview We are a clinical stage biopharmaceutical company with a proprietary technology platform that enables the discoveryand development of novel constrained peptide-based drug candidates that address significant unmet medical needs. Ourproduct candidates are designed to affect critical steps in the biological pathways of particular diseases, for example, byblocking protein-protein interactions. We believe our peptide-based approach has advantages over alternative approachessuch as small molecules and antibodies. Two of our clinical stage product candidates, PTG-100 and PTG-200, are potentialfirst-in-class oral drugs that block biological pathways currently targeted by marketed injectable antibody drugs and offertargeted delivery to the gastrointestinal (“GI”) tissue compartment. We believe that, as compared to antibody drugs, theseproduct candidates have the potential to provide improved safety due to minimal exposure in the blood, increasedconvenience and compliance due to oral delivery, and the opportunity for the earlier introduction of targeted therapy. As aresult, if approved, they may transform the existing treatment paradigm for inflammatory bowel disease (“IBD”), a GI diseaseconsisting primarily of ulcerative colitis (“UC”), and Crohn’s disease (“CD”). Our third clinical stage product candidate,PTG-300, mimics the effect of the hormone hepcidin and has the potential to treat the anemia caused by certain rare blooddisorders.PTG-100, a potential first-in-class oral, alpha-4-beta-7 (“α4β7”) integrin antagonist, is currently in a global Phase 2bclinical trial for the treatment of moderate-to-severe UC that is anticipated to randomize approximately 240 patients atapproximately 100 clinical sites. We anticipate conducting an interim futility analysis in the first quarter of 2018 andreporting top-line results in the fourth quarter of 2018. If this trial is successful, we anticipate conducting end-of-Phase 2meetings with global health authorities and initiating pivotal clinical development programs in both UC and CD in2019. We also anticipate developing PTG-100 for the treatment of chronic pouchitis, a GI condition that occurs in manypost-surgical IBD patients. We have completed a pre-Investigational New Drug (“IND”) meeting with the FDA regarding thedevelopment pathway for PTG-100 in this indication and anticipate proceeding with clinical development activities pendinga successful outcome of the Phase 2b futility analysis.PTG-200 is a potential first-in-class oral Interleukin-23 receptor (“IL-23R”) antagonist for the treatment of IBD. It iscurrently in a Phase 1 healthy volunteer clinical study that was initiated in the fourth quarter of 2017. We have entered into aworldwide license and collaboration agreement with Janssen Biotech, Inc. (“Janssen”), a Johnson and Johnson company, toco-develop and co-detail PTG-200 for all indications, including IBD. See the section below titled “Janssen License andCollaboration Agreement” for additional information.Our novel peptides have potential applicability in a wide range of therapeutic areas in addition to GI diseases. Ourthird product candidate, PTG-300, is a mimic of the hormone hepcidin that we are developing for the treatment of anemia incertain rare blood disorders, with an initial focus on beta-thalassemia. In the fourth quarter of 2017, we completed asuccessful Phase 1 study of PTG-300 in healthy volunteers which established pharmaceutical proof of concept. In 2018, weanticipate filing an IND in the United States and related clinical trial applications outside the United States and initiating aPhase 2 study of PTG-300 in patients with beta-thalassemia. PTG-300 has received an orphan drug designation from the FDAfor the treatment of beta-thalassemia.In addition, we continue to use our peptide technology platform to discover product candidates against targets indisease areas with significant unmet medical needs. In 2018, we anticipate initiating IND-enabling studies for a fourthproduct candidate, an oral peptide targeting a GI condition other than IBD. 85 Table of ContentsWe have not generated any revenue from product sales and we do not currently have any products approved forcommercialization. We have never been profitable and have incurred net losses in each year since inception and we do notanticipate that we will achieve sustained profitability in the near term. Our net loss was $37.0 million, $37.2 million and$14.8 million for the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, we had anaccumulated deficit of $101.6 million. Substantially all of our net losses have resulted from costs incurred in connection withour research and development programs and from general and administrative costs associated with our operations. We expectto continue to incur significant research, development and other expenses related to our ongoing operations and productdevelopment, including clinical development activities under the Janssen License and Collaboration Agreement, and as aresult, we expect to continue to incur losses in the future as we continue our development of, and seek regulatory approvalfor, our product candidates. In August 2016, we completed our initial public offering (“IPO”) of our common stock pursuant to which we issued7,500,000 shares of our common stock at a price of $12.00 per share. In September 2016, we issued an additional 252,972shares of our common stock at a price of $12.00 per share following the underwriters’ exercise of their option to purchaseadditional shares. We received an aggregate of $83.6 million in cash from the IPO, net of underwriting discounts andcommissions, and after deducting offering costs paid by us.In October 2017, we completed an underwritten public offering of our common stock pursuant to which we issued3,530,000 shares of our common stock at a public offering price of $17.00 per share. In November 2017, we issued anadditional 529,500 shares of our common stock at a price of $17.00 per share following the underwriters’ exercise of theiroption to purchase additional shares. Net proceeds, after deducting underwriting commissions and offering costs, were $64.5million.Janssen License and Collaboration AgreementOn May 26, 2017, we and Janssen Biotech, Inc., (“Janssen”), one of the Janssen Pharmaceutical Companies of Johnson& Johnson, entered into an exclusive license and collaboration agreement (the “Janssen License and CollaborationAgreement”) for the development, manufacture and commercialization of PTG-200 worldwide for the treatment of CD andUC. Janssen is a related party to us as Johnson & Johnson Innovation - JJDC, Inc., a significant shareholder of ours, andJanssen are both subsidiaries of Johnson and Johnson. The Janssen License and Collaboration Agreement became effectiveon July 13, 2017. Upon the effectiveness of the agreement, we became eligible for and received a non-refundable, upfrontcash payment of $50.0 million from Janssen.Under the Janssen License and Collaboration Agreement, we granted to Janssen an exclusive worldwide license todevelop, manufacture and commercialize PTG-200 and related IL-23R compounds for all indications, including CD and UC.We are responsible, at our own expense, for the conduct of the Phase 1 clinical trial for PTG-200 and Janssen will beresponsible for the conduct of a potential Phase 2 clinical trial for PTG-200 in CD, including filing the Phase 2 IND. All suchclinical trials will be conducted in accordance with a mutually agreed upon clinical development plan and budget.Development costs for the Phase 2 clinical trial will be shared between the parties on an 80%/20% basis, with Janssenassuming the larger share. Should Janssen elect to retain its license following completion of the Phase 2 clinical trial, it willbe responsible, at its own expense, for the manufacture, continued development of, seeking regulatory approval for, andcommercialization of PTG-200 worldwide. The parties’ development activities under the Janssen License and CollaborationAgreement through the Phase 2 clinical trial will be overseen by a joint governance structure which will have equalrepresentation by both parties unless both parties mutually agree to disband such structure or we have provided writtennotice to Janssen of our intention to disband and no longer participate in such structure.We are eligible to receive a $25.0 million payment upon filing of the Phase 2 IND. Following the conclusion of theplanned Phase 2a portion of the Phase 2 clinical trial, if Janssen elects to maintain its license rights and continue thedevelopment of PTG-200 in the Phase 2b portion of such clinical trial (the “First Opt-in Election”), we would be eligible toreceive a $125.0 million payment. Following the conclusion of the planned Phase 2b portion of the Phase 2 clinical trial, ifJanssen elects again to maintain its license rights (the “Second Opt-in Election”), we would be eligible to receive a $200.0million payment. In addition to the opt-in fees, we are eligible to receive additional potential development, regulatory andsales milestone payments of up to an aggregate of $590.0 million, and tiered royalties paid as a percentage of Janssen’sworldwide net sales at rates ranging from ten to the mid-teens, with certain customary reductions86 Table of Contentsunder certain circumstances. If Janssen does not make either the First Opt-in Election or the Second Opt-in Election, theJanssen License and Collaboration Agreement will terminate. If Janssen does not make the Second Opt-in Election, or if atany time after the Second Opt-in Election, Janssen terminates the Janssen License and Collaboration Agreement, we wouldbe obligated to pay Janssen a low single-digit royalty on worldwide net sales of PTG-200. We would also have an option toprovide up to 30% of the required U.S. details for PTG-200 to prescribers, using our own sales force personnel, uponcommercial launch in the United States. If such right is exercised, our detailing costs would be reimbursed by Janssen, at amutually agreed upon cost per primary detailing equivalent.The Janssen License and Collaboration Agreement contains customary representations, warranties and covenants by usand Janssen and includes an obligation by us not to develop or commercialize other compounds which also target IL-23Routside of the Janssen License and Collaboration Agreement until completion of the Phase 2b portion of the Phase 2 clinicaltrial. We and Janssen are required to indemnify the other party against all losses and expenses related to breaches of itsrepresentations, warranties and covenants under the Janssen License and Collaboration Agreement.The Janssen License and Collaboration Agreement remains in effect until the royalty obligations cease followingpatent and regulatory expiry, unless terminated earlier. Either we or Janssen may terminate the Janssen License andCollaboration Agreement for uncured material breach. Janssen retains the right to terminate the Janssen License andCollaboration Agreement for convenience and without cause on written notice of a certain period to us. Upon a terminationof the Janssen License and Collaboration Agreement, all rights revert back to us, and in certain circumstances, if suchtermination occurs during ongoing clinical trials, Janssen would, if requested, provide certain financial and operationalsupport to us for the completion of such trials.Critical Accounting Polices and EstimatesOur management’s discussion and analysis of our financial condition and results of operations is based on ourconsolidated financial statements, which have been prepared in accordance with United States generally acceptedaccounting principles. The preparation of these consolidated financial statements requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities atthe date of the consolidated financial statements, as well as the reported revenue generated and expenses incurred during thereporting periods. Our estimates are based on our historical experience and on various other factors that we believe arereasonable under the circumstances, the results of which form the basis for making judgments about the carrying value ofassets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates underdifferent assumptions or conditions. We believe that the accounting policies discussed below are critical to understandingour historical and future performance, as these policies relate to the more significant areas involving management’sjudgments and estimates.Revenue RecognitionEffective July 1, 2017, we adopted Accounting Standards Codification, or ASC Topic 606, Revenue from Contractswith Customers (“ASC 606”) using the full retrospective transition method. We did not have any effective contracts withinthe scope of this guidance prior to July 1, 2017. Accordingly, we did not elect to use any of the practical expedientspermitted under the transition guidance, and the adoption had no impact on our previously reported financial position,results of operations or liquidity. This standard applies to all contracts with customers, except for contracts that are within thescope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC 606,we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects theconsideration which we expect to receive in exchange for those goods or services. To determine revenue recognition forarrangements that we determine are within the scope of ASC 606, we perform the following five steps: (i) identify thecontract(s) with a customer; (ii) 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) wesatisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect theconsideration we are entitled to in exchange for the goods or services it transfers to the customer. At contract inception, oncethe contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contractand determine those that are performance obligations and assess whether each87 Table of Contentspromised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to therespective performance obligation when (or as) the performance obligation is satisfied.We entered into a license and collaboration agreement that became effective upon resolution of regulatoryrequirements during the third quarter of 2017 which is within the scope of ASC 606, under which we have licensed certainrights to our PTG-200 product candidate to a third party and may enter into other such arrangements in the future. The termsof the arrangement include payment to us of one or more of the following: non-refundable, up-front license fees,development and regulatory and commercial milestone payments, and royalties on net sales of licensed products.Licenses of intellectual property: If the license to our intellectual property is determined to be distinct from the otherperformance obligation identified in the arrangement, we recognize revenue from non-refundable, up-front fees allocated tothe license when the license is transferred to the customer and the customer is able to use and benefit from the license. Forlicenses that are bundled with other promises, we utilize judgment to assess the nature of the combined performanceobligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if overtime, the appropriate method of measuring proportional performance for purposes of recognizing revenue from non-refundable, up-front fees. We evaluate the measure of proportional performance each reporting period and, if necessary,adjust the measure of performance and related revenue recognition.Milestone payments: At the inception of each arrangement that includes development, regulatory or commercialmilestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amountto be included in the transaction price. ASC 606 suggests two alternatives to use when estimating the amount of variableconsideration: the expected value method and the most likely amount method. Under the expected value method, an entityconsiders the sum of probability-weighted amounts in a range of possible consideration amounts. Under the most likelyamount method, an entity considers the single most likely amount in a range of possible consideration amounts. Whichevermethod is used, it should be consistently applied throughout the life of the contract; however, it is not necessary for us to usethe same approach for all contracts. We expect to use the most likely amount method for development and regulatorymilestone payments. If it is probable that a significant revenue reversal would not occur, the associated milestone value isincluded in the transaction price. Milestone payments that are not within our control or the control of the licensee, such asregulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction priceis then allocated to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenueas or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, were-evaluate the probability or achievement of each such milestone and any related constraint, and if necessary, adjust ourestimates of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which wouldaffect revenues and earnings in the period of adjustment. To date, we have not recognized any milestone payments resultingfrom our collaboration arrangement.Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level ofsales, and the license is deemed to be the predominant item to which the royalties relate, we recognize 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 allocatedhas been satisfied (or partially satisfied). To date, we have not recognized any royalty revenue resulting from ourcollaboration arrangement.Up-front payments and fees are recorded as deferred revenue upon receipt or when due and may require deferral ofrevenue recognition to a future period until we perform our obligations under these arrangements. Amounts payable to us arerecorded as accounts receivable when our right to consideration is unconditional. We do not assess whether a contract has asignificant financing component if the expectation at contract inception is such that the period between payment by thecustomer and the transfer of the promised goods or services to the customer will be one year or less.Research and Development CostsWe record accrued expenses for estimated costs of our research and development activities conducted by third partyservice providers, which include the conduct of pre-clinical studies and clinical trials and contract manufacturing activities.We record the estimated costs of research and development activities based upon the estimated amount of services providedbut not yet invoiced and include these costs in accrued liabilities in the consolidated balance sheets88 Table of Contentsand within research and development expense in the consolidated statements of operations. These costs are a significantcomponent of our research and development expenses. We record accrued expenses for these costs based on factors such asestimates of the work completed and in accordance with agreements established with these third party service providers.We estimate the amount of work completed through discussions with internal personnel and external service providersas to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. We makesignificant judgments and estimates in determining the accrued balance in each reporting period. As actual costs becomeknown, we adjust our accrued estimates. Although we do not expect our estimates to be materially different from amountsactually incurred, our understanding of the status and timing of services performed, the number of patients enrolled and therate of patient enrollment may vary from our estimates and could result in us reporting amounts that are too high or too lowin any particular period. Our accrued expenses are dependent, in part, upon the receipt of timely and accurate reporting fromclinical research organizations and other third-party service providers. To date, there have been no material differences fromour accrued expenses to actual expenses.Stock-Based CompensationWe recognize compensation costs related to stock options granted to employees based on the estimated fair value ofthe awards on the date of grant, net of estimated forfeitures. We estimate the fair value, and the resulting stock-basedcompensation expense, using the Black-Scholes option-pricing model. The estimated fair value of the stock-based awards isgenerally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of therespective awards.The Black-Scholes option-pricing model requires the use of highly subjective assumptions which determine the fairvalue of stock-based awards. These assumptions include:Expected Term— Our expected term represents the period that our stock-based awards are expected to be outstandingand is determined using the simplified method (based on the mid-point between the vesting date and the end of thecontractual term). We have very limited historical information to develop reasonable expectations about future exercisepatterns and post-vesting employment termination behavior for our stock option grants.Expected Volatility—Prior to our IPO in August 2016, we were privately held and did not have any trading history forour common stock, the expected volatility was estimated based on the average volatility for comparable publicly tradedbiopharmaceutical companies over a period equal to the expected term of the stock option grants. The comparablecompanies were chosen based on their similar size, stage in the life cycle, or area of specialty. We will continue to apply thisprocess until a sufficient amount of historical information regarding the volatility of our own stock price becomes available.Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the timeof grant for periods corresponding with the expected term of option.Expected Dividend—We have never paid dividends on our common stock and have no plans to pay dividends on ourcommon stock. Therefore, we used an expected dividend yield of zero.In addition to the Black-Scholes assumptions, we estimate our forfeiture rate based on an analysis of our actualforfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis ofemployee turnover behavior, and other factors. The impact from any forfeiture rate adjustment would be recognized in full inthe period of adjustment and if the actual number of future forfeitures differs from our estimates, we might be required torecord adjustments to stock-based compensation in future periods.For the years ended December 31, 2017, 2016, and 2015, stock-based compensation expense was $4.2 million, $2.1million and $99,000, respectively. As of December 31, 2017, we had $10.7 million of total unrecognized stock-basedcompensation costs, which we expect to recognize over a weighted-average period of 2.46 years.89 Table of ContentsIncome TaxesWe use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets andliabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilitiesand are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Weassess the likelihood that the resulting deferred tax assets will be realized. A valuation allowance is provided when it is morelikely than not that all or some portion of a deferred tax asset will not be realized.As of December 31, 2017, our total gross deferred tax assets were $25.9 million. Due to our lack of earnings history anduncertainties surrounding our ability to generate future taxable income, the net deferred tax assets have been fully offset by avaluation allowance. The deferred tax assets were primarily comprised of federal and state tax net operating loss and taxcredit carryforwards. As of December 31, 2017, our net operating loss carryforwards for federal income tax purposes of $79.2million which are available to offset future taxable income, if any, through 2033 and net operating loss carryforwards forstate income tax purposes of approximately $68.0 million which are available to offset future taxable income, if any,through 2033. As of December 31, 2017, we also had accumulated Australian tax losses of $10.4 million available for carryforward against future earnings, which under relevant tax laws do not expire but may not be available under certaincircumstances.On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law making significant changesto the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21%effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide taxsystem to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreignearnings as of December 31, 2017.The reduction of the corporate tax rate under the Tax Act is effective January 1, 2018. Consequently, we have recordeda decrease in net deferred tax assets of $11.5 million, with a corresponding adjustment to the valuation allowance of $11.5million, for the year ended December 31, 2017. The state deferred tax effect on federal deferred tax assets has been calculatedusing 79% rather than the previous 66% federal benefit. The increase in deferred tax assets has been offset against an increaseto the valuation allowance.The Deemed Repatriation Transition Tax, (“Transition Tax”) is a tax on previously untaxed accumulated and currentearnings and profits (“E&P”) of certain foreign subsidiaries. To determine the amount of the Transition Tax, we mustdetermine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount ofnon-U.S. income taxes paid on such earnings. Since Protagonist Pty Ltd., our foreign subsidiary, has a cumulative deficit inE&P, there is no Transition Tax to be included in the December 31, 2017 tax provision.On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which providesguidance for the tax effect of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one yearfrom the Tax Act’s enactment date for companies to complete the accounting under Accounting Standards CodificationTopic 740, Income Taxes (“ASC 740”). In accordance with SAB 118, we must reflect the income tax effects of those aspectsof the Tax Act for which the accounting under ASC 740 is complete. To the extent that our accounting for certain income taxeffects of the Tax Act is incomplete, but we are able to determine a reasonable estimate, we must record a provisional estimatein our consolidated financial statements. If we cannot determine a provisional estimate to be included in our consolidatedfinancial statements, we should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effectimmediately before the enactment of the Tax Act. The amounts of the tax effects related to the Tax Act described in theparagraphs above represent our reasonable estimates and are provisional amounts within the meaning of SAB 118. Theprovisional transition tax at zero has been determined based on the cumulative deficit foreign E&P as of the relevantmeasurement date. Any change in such estimate during the measurement period should have no impact on our financialstatements. Also, it is expected that the U.S. Treasury will issue regulations and other guidance on the application of certainprovisions of the Tax Act. In subsequent periods, but within the measurement period, we will analyze that guidance and othernecessary information to refine our estimates and complete our accounting for the tax effects of the Tax Act as necessary.90 Table of ContentsUtilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to ownershipchanges that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code(the “Code”), and similar state provisions. These ownership change limitations may limit the amount of net operating losscarryforwards and other tax attributes that can be utilized annually to offset future taxable income and tax, respectively. Ingeneral, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions overa three-year period resulting in an ownership change of more than 50 percentage points (by value) of the outstanding stock ofa company by certain stockholders. Based on a review of our equity transactions since inception, we believe a portion of ournet operating loss carryforwards and credit carryforwards may be limited due to an equity financing that occurred in 2015.Recent Accounting PronouncementsInformation regarding recent accounting pronouncements applicable to us is included in the notes to our consolidatedfinancial statements included elsewhere in this Annual Report.Components of Our Results of OperationsLicense and Collaboration RevenueOur license and collaboration revenue is derived from payments we receive under the Janssen License andCollaboration Agreement.We identified the following material promises under the Janssen License and Collaboration Agreement: (1) the licenserelated to PTG-200, (2) the performance of development services, including regulatory support, during Phase 1 clinical trialfor PTG-200 through the filing of the IND by Janssen, and (3) compound supply services for Phase 1 and Phase 2 activities.We considered that the license has standalone functionality and is capable of being distinct. However, we determined thatthe license is not distinct from the development and compound supply services within the context of the agreement becausethe development and compound supply services significantly increase the utility of the intellectual property.Specifically, our development, manufacturing and commercialization license can provide benefit to Janssen only incombination with our development services in the Phase 1 study. The intellectual property (“IP”) related to the peptidetechnology platform, which is proprietary to us, is the foundation for the development activities related to the treatment forCD. The compound supply services are a necessary and integral part of the development services as they could only beconducted utilizing the outcomes of these services. Given the development services under the Janssen CollaborationAgreement are expected to involve significant further development of the initial IP, we have concluded that the developmentand compound supply services are not distinct from the license, and thus the license, development services and compoundsupply services are combined into a single performance obligation. The nature of the combined performance obligation is toprovide development and compound supply services to Janssen under the arrangement.We also evaluated whether the fees related to the First Opt-in Election and Second Opt-in Election are options withmaterial rights. These two options include additional sublicense rights and patent rights transferred to Janssen uponexercising both of these options. We concluded that Janssen’s opt in rights are not options with material rights because the$50.0 million upfront payment to us was not negotiated to provide incremental discount for the future opt in payments at theend of Phase 2a and Phase 2b. The option to “opt in” provides Janssen with a license for IP that has been improved from thelicense initially granted for a term in the case of the opt in after completion Phase 2a and then a perpetual license in the caseof opt in after completion of Phase 2b. Therefore, the First Opt-in Election and Second Opt-in Election options are notconsidered to be material rights. The option fees will be recognized as revenue when, and if, Janssen exercises its optionsbecause we have no further performance obligations at that point.For revenue recognition purposes, we determined that the duration of the contract begins on the effective date of July13, 2017 and ends upon completion of Phase 2a activities. The contract duration is defined as the period in which parties tothe contract have present enforceable rights and obligations. We analyzed the impact of Janssen terminating the agreementprior to the completion of Phase 2a and determined that there were significant economic penalties to91 Table of ContentsJanssen for doing so. We believe that if Janssen terminates the agreement upon completion of Phase 2a, the forfeiture of theremaining license rights and payment of 50% of the remaining Phase 2 costs is not a significant economic penalty whencompared to paying $125 million as an opt in license fee to continue the use of the License. Thus, the duration of thecontract is limited to the end of Phase 2a.We determined that the transaction price of the Janssen License and Collaboration Agreement was $53.9 million as ofDecember 31, 2017, a decrease of $0.4 million from the transaction price of $54.3 million that was determined at September30, 2017. In order to determine the transaction price, we evaluated all the payments to be received during the duration of thecontract. We determined that the $50.0 million upfront payment, the $25.0 million payment payable upon filing of the Phase2 IND, which is fully constrained as of December 31, 2017, and $3.9 million of estimated variable consideration for cost-sharing payments from Janssen for agreed upon services related to Phase 2 activities constituted consideration to be includedin the transaction price, which is to be allocated to the combined performance obligation. The decrease in the transactionprice from September 30, 2017 was due to a decrease in variable consideration related to compound supply services. We willre-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes incircumstances occur.As part of the evaluation for determining that the $25.0 million payment upon filing of Phase 2 IND is fully constrainedas of December 31, 2017, we considered several factors, including the stage of development of PTG-200 and thatachievement of the milestone is outside of our control, and concluded that the filing of the Phase 2 IND is not probable atthis time. If and when the filing of the Phase 2 IND becomes probable, the $25.0 million payment will be constrained bycontra revenue amounts for payments that we expect to make for 20% of the cost of Phase 2 activities to be performed byJanssen. The additional potential development, regulatory and sales milestone payments of up to an aggregate of $590.0million after the completion of Phase 2a activities that we are eligible to receive are outside the contract term and as suchhave been excluded from the transaction price. Any consideration related to sales-based milestones (including royalties) willbe recognized when the related sales occur as they were determined to relate predominantly to the license granted to Janssenand therefore have also been excluded from the transaction price. At the end of each reporting period, we will update ourassessment of whether an estimate of variable consideration is constrained and update the estimated transaction priceaccordingly.Variable consideration for cost-sharing payments related to agreed upon services for Phase 2 activities that we performwithin the duration of the contract are included in the transaction price at an amount equal to 80% of the estimated budgetedcosts for these activities, including primarily internal full-time equivalent effort and third party contract costs. We areresponsible for 20% of the development costs for the Phase 2 clinical trial. Accordingly, a significant portion of this work isexpected to be performed by Janssen. Because the Phase 2 clinical trial activity is related to the license, it is not capable ofbeing distinct. This is because both we and Janssen cannot benefit from these activities absent the Phase 1 activities. As thePhase 2 activities for which we will share 20% of the cost activities are not capable of being distinct and are not separatelyidentifiable within the context of the contract, they are not a distinct service that Janssen transfers us. Therefore, theconsideration payable to Janssen is accounted for as a reduction in the transaction price. We and Janssen make quarterly cost-sharing payments to one another in amounts necessary to ensure that each party bears its contractual share of the overallshared costs incurred. We account for cost-sharing payments from Janssen as increases in license and collaboration revenuein our consolidated statements of operations, while cost-sharing payments to Janssen are accounted for as reductions inlicense and collaboration revenue, or contra-revenue. Costs we incur related to agreed upon services for Phase 2 activitiesunder the Janssen License and Collaboration Agreement are recorded as research and development expenses in ourconsolidated statements of operations.In summary, the license, the development activities for Phase 1 activities and the agreed upon services for Phase 2activities are combined as one performance obligation that will be performed over the duration of the contract, which is fromthe effective date of the Janssen License and Collaboration Agreement through to the completion of Phase 2a activities.Since we have determined that the combined performance obligation is satisfied over time, ASC 606 requires us to select asingle revenue recognition method for the performance obligation that faithfully depicts our performance in transferringcontrol of the services. The guidance allows entities to choose between two methods to measure its progress toward completesatisfaction of a performance obligation:92 Table of Contents1.Output methods - recognize revenue on the basis of direct measurements of the value to the customer of the goodsor services transferred to date relative to the remaining goods or services promised under the contract (e.g. surveysof performance completed to date, appraisals of results achieved, milestones reached, time elapsed, and units ofproduced or units delivered); and2.Input methods - recognize revenue on the basis of the entity’s efforts or inputs to the satisfaction of a performanceobligation (e.g., resources consumed, labor hours expended, costs incurred, or time elapsed) relative to the totalexpected inputs to the satisfaction of that performance obligation.We concluded that we will utilize a cost-based input method to measure proportional performance and to calculate thecorresponding amount of revenue to recognize. We believe this is the best measure of progress because other measures do notreflect how we transfer our performance obligation to Janssen. In applying the cost-based input methods of revenuerecognition, we use actual costs incurred relative to budgeted costs to fulfill the combined performance obligation. Thesecosts consist primarily of internal full-time equivalent effort and third-party contract costs. Revenue will be recognized basedon actual costs incurred as a percentage of total budgeted costs as we complete our performance obligations, which webelieve will be fulfilled within the next 12 months. A cost-based input method of revenue recognition requires managementto make estimates of costs to complete our performance obligations. In making such estimates, significant judgment isrequired to evaluate assumptions related to cost estimates. The cumulative effect of revisions to estimated costs to completeour performance obligations will be recorded in the period in which changes are identified and amounts can be reasonablyestimated. A significant change in these assumptions and estimates could have a material impact on the timing and amountof revenue recognized in future periods.Research and Development ExpensesResearch and development expenses represent costs incurred to conduct research, such as the discovery anddevelopment of our product candidates. We recognize all research and development costs as they are incurred unless there isan alternative future use in other research and development projects or otherwise. Non-refundable advance payments forgoods and services that will be used in future research and development activities are expensed when the activity has beenperformed or when the goods have been received rather than when payment has been made. In instances where we enter intoagreements with third parties to provide research and development services to us, costs are expensed as services areperformed. Amounts due under such arrangements may be either fixed fee or fee for service and may include upfrontpayments, monthly payments, and payments upon the completion of milestones or the receipt of deliverables.Research and development expenses consist primarily of the following:·expenses incurred under agreements with clinical study sites that conduct research and developmentactivities on our behalf;·employee-related expenses, which include salaries, benefits and stock-based compensation;·laboratory vendor expenses related to the preparation and conduct of pre-clinical, non-clinical, and clinicalstudies;·costs related to production of clinical supplies and non-clinical materials, including fees paid to contractmanufacturers;·license fees and milestone payments under license and collaboration agreements; and·facilities and other allocated expenses, which include expenses for rent and maintenance of facilities,depreciation and amortization expense and other supplies.93 Table of Contents We recognize the funds from grants under government programs as a reduction of research and development expenseswhen the related research costs are incurred. In addition, we recognize the funds related to our Australian research anddevelopment tax incentive that are not subject to refund provisions as a reduction of research and development expenses.The amounts are determined on a cost reimbursement basis and, as the incentive is related to our research and developmentexpenditures and is non-refundable regardless of whether any Australian tax is owed, the amounts have been recorded as areduction of research and development expenses. The Australian research and development tax incentive is recognized whenthere is reasonable assurance that the incentive will be received, the relevant expenditure has been incurred and the amountof the consideration can be reliably measured.We allocate direct costs and indirect costs incurred to product candidates when they enter clinical development. Forproduct candidates in clinical development, direct costs consist primarily of clinical, pre-clinical, and drug discovery costs,costs of supplying drug substance and drug product for use in clinical and pre-clinical studies, including clinicalmanufacturing costs, contract research organization fees, and other contracted services pertaining to specific clinical and pre-clinical studies. Indirect costs allocated to our product candidates on a program specific basis include research anddevelopment employee salaries, benefits, and stock-based compensation, and indirect overhead and other administrativesupport costs. Program-specific costs are unallocated when the clinical expenses are incurred for our early stage research anddrug discovery projects, our internal resources, employees and infrastructure are not tied to any one research or drugdiscovery project and are typically deployed across multiple projects. As such, we do not provide financial informationregarding the costs incurred for early stage pre-clinical and drug discovery programs on a program-specific basis prior to theclinical development stage. We initiated a Phase 1 clinical study of PTG-300 during the second quarter of 2017. We havepresented separately in the table below costs associated with the PTG-300 program beginning in June 2017. We initiated aPhase 1 clinical study of PTG-200 during the fourth quarter of 2017. We have presented separately in the table below costsassociated with the PTG-200 program beginning in December 2017. Our development and compound supply expensesincurred under the Janssen License and Collaboration Agreement prior to December 2017 are included in pre-clinical anddrug discovery research expense.The following table summarizes our research and development expenses incurred during the respective periods: Year Ended December 31, 2017 2016 2015 (In thousands)Clinical and development expense — PTG-100 $25,825 $17,738 $1,563Clinical and development expense — PTG-200 2,079 — —Clinical and development expense — PTG-300 4,246 — —Pre-clinical and drug discovery research expense 15,292 11,849 11,159Milestone payment obligation to former collaboration partner 250 250 —Less: Reimbursement of expenses under grants and incentives (1,511) (4,132) (891)Total research and development expenses $46,181 $25,705 $11,831 We expect our research and development expenses will increase as we progress our product candidates, includingdevelopment activities under the Janssen License and Collaboration Agreement, advance our discovery research projectsinto the pre-clinical stage and continue our early stage research. The process of conducting research, identifying potentialproduct candidates and conducting pre-clinical and clinical trials necessary to obtain regulatory approval is costly and timeconsuming. We may never succeed in achieving marketing approval for our product candidates. The probability of success ofour product candidates may be affected by numerous factors, including pre-clinical data, clinical data, competition,manufacturing capability and commercial viability. As a result, we are unable to determine the duration and completion costsof our research and development projects or when and to what extent we will generate revenue from the commercializationand sale of any of our product candidates. Our research and development programs may be subject to change from time totime as we evaluate our priorities and available resources.General and Administrative ExpensesGeneral and administrative expenses consist of personnel costs, allocated facilities costs and other expenses for outsideprofessional services, including legal, human resources, audit and accounting services. Personnel costs consist of94 Table of Contentssalaries, benefits and stock-based compensation. Allocated expenses consist of expenses for rent and maintenance offacilities, information technology, depreciation and amortization expense and other supplies. We expect to incur additionalexpenses to support the growth of our operations and as a result of operating as a public company, including expenses relatedto compliance with the rules and regulations of the SEC, and those of the national securities exchange on which oursecurities are traded, additional insurance expenses, investor relations activities and other administrative and professionalservices.Interest IncomeInterest income consists of interest earned on our cash, cash equivalents, and available-for-sale securities.Change in Fair Value of Redeemable Convertible Preferred Stock Tranche and Warrant LiabilitiesChange in fair value of redeemable convertible preferred stock tranche and warrant liabilities consists of theremeasurement of the fair value of financial liabilities related to our obligation to sell additional redeemable convertiblepreferred stock shares in subsequent closings contingent upon the achievement of certain development milestones orapproval of investors and warrants for the purchase of redeemable convertible preferred stock.In connection with our Series C redeemable convertible preferred stock financing, we were obligated to sell additionalshares of Series C redeemable convertible preferred stock in a subsequent closing contingent upon the achievement of certaindevelopment milestones or upon the approval of the investors. We recorded this redeemable convertible preferred stocktranche liability incurred as a derivative financial instrument liability at fair value on the date of issuance, and we remeasuredthe liability on each subsequent balance sheet date. In March 2016, upon closing of the second tranche of the Series Credeemable convertible preferred stock, the fair value of the tranche liability was remeasured and the liability was reclassifiedto redeemable convertible preferred stock.In addition, in connection with the issuance of our Series B redeemable convertible preferred stock financing, we issuedfreestanding warrants to purchase shares of Series B redeemable convertible preferred stock. We accounted for these warrantsas a liability in our condensed consolidated financial statements because the underlying instrument into which the warrantswere exercisable contained redemption provisions that were outside our control. Upon the exercise of warrants in April 2016,the fair value of the redeemable convertible preferred stock warrant liability was remeasured and the liability was reclassifiedto redeemable convertible preferred stock. The remaining warrants expired unexercised in May 2016 and, accordingly, are nolonger subject to remeasurement.Results of OperationsComparison of the year ended December 31, 2017 and 2016 Year Ended December 31, Dollar % 2017 2016 Change Change (Dollars in thousands) License and collaboration revenue - related party $20,063 $ — $20,063 100Operating expenses: Research and development 46,181 25,705 $20,476 80General and administrative 11,779 6,961 4,818 69Total operating expenses 57,960 32,666 25,294 77Loss from operations (37,897) (32,666) (5,231) 16Interest income 940 242 698 288Change in fair value of redeemable convertible preferred stock trancheand warrant liabilities — (4,719) 4,719 *Other expense — (34) 34 *Net loss $(36,957) $(37,177) $220 195 (1)(2)Table of ContentsIncludes $2.0 million and $1.1 million of non-cash stock-based compensation expense for the year ended December 31,2017 and 2016, respectively.Includes $2.2 million and $1.0 million of non-cash stock-based compensation expense for the year ended December 31,2017 and 2016, respectively.*Percentage not meaningfulLicense and Collaboration Revenue For the year ended December 31, 2017, we recognized $20.1 million as license and collaboration revenue under theJanssen License and Collaboration Agreement. This amount included $19.0 million of the transaction price for the JanssenLicense and Collaboration Agreement recognized based on proportional performance as measured by actual costs incurred asa percentage of budgeted costs, and $1.1 million for other services related to Phase 2 activities performed by us on behalf ofJanssen that are not included in the performance obligations identified under the Janssen License and CollaborationAgreement. We did not recognize any license and collaboration revenue during the year ended December 31, 2016. Deferred revenue related to the Janssen License and Collaboration Agreement was $31.8 million as of December 31,2017 and was comprised of the $50.0 million upfront payment and $0.7 million of cost sharing payments from Janssen foragreed upon services for Phase 2 activities, less $19.0 million of license and collaboration revenue recognized under thecontract. We recorded a $1.8 million receivable from collaboration partner as of December 31, 2017 for cost sharing amountspayable from Janssen. Research and Development Expenses Research and development expenses increased $20.5 million, or 80%, from $25.7 million for the year ended December31, 2016, to $46.2 million for the year ended December 31, 2017. The increase was primarily due to an increase of $8.1million in PTG-100 clinical trial and development expenses, $2.1 million for PTG-200 Phase 1 clinical trial anddevelopment expenses, $4.2 million for PTG-300 Phase 1 clinical trial and development expenses, an increase of $3.5million in pre-clinical and discovery research expense, including pre-clinical development activities for PTG-200, PTG-300and our other product candidates, and a decrease of $2.6 million in expense reimbursement under grants and incentives.Research and development expenses for the year ended December 31, 2017 include an increase in personnel costs due toincreased research and development headcount from 27 employees at December 31, 2016 to 44 employees at December 31,2017. General and Administrative Expenses General and administrative expenses increased $4.8 million, or 69%, from $7.0 million for the year ended December31, 2016, to $11.8 million for the year ended December 31, 2017. The increase was primarily due to an increase of $2.7million in personnel costs to support the growth of our operations and increases of $1.1 million in professional service feesand $1.0 million in consulting and contracted labor expenses due to the growth of our operations and operating as a publiccompany. Interest Income Interest income increased $0.7 million, or 288%, from $0.2 million for the year ended December 31, 2016 to $0.9million for the year ended December 31, 2017. The increase was primarily due to the investment of funds from our IPO inAugust 2016, the $50.0 million upfront payment from Janssen during the third quarter of 2017, and funds from our follow-onpublic offering of common stock during the fourth quarter of 2017. Change in Fair Value of Redeemable Convertible Preferred Stock Tranche and Warrant Liabilities The change in estimated fair value associated with redeemable convertible preferred stock tranche and warrantliabilities was a charge of $4.7 million for the year ended December 31, 2016 due to the settlement of Series C96 (1) (2) Table of Contentsredeemable convertible preferred stock tranche liability in March 2016 and the fair value remeasurement of the outstandingwarrant liability. There were no such items for the year ended December 31, 2017. Comparison of the years ended December 31, 2016 and 2015 Year Ended December 31, Dollar % 2016 2015 Change Change (Dollars in thousands) Operating expenses: Research and development $25,705 $11,831 $13,874 117General and administrative 6,961 2,963 3,998 135Total operating expenses 32,666 14,794 17,872 121Loss from operations (32,666) (14,794) (17,872) 121Interest income 242 19 223 *Change in fair value of redeemable convertible preferred stock tranche andwarrant liabilities (4,719) (83) (4,636) *Other expense (34) — (34) 100Net loss $(37,177) $(14,858) $(22,319) 150Includes $1.1 million and $39,000 of non-cash stock-based compensation expense for the year ended December 31, 2016and 2015, respectively.Includes $1.0 million and $60,000 of non-cash stock-based compensation expense for the year ended December 31, 2016and 2015, respectively.*Percentage not meaningfulResearch and Development ExpensesResearch and development expenses increased $13.9 million, or 117%, from $11.8 million for the year endedDecember 31, 2015 to $25.7 million for the year ended December 31, 2016. The increase was primarily due to an increase of$6.5 million related to contract manufacturing activities for PTG‑100 clinical trials and other product candidate studies, anincrease of $2.8 million in costs for third party consultants, an increase of $2.7 million in pre-clinical activities for ourproduct candidates, an increase of $2.6 million in salaries and employee-related expense due to an increase in headcount, anincrease of $1.9 million in PTG‑100 Phase 1 clinical trials and other related studies, an increase of $0.3 million due toachieving certain development milestones in a prior collaboration agreement related to the initiation of preclinicaldevelopment studies on PTG‑300 and an increase of $0.3 million in facility expenses. The increases were partially offset byan increase of $3.3 million in government programs recognized as a reduction of research and development expenses,primarily due to the increase in our Australian research and development tax incentive including the recognition of amountsrelated to overseas finding that are no longer deemed to be at risk of clawback and funds earned under the Small BusinessResearch grant awards.General and Administrative ExpensesGeneral and administrative expenses increased $4.0 million, or 135%, from $3.0 million for the year endedDecember 31, 2015, to $7.0 million for the year ended December 31, 2016. The increase was primarily due to an increase of$1.9 million in professional service fees, an increase of $1.8 million increase in salaries and employee-related expense due toan increase in headcount to support the growth of our operations and an increase of $0.3 million in facility and otheradministrative expenses.Change in Fair Value of Redeemable Convertible Preferred Stock Tranche and Warrant LiabilitiesChange in fair value of redeemable convertible preferred stock tranche liability and warrant liabilities increased from acharge of $0.1 million for the year ended December 31, 2015 to a charge of $4.7 million for the year ended97 (1)(2)(1) (2) Table of ContentsDecember 31, 2016. The change was due to the fair value remeasurement of the outstanding mark to market liabilities as thefair value increased in 2016.Liquidity and Capital ResourcesLiquidity and Capital ExpendituresAs of December 31, 2017, we had $155.5 million of cash, cash equivalents and available-for-sale securities and anaccumulated deficit of $101.6 million. Our operations have been financed by net proceeds from the sale of shares of ourcapital stock and revenue from the Janssen License and Collaboration Agreement. During the third quarter of 2017 webecame eligible for and received a non-refundable, upfront cash payment of $50.0 million from Janssen. In September 2017, we filed a registration statement on Form S-3 with the Securities and Exchange Commission (FileNo. 333-220314), effective as of October 5, 2017, which permits the offering, issuance, and sale by us of up to a maximumaggregate offering price of $200.0 million of our common stock. Up to a maximum of $50.0 million of the maximumaggregate offering price of $200.0 million may be issued and sold pursuant to an at-the-market financing facility under asales agreement with Cantor Fitzgerald & Co. (the “Sales Agreement”).As of the filing of this Annual Report, we have not sold any shares of our common stock pursuant to the SalesAgreement. In October 2017, we completed an underwritten public offering of 3,530,000 shares of our common stock at apublic offering price of $17.00 per share. In November 2017, we issued an additional 529,500 shares of our common stock ata price of $17.00 per share following the underwriters’ exercise of their option to purchase additional shares. Net proceeds,after deducting underwriting commissions and offering costs, were $64.5 million. As of the filing of this Annual Report, up toa maximum aggregate offering price of $131.0 million of our common stock may be offered, issued and sold by us under ourregistration statement on Form S-3.Our primary uses of cash are to fund operating expenses, primarily research and development expenditures. Cash usedto fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in ouroutstanding accounts payable and accrued expenses. We believe, based on our current operating plan and expected expenditures, that our existing cash, cash equivalentsand available-for-sale securities will be sufficient to meet our anticipated operating and capital expenditure requirements forat least the next 12 months from the date of this filing. We have based this estimate on assumptions that may prove to bewrong, and we could utilize our available capital resources sooner than we currently expect. If our planned pre-clinical andclinical trials are successful, or our other product candidates enter clinical trials or advance beyond the discovery stage, wewill need to raise additional capital in order to further advance our product candidates towards potential regulatory approval.We will continue to require additional financing to advance our current product candidates through clinical development, todevelop, acquire or in-license other potential product candidates and to fund operations for the foreseeable future. We willcontinue to seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, orthrough other sources of financing, but such financing may not be available at terms acceptable to us, if at all. We anticipatethat we will need to raise substantial additional capital, the requirements of which will depend on many factors, including: ·the progress, timing, scope, results and costs of our pre-clinical studies and clinical trials for our product candidates,including the ability to enroll patients in a timely manner for our clinical trials;·the costs of and ability to obtain clinical and commercial supplies and any other product candidates we mayidentify and develop;·our ability to successfully commercialize the product candidates we may identify and develop;·the selling and marketing costs associated with our lead product candidates and any other product candidates wemay identify and develop, including the cost and timing of expanding our sales and marketing capabilities;·the achievement of development, regulatory and sales milestones resulting in payments to us from Janssen underthe Janssen License and Collaboration Agreement, and the timing of receipt of such payments, if any;·the timing, receipt and amount of royalties under the Janssen License and Collaboration Agreement on worldwidenet sales of PTG-200, upon regulatory approval or clearance, if any;98 Table of Contents·the amount and timing of sales and other revenues from our lead product candidates and any other productcandidates we may identify and develop, including the sales price and the availability of adequate third-partyreimbursement;·the cash requirements of any future acquisitions or discovery of product candidates;·the time and cost necessary to respond to technological and market developments;·the extent to which we may acquire or in-license other product candidates and technologies;·costs necessary to attract, hire and retain qualified personnel; and·the costs of maintaining, expanding and protecting our intellectual property portfolio. Adequate additional funding may not be available to us on acceptable terms, or at all. Any failure to raise capital asand when needed could have a negative impact on our financial condition and on our ability to pursue our business plansand strategies. Further, our operating plans may change, and we may need additional funds to meet operational needs andcapital requirements for clinical trials and other research and development activities. If we do raise additional capital throughpublic or private equity offerings or convertible debt securities, the ownership interest of our existing stockholders will bediluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our abilityto take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. We currentlyhave no credit facility and, with the exception of payments we may receive under the Janssen License and CollaborationAgreement, we do not currently have any commitments for future external financing. Because of the numerous risks anduncertainties associated with the development and commercialization of our product candidates, we are unable to estimatethe amounts of increased capital outlays and operating expenditures associated with our current and anticipated productdevelopment programs. The following table summarizes our cash flows for the periods indicated: Year Ended December 31, 2017 2016 2015 (In thousands)Cash provided by (used in) operating activities $ 3,872 $(29,972) $(14,385)Cash provided by (used in) investing activities 15,823 (59,328) (8,264)Cash provided by financing activities 65,554 106,307 17,419 Cash Flows from Operating ActivitiesCash provided by operating activities for the year ended December 31, 2017 was $3.9 million, consisting of a netchange of $35.6 million in net operating assets and liabilities and non-cash charges of $5.3 million, partially offset by ournet loss of $37.0 million. The change in net operating assets and liabilities was due primarily to an increase of $31.8 millionin deferred revenue related to the Janssen License and Collaboration Agreement, an increase of $4.8 million in accountspayable and accrued expenses related primarily to an increase in research and development activities and other general andadministrative professional services and a decrease of $1.1 million in the Australian research and development tax incentivereceivable, partially offset by an increase of $1.8 million in receivable from collaboration partner and an increase of $0.3million in prepaid expenses and other assets. The non-cash charges were primarily comprised of $4.2 million of stock-basedcompensation, $0.7 million of net amortization of premium on available-for-sale securities and $0.4 million of depreciationand amortization.Cash used in operating activities for the year ended December 31, 2016 was $30.0 million, consisting of a net loss of$37.2 million and a net change of $0.1 million in our net operating assets and liabilities, which were offset by non-cashcharges of $7.3 million. The non-cash charges were primarily comprised of $4.2 million for the change in fair valueassociated with redeemable convertible preferred stock tranche liability, $2.1 million for stock-based compensation, $0.5million for the change in fair value of convertible preferred stock warrant liability, and $0.3 million for depreciation andamortization expense. The change in our net operating assets and liabilities was due primarily to an increase of $1.8 millionin prepaid and other current assets related to advance payments of costs for research activities during the current period andan increase of $1.6 million in the receivable related to the Australian research and development tax99 Table of Contentsincentives, offset by a $3.3 million increase in our accounts payable and accrued expenses and other payables related to anincrease in research and development activities.Cash used in operating activities for the year ended December 31, 2015 was $14.4 million, consisting of a net loss of$14.9 million, which was partially offset by non-cash charges of $0.4 million and a net change of $0.1 million in our netoperation assets and liabilities. The non-cash charges were primarily comprised of $0.6 million for the change in fair value ofredeemable convertible preferred stock tranche liability, $0.2 million for depreciation and amortization expense, $0.1million for stock-based compensation, offset by gain of $0.5 million for the change in fair value of convertible preferredstock warrant liability. The change in our net operating assets and liabilities was due primarily to an increase of $1.8 millionin our accounts payable and accrued liabilities related to an increase in research and development activities, offset by $1.5million increase in cash used for prepaid and other current assets related to payments associated with clinical trials andstudies and a $0.2 million increase in a receivable related to the Australia research and development tax incentive.Cash Flows from Investing ActivitiesCash provided by investing activities for the year ended December 31, 2017 was $15.8 million, consisting of proceedsfrom maturities of available-for-sale securities of $56.0 million, partially offset by purchases of available-for-sale securities of$39.5 million and purchases of property and equipment of $0.7 million. Purchases of property and equipment were primarilyrelated to purchases of scientific equipment.Cash used in investing activities for the year ended December 31, 2016 was $59.3 million, consisting of purchases ofavailable-for-sale securities of $73.2 million and purchases of property and equipment of $0.4 million, partially offset byproceeds from maturities of our available-for-sale securities of $14.2 million. Purchases of property and equipment wereprimarily related to the expansion of our laboratory and related equipment.Cash used in investing activities for the year ended December 31, 2015 was $8.3 million, consisting of the purchase ofavailable-for-sale securities of $7.9 million and our purchase of property and equipment of $0.4 million. Purchases ofproperty and equipment were primarily related to the expansion of our laboratory and related equipment.Cash Flows from Financing ActivitiesCash provided by financing activities for the year ended December 31, 2017 was $65.5 million, consisting of netproceeds of $64.5 million from our public offering of common stock and proceeds of $1.0 million from the issuance ofcommon stock upon exercise of stock options and purchases of common stock under our employee stock purchase plan.Cash provided by financing activities for the year ended December 31, 2016 was $106.3 million, consisting of netproceeds of $83.6 million from our initial public offering, net proceeds of $22.5 million from the issuance of redeemableconvertible preferred stock and proceeds of $0.2 million from the issuance of common stock upon exercise of stock options.Cash provided by financing activities for the year ended December 31, 2015 was primarily related to proceeds from theissuance of redeemable convertible preferred stock of $17.4 million.Contractual Obligations and Other CommitmentsIn March 2017, we entered into a lease agreement for office and laboratory space in Newark, California. We relocatedour operations to the new facility in May 2017. We provided the landlord with a $450,000 letter of credit collateralized byrestricted cash as security deposit for the lease which expires in May 2024. Under the terms of the lease, we are responsiblefor certain taxes, insurance and maintenance expenses.100 Table of ContentsThe following table summarizes our future minimum contractual obligations as of December 31, 2017: Payments Due by Period Less Than More Than Contractual Obligations: 1 Year 1 to 3 Years 3 to 5 Years 5 Years Total (In thousands)Operating lease obligations $1,667 $3,941 $4,181 $3,106 $12,895Total contractual obligations $1,667 $3,941 $4,181 $3,106 $12,895 Potential Obligations Not Included in the Table AboveWe enter into agreements in the normal course of business with contract research organizations for clinical trials andwith vendors for pre-clinical studies and other services and products for operating purposes, which are cancelable at any timeby us, generally upon 30 to 60 days prior written notice. Future potential payments under these agreements are not includedin the table above. Under the Janssen License and Collaboration Agreement, we share with Janssen certain development, regulatory andcompound supply costs. The actual amounts that we pay Janssen or that Janssen pays us will depend on numerous factors,some of which are outside of our control and some of which are contingent upon the success of certain development andregulatory activities. Future development and commercialization payments to Janssen are not included in the table above asthe timing and amounts of such payments are not determinable.In October 2013, the collaboration program under our Research Collaboration and License Agreement with ZealandPharma A/S (Zealand) was abandoned by Zealand. Pursuant to the terms of the agreement, we elected to assume theresponsibility for the development and commercialization of the product candidate. Upon Zealand’s abandonment, Zealandassigned to us certain intellectual property arising from the collaboration and also granted us an exclusive license to certainbackground intellectual property rights of Zealand that relate to the products assumed by us. The nomination of PTG‑300 asa development candidate triggered a $250,000 payment from us to Zealand, which was recognized within research anddevelopment expense in our consolidated statement of operations for the year ended December 31, 2016. The initiation of aPhase 1 clinical trial for PTG-300 triggered a $250,000 payment from us to Zealand, which was recognized within researchand development expense in our consolidated statement of operations for the year ended December 31, 2017. We have theright, but not the obligation, to further develop and commercialize the product candidate and, if we successfully develop andcommercialize PTG‑300 without a partner, we will pay to Zealand up to an additional aggregate of $128.5 million for theachievement of certain development, regulatory and sales milestone events. In addition, we will pay to Zealand a low singledigit royalty on worldwide net sales of the product. Future development, regulatory and sales payments to Zealand are notincluded in the table above as the timing and amounts of such payments are not determinable.Off-Balance Sheet ArrangementsWe have not entered into any off-balance sheet arrangements, as defined under SEC rules, including the use ofstructured finance, special purpose entities or variable interest entities. Item 7A.Quantitative and Qualitative Disclosures about Market RiskWe are exposed to market risks in the ordinary course of our business. These risks primarily include interest ratesensitivities.We had $155.5 million and $87.7 million in cash, cash equivalents and available-for-sale securities at December 31,2017 and December 31, 2016, respectively. Cash and cash equivalents consist of cash, money market funds, commercialpaper and government bonds. Available-for-sale securities consist of corporate bonds, commercial paper and governmentbonds. Short-term available-for-sale securities have maturities of greater than three months but no longer than 365 days as ofthe balance sheet date. Long-term available-for-sale securities have maturities of 365 days or longer101 Table of Contentsas of the balance sheet date. Such interest earning instruments carry a degree of interest rate risk; however, historicalfluctuations in interest income have not been material. We had no outstanding debt as of December 31, 2017.Approximately $1.2 million and $1.9 million of our cash balance was located in Australia at December 31, 2017 andDecember 31, 2016, respectively. Our expenses, except those related to our Australian operations, are generally denominatedin U.S. dollars. For our operations in Australia, the majority of the expenses are denominated in Australian dollars. To date,we have not had a formal hedging program with respect to foreign currency, but we may do so in the future if our exposure toforeign currency becomes more significant. A 10% increase or decrease in current exchange rates would not have a materialeffect on our results of operations. 102 Table of Contents Item 8.Financial Statements and Supplementary DataPROTAGONIST THERAPEUTICS, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTSAudited Consolidated Financial Statements PageReport of Independent Registered Public Accounting Firm 104Consolidated Balance Sheets 105Consolidated Statements of Operations 106Consolidated Statements of Comprehensive Loss 107Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) 108Consolidated Statements of Cash Flows 109Notes to the Consolidated Financial Statements 110Supplementary Financial Data (unaudited) 136 103 Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders ofProtagonist Therapeutics, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Protagonist Therapeutics, Inc. and its subsidiary asof December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive loss, redeemableconvertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period endedDecember 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). In ouropinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Companyas of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in theperiod ended December 31, 2017 in conformity with accounting principles generally accepted in the United States ofAmerica. Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is toexpress an opinion on the Company’s consolidated financial statements based on our audits. We are a public accountingfirm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to beindependent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules andregulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits of these consolidated financial statements in accordance with the standards of thePCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is notrequired to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of ouraudits we are required to obtain an understanding of internal control over financial reporting but not for the purpose ofexpressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, weexpress no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the consolidated financialstatements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures includedexamining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Ouraudits also included evaluating the accounting principles used and significant estimates made by management, as well asevaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonablebasis for our opinion./s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaMarch 7, 2018 We have served as the Company’s auditor since 2015. 104 Table of ContentsPROTAGONIST THERAPEUTICS, INC.Consolidated Balance Sheets(In thousands, except share data) December 31, 2017 2016Assets Current assets: Cash and cash equivalents $106,029 $21,084Restricted cash - current 10 10Available-for-sale securities - current 37,972 56,515Receivable from collaboration partner - related party 1,816 —Research and development tax incentive receivable 1,347 2,241Prepaid expenses and other current assets 3,773 3,394Total current assets 150,947 83,244Property and equipment, net 879 562Restricted cash - noncurrent 450 —Available-for-sale securities - noncurrent 11,458 10,150Other assets — 34Total assets $163,734 $93,990Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $1,257 $1,163Accrued expenses and other payables 9,546 5,272Deferred revenue - related party 31,752 —Total current liabilities 42,555 6,435Deferred rent - noncurrent 547 —Total liabilities 43,102 6,435Commitments and contingencies (Note 8) Stockholders’ equity: Preferred stock, $0.00001 par value, 10,000,000 shares authorized; no shares issued and outstanding — —Common stock, $0.00001 par value, 90,000,000 shares authorized; 21,088,306 and 16,722,280 sharesissued and outstanding as of December 31, 2017 and 2016, respectively — —Additional paid-in capital 222,188 152,393Accumulated other comprehensive loss (6) (245)Accumulated deficit (101,550) (64,593)Total stockholders’ equity 120,632 87,555Total liabilities and stockholders’ equity $163,734 $93,990 The accompanying notes are an integral part of these consolidated financial statements.105 Table of ContentsPROTAGONIST THERAPEUTICS, INC.Consolidated Statements of Operations(In thousands, except share and per share data) Year Ended December 31, 2017 2016 2015 License and collaboration revenue - related party $20,063 $ — $ —Operating expenses: Research and development 46,181 25,705 11,831General and administrative 11,779 6,961 2,963Total operating expenses 57,960 32,666 14,794Loss from operations (37,897) (32,666) (14,794)Interest income 940 242 19Change in fair value of redeemable convertible preferred stock tranche and warrantliabilities — (4,719) (83)Other expense — (34) —Net loss $(36,957) $(37,177) $(14,858)Net loss attributable to common stockholders $(36,957) $(37,735) $(14,933)Net loss per share attributable to common stockholders, basic and diluted $(2.09) $(5.80) $(59.32)Weighted-average shares used to compute net loss per share attributable to commonstockholders, basic and diluted 17,694,505 6,501,796 251,717 The accompanying notes are an integral part of these consolidated financial statements.106 Table of ContentsPROTAGONIST THERAPEUTICS, INC.Consolidated Statements of Comprehensive Loss(In thousands) Year Ended December 31, 2017 2016 2015Net loss $(36,957) $(37,177) $(14,858)Other comprehensive loss: Gain (loss) on translation of foreign operations 298 (76) 3Unrealized loss on available-for-sale securities (59) (67) (5)Comprehensive loss $(36,718) $(37,320) $(14,860) The accompanying notes are an integral part of these consolidated financial statements. 107 Table of ContentsPROTAGONIST THERAPEUTICS, INC.Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)(In thousands, except share and per share data) Accumulated Total Redeemable Additional Other Stockholders’ Convertible Preferred Common Paid-In Comprehensive Accumulated Equity Stock Stock Capital Gain (Loss) Deficit (Deficit) Shares Amount Shares Amount Balance at December 31, 2014 42,037,500 $20,576 228,557 $ — $37 $(100) $(12,558) $(12,621)Issuance of Series C redeemable convertiblepreferred stock, net of issuance costs of $138and reclassification of $1,017 to redeemableconvertible preferred stock tranche liability 35,147,617 16,345 — — — — — —Accretion of redeemable convertible preferredstock to redemption value — 75 — — (75) — — (75)Stock-based compensation expense — — — — 99 — — 99Issuance of common stock upon the exercise ofoptions — — 43,852 — 57 — — 57Other comprehensive loss — — — — — (2) — (2)Net loss — — — — — — (14,858) (14,858)Balance at December 31, 2015 77,185,117 36,996 272,409 — 118 (102) (27,416) (27,400)Issuance of Series C redeemable convertiblepreferred stock, net of issuance costs 45,189,794 22,488 — — — — — —Settlement of fair value of redeemableconvertible preferred stock tranche liability — 5,837 — — — — — —Exercise of redeemable convertible preferredstock warrant liability 1,999,998 1,025 — — — — — —Accretion of redemption of convertiblepreferred stock to redemption value — 558 — — (558) — — (558)Conversion of redeemable convertiblepreferred stock to common stock at closing ofinitial public offering (124,374,909) (66,904) 8,577,571 — 66,904 — — 66,904Issuance of common stock upon initial publicoffering, net of issuance costs — — 7,752,972 — 83,648 — — 83,648Stock-based compensation expense — — — — 2,130 — — 2,130Issuance of common stock upon the exercise ofoptions — — 119,328 — 151 — — 151Other comprehensive loss — — — — — (143) — (143)Net loss — — — — — — (37,177) (37,177)Balance at December 31, 2016 — — 16,722,280 — 152,393 (245) (64,593) 87,555Issuance of common stock upon publicoffering, net of issuance costs — — 4,059,500 — 64,547 — — 64,547Stock-based compensation expense — — — — 4,241 — — 4,241Issuance of common stock upon the exercise ofoptions and purchases under employee stockpurchase plan — — 306,526 — 1,007 — — 1,007Other comprehensive gain — — — — — 239 — 239Net loss — — — — — — (36,957) (36,957)Balance at December 31, 2017 — $ — 21,088,306 $ — $222,188 $(6) $(101,550) $120,632 The accompanying notes are an integral part of these consolidated financial statements. 108 Table of ContentsPROTAGONIST THERAPEUTICS, INC.Consolidated Statements of Cash Flows(In thousands) Year Ended December 31, 2017 2016 2015CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(36,957) $(37,177) $(14,858)Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Stock-based compensation 4,241 2,130 99Net amortization of premium on available-for-sale securities 687 117 (8)Depreciation and amortization 406 317 247(Gain) loss on disposal of property and equipment (62) 34 —Change in fair value associated with redeemable convertible preferred stock tranche liability — 4,194 626Change in fair value of redeemable convertible preferred stock warrant liability — 525 (543)Changes in operating assets and liabilities: Research and development tax incentive receivable 1,070 (1,588) (192)Receivable from collaboration partner - related party (1,816) — —Prepaid expenses and other assets (333) (1,804) (1,532)Accounts payable 91 (115) 898Accrued expenses and other payables 4,793 3,395 878Deferred revenue - related party 31,752 — —Net cash provided by (used in) operating activities 3,872 (29,972) (14,385)CASH FLOWS FROM INVESTING ACTIVITIES Purchase of available-for-sale securities (39,546) (73,169) (7,865)Proceeds from maturities of available-for-sale securities 56,035 14,188 —Purchases of property and equipment, net (666) (347) (399)Net cash provided by (used in) investing activities 15,823 (59,328) (8,264)CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock, net of issuance costs 64,547 83,648 —Proceeds from issuance of common stock upon exercise of stock options and purchases underemployee stock purchase plan 1,007 151 57Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs — 22,508 17,362Net cash provided by financing activities 65,554 106,307 17,419Effect of exchange rate changes on cash, cash equivalents and restricted cash 146 22 (39)Net increase (decrease) in cash, cash equivalents and restricted cash 85,395 17,029 (5,269)Cash, cash equivalents and restricted cash, beginning of year 21,094 4,065 9,334Cash, cash equivalents and restricted cash, end of year $106,489 $21,094 $4,065SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING INFORMATION: Acquisition of new equipment upon trade-in for existing equipment $185 $ — $ —Deferred offering costs in accounts payable and accrued liabilities $66 $ — $ —Conversion of redeemable convertible preferred stock to common stock at closing of initialpublic offering $ — $66,904 $—Settlement of fair value of redeemable convertible preferred stock liability $ — $5,837 $—Reclassification of preferred stock warrant liability to equity $ — $1,005 $—Accretion of redeemable convertible preferred stock $ — $558 $75Purchases of property and equipment in accounts payable $ — $21 $ —Tranche liability in connection with the Series C redeemable convertible preferred stockfinancing $ — $ — $1,017 The accompanying notes are an integral part of these consolidated financial statements. 109 Table of ContentsPROTAGONIST THERAPEUTICS, INC.Notes to Consolidated Financial StatementsNote 1. Organization and Description of BusinessProtagonist Therapeutics, Inc. (the “Company”) was incorporated in the state of Delaware on August 22, 2006 and isheadquartered in Newark, California. The Company is a clinical-stage biopharmaceutical company with a proprietarytechnology platform that enables the discovery and development of novel constrained peptide-based drug candidates thataddress significant unmet medical needs. Protagonist Pty Limited (“Protagonist Australia”) is a wholly-owned subsidiary ofthe Company and is located in Brisbane, Queensland, Australia. Protagonist Australia was incorporated in Australia inSeptember 2001. The Company became the parent of Protagonist Australia pursuant to a transaction in which all of theissued and outstanding capital stock of Protagonist Australia was exchanged for shares of the Company’s common stock andSeries A preferred stock. The Company manages its operations as a single operating segment.LiquidityThe Company has incurred net losses from operations since inception and has an accumulated deficit of $101.6 millionas of December 31, 2017. The Company’s ultimate success depends on the outcome of its research and developmentactivities. The Company expects to incur additional losses in the future and it anticipates the need to raise additional capitalto fully implement its business plan. Through December 31, 2017, the Company has financed its operations through privateplacements of redeemable convertible preferred stock, an initial public offering (“IPO”) of common stock, payments receivedunder a license and collaboration agreement, and a follow-on public offering of common stock.On August 10, 2016, the Company’s registration statement on Form S-1 (File Nos. 333-212476 and 333-213071)related to its IPO became effective. The IPO closed on August 16, 2016, at which time the Company issued 7,500,000 sharesof its common stock at a price of $12.00 per share. In addition, upon closing the IPO, all outstanding shares of theCompany’s redeemable convertible preferred stock converted into 8,577,571 shares of common stock. There were no sharesof redeemable convertible preferred stock outstanding at December 31, 2017 or 2016. In September 2016, the Companyissued an additional 252,972 shares of its common stock at a price of $12.00 per share following the underwriters’ exercise oftheir option to purchase additional shares. The Company received an aggregate of $83.6 million in cash, net of underwritingdiscounts and commissions, after deducting offering costs paid by the Company.In September 2017, the Company filed a registration statement on Form S-3 with the Securities and ExchangeCommission (“SEC”) (File No. 333-220314), effective as of October 5, 2017, which permits the offering, issuance, and saleby the Company of up to a maximum aggregate offering price of $200.0 million of its common stock. Up to a maximum of$50.0 million of the maximum aggregate offering price of $200.0 million may be issued and sold pursuant to an at-the-market financing facility under a sales agreement with Cantor Fitzgerald & Co. (the “Sales Agreement”).During 2017, the Company did not sell any shares of its common stock pursuant to the Sales Agreement. In October2017, the Company completed an underwritten public offering of 3,530,000 shares of common stock at a public offeringprice of $17.00 per share. In November 2017, the Company issued an additional 529,500 shares of its common stock at aprice of $17.00 per share following the underwriters’ exercise of their option to purchase additional shares. Net proceeds,after deducting underwriting commissions and offering costs paid by the Company, were $64.5 million.The Company will continue to seek funds through equity or debt financings, collaborative or other arrangements withcorporate sources, or through other sources of financing, but there is no assurance that such financing will be available atterms acceptable to the Company, if at all.Reverse Stock SplitIn July 2016, the Company’s board of directors approved an amendment to the Company’s amended and restatedcertificate of incorporation to effect a reverse split of the Company’s issued and outstanding common stock at a 1-for-14.5ratio, which was effected on August 1, 2016. The par value and authorized shares of common stock and convertible110 Table of Contentspreferred stock were not adjusted as a result of the reverse stock split. All issued and outstanding common stock, options topurchase common stock and per share amounts contained in the consolidated financial statements have been retroactivelyadjusted to reflect the reverse stock split for all periods presented.Note 2. Summary of Significant Accounting PoliciesBasis of Presentation and ConsolidationThe accompanying consolidated financial statements include the accounts of the Company and its wholly ownedsubsidiary, Protagonist Pty Limited and have been prepared in conformity with accounting principles generally accepted inthe United States of America (“GAAP”). All intercompany balances and transactions have been eliminated in consolidation.The financial statements of Protagonist Pty Limited use the Australian dollar as the functional currency since themajority of expense transactions occur in such currency. Gains and losses from foreign currency transactions were notmaterial for all periods presented. The re-measurement from Australian dollar to U.S. dollars is outlined below:a.Equity accounts, except for the change in retained earnings during the year, have been translated usinghistorical exchange rates.b.All other Australian dollar denominated assets and liabilities as of December 31, 2017 and 2016 have beentranslated using the year-end exchange rate.c.The consolidated statements of operations have been translated at the weighted average exchange rates ineffect during each year.Foreign currency translation gains and losses are reported as a component of stockholders’ equity in accumulated othercomprehensive loss on the consolidated balance sheets.Use of EstimatesThe preparation of the consolidated financial statements in conformity with GAAP requires management to makeestimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingentassets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues andexpenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related torevenue, recognition, accruals for research and development activities, fair value of redeemable convertible preferred stocktranche liability, fair value of redeemable convertible preferred stock warrant liability, fair value of common stock, stock-based compensation and income taxes. Management bases these estimates on historical and anticipated results, trends, andvarious other assumptions that the Company believes are reasonable under the circumstances, including assumptions as toforecasted amounts and future events. Actual results may differ significantly from those estimates.Concentrations of Credit RiskFinancial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cashequivalents and available-for-sale securities. Substantially all of the Company’s cash is held by three financial institutionsthat management believes are of high credit quality. Such deposits may, at times, exceed federally insured limits. Theprimary focus of the Company’s investment strategy is to preserve capital and to meet liquidity requirements. TheCompany’s cash equivalents and available-for-sale securities are managed by external managers within the guidelines of theCompany’s investment policy. The Company’s investment policy addresses the level of credit exposure by limitingconcentration in any one corporate issuer and establishing a minimum allowable credit rating. To manage its credit riskexposure, the Company maintains its portfolio of cash equivalents and available-for-sale securities in fixed income securitiesdenominated and payable in U.S. dollars. Permissible investments of fixed income securities include obligations of theUnited States government and its agencies, money market instruments including commercial paper111 Table of Contentsand negotiable certificates of deposit, and highly rated corporate debt obligations and money market funds. The Companyhas not experienced any material credit losses on its investments.Cash EquivalentsCash equivalents that are readily convertible to cash are stated at cost, which approximates fair value. The Companyconsiders all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.Restricted CashRestricted cash consists of cash balances primarily held as security in connection with the Company’s corporate creditcard and a letter of credit related to the Company’s facility lease entered into in March 2017.Cash as Reported in Consolidated Statements of Cash FlowsCash as reported in the consolidated statements of cash flows includes the aggregate amounts of cash and cashequivalents and the restricted cash as presented on the consolidated balance sheets.Cash as reported in the consolidated statements of cash flows consists of (in thousands): December 31, 2017 2016 2015Cash and cash equivalents $106,029 $21,084 $4,055Restricted cash - current 10 10 10Restricted cash - noncurrent 450 — —Cash balance in consolidated statements of cash flows $106,489 $21,094 $4,065Available-for-Sale Securities All marketable securities have been classified as “available-for-sale” and are carried at estimated fair value asdetermined based upon quoted market prices or pricing models for similar securities. Management determines the appropriateclassification of its marketable securities at the time of purchase and reevaluates such designation as of each balance sheetdate. Short-term marketable securities have maturities less than 365 days as of the balance sheet date. Long-term marketablesecurities have maturities greater than 365 days as of the balance sheet date. Unrealized gains and losses are excluded fromearnings and are reported as a component of comprehensive loss. Realized gains and losses and declines in fair value judgedto be other than temporary, if any, on available-for-sale securities are included in interest income. The cost of securities soldis based on the specific-identification method. Interest on marketable securities is included in interest income.Fair Value of Financial InstrumentsFair value accounting is applied to all financial assets and liabilities that are recognized or disclosed at fair value in theconsolidated financial statements on a recurring basis (at least annually). The carrying amount of the Company’s financialinstruments, including cash equivalents, receivable from collaboration partner, accounts payable and accrued expenses andother payables approximate fair value due to their short-term maturities. See Note 4. Fair Value Measurements regarding thefair value of the Company’s other financial assets and liabilities.Property and EquipmentProperty and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using thestraight-line method over the estimated useful lives of the assets, ranging from three to five years. Leasehold improvementsare amortized over the shorter of the lease term or the estimated useful lives of the assets. Maintenance and repairs arecharged to expense as incurred. When assets are retired or otherwise disposed of, the cost and112 Table of Contentsaccumulated depreciation are removed from the consolidated balance sheet and any resulting gain or loss is reflected inoperations in the period realized.Impairment of Long-Lived AssetsThe Company reviews long-lived assets, primarily comprised of property and equipment, for impairment wheneverevents or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability ismeasured by comparison of the carrying amount to the future net cash flows which the assets are expected to generate. If suchassets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carryingamount of the assets exceeds the projected discounted future net cash flows arising from the asset. There have been no suchimpairments of long-lived assets for any of the periods presented.Comprehensive LossComprehensive loss includes net loss as well as other changes in stockholders’ equity (deficit) that result fromtransactions and economic events other than those from stockholders. The Company’s foreign currency translation andunrealized gains and losses on available-for-sale securities represent the only components of other comprehensive loss thatare excluded from reported net loss and that are presented in the consolidated statements of comprehensive loss.Income TaxesThe Company uses the asset and liability method to account for income taxes in accordance with the authoritativeguidance for income taxes. Under this method, deferred tax assets and liabilities are determined based on future taxconsequences attributable to differences between the financial statement carrying amounts of existing assets and liabilitiesand their respective tax bases, and tax loss and credit carryforwards. Deferred tax assets and liabilities are measured usingenacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered orsettled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to the amountexpected to be realized.The Company recognizes the effect of income tax positions only if those positions are more likely than not of beingsustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likelihood of beingrealized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. TheCompany records interest and penalties related to unrecognized tax benefits in income tax expense. To date, there have beenno interest or penalties recorded in relation to unrecognized tax benefits.Revenue RecognitionEffective July 1, 2017, the Company adopted Accounting Standards Codification Topic 606, Revenue from Contractswith Customers (“ASC 606”) using the full retrospective transition method. The Company did not have any effectivecontracts within the scope of this guidance prior to July 1, 2017. Accordingly, the Company did not elect to use any of thepractical expedients permitted related to adoption, and the adoption of ASC 606 had no impact on the Company’s financialposition, results of operations or liquidity. This standard applies to all contracts with customers, except for contracts that arewithin the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. UnderASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amountthat reflects the consideration which the Company expects to receive in exchange for those goods or services. To determinerevenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performsthe following five steps: (i) identify the contract(s) with a customer; (ii) 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 Company satisfies a performance obligation. The Company only applies the five-stepmodel to contracts when it is probable that Company will collect the consideration it is entitled to in exchange for the goodsor services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC606, the Company assesses the goods or services promised within each contract and determines those that are performanceobligations and assesses113 Table of Contentswhether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transactionprice that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.The Company entered into a license and collaboration agreement that became effective upon the resolution ofregulatory requirements during the third quarter of 2017 which is within the scope of ASC 606, under which it has licensedcertain rights to its PTG-200 product candidate to a third party, and may enter into other such arrangements in the future. Theterms of the arrangement include payment to the Company of one or more of the following: non-refundable, up-front licensefees, development and regulatory and commercial milestone payments, and royalties on net sales of licensed products.Licenses of intellectual property: If the license to the Company’s intellectual property is determined to be distinct fromthe other performance obligations identified in the arrangement, the Company recognizes revenue from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefitfrom the license. For licenses that are bundled with other promises, the Company utilizes judgement to assess the nature ofthe combined performance obligation to determine whether the combined performance obligation is satisfied over time or ata point in time and, if over time, the appropriate method of measuring proportional performance for purposes of recognizingrevenue from non-refundable, up-front fees. The Company evaluates the measure of proportional performance each reportingperiod and, if necessary, adjusts the measure of performance and related revenue recognition.Milestone payments: At the inception of each arrangement that includes development, regulatory or commercialmilestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimatesthe amount to be included in the transaction price. ASC 606 suggests two alternatives to use when estimating the amount ofvariable consideration: the expected value method and the most likely amount method. Under the expected value method, anentity considers the sum of probability-weighted amounts in a range of possible consideration amounts. Under the mostlikely amount method, an entity considers the single most likely amount in a range of possible consideration amounts.Whichever method is used, it should be consistently applied throughout the life of the contract; however, it is not necessaryfor the Company to use the same approach for all contracts. The Company expects to use the most likely amount method fordevelopment and regulatory milestone payments. If it is probable that a significant revenue reversal would not occur, theassociated milestone value is included in the transaction price. Milestone payments that are not within the control of theCompany or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvalsare received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling pricebasis. The Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end ofeach subsequent reporting period, the Company re-evaluates the probability or achievement of each such milestone and anyrelated constraint, and if necessary, adjusts its estimates of the overall transaction price. Any such adjustments are recordedon a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment. To date, the Companyhas not recognized any milestone payments resulting from its collaboration arrangement.Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level ofsales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue atthe later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty hasbeen allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenueresulting from its collaboration arrangement.Up-front payments and fees are recorded as deferred revenue upon receipt or when due, and may require deferral ofrevenue recognition to a future period until the Company performs its obligations under these arrangements. Amountspayable to the Company are recorded as accounts receivable when the Company’s right to consideration is unconditional.The Company does not assess whether a contract has a significant financing component if the expectation at contractinception is such that the period between payment by the customer and the transfer of the promised goods or services to thecustomer will be one year or less.114 Table of ContentsResearch and Development CostsResearch and development costs are expensed as incurred, unless there is an alternate future use in other research anddevelopment projects. Research and development costs include salaries and benefits, stock-based compensation expense,laboratory supplies and facility-related overhead, outside contracted services including clinical trial costs, manufacturingand process development costs for both clinical and preclinical materials, research costs, development milestone paymentsunder license and collaboration agreements, and other consulting services.The Company accrues for estimated costs of research and development activities conducted by third-party serviceproviders, which include the conduct of pre-clinical studies and clinical trials, and contract manufacturing activities. TheCompany records the estimated costs of research and development activities based upon the estimated services provided butnot yet invoiced and includes these costs in accrued expenses and other payables in the consolidated balance sheets andwithin research and development expense in the consolidated statements of operations. These costs are a significantcomponent of the Company’s research and development expenses. The Company accrues for these costs based on factorssuch as estimates of the work completed and in accordance with agreements established with its third party service providers.The Company makes significant judgments and estimates in determining the accrued liabilities at each balance sheet date.As actual costs become known, the Company adjusts its accrued liabilities. The Company has not experienced any materialdifferences between accrued liabilities and actual costs incurred. However, the status and timing of actual services performed,number of patients enrolled, and the rate of patient enrollment may vary from the Company’s estimates, resulting inadjustments to expense in future periods. Changes in these estimates that result in material changes to the Company’saccruals could materially affect the Company’s results of operations.Research and Development Tax IncentiveThe Company is eligible under the AusIndustry research and development tax incentive program to obtain a cashamount from the Australian Taxation Office (“ATO”). The tax incentive is available to the Company on the basis of specificcriteria with which the Company must comply. Specifically, the Company must have annual turnover of less than AUD 20.0million and cannot be controlled by income tax exempt entities. The research and development tax incentive is recognizedas a reduction to research and development expense when the right to receive has been attained and funds are considered tobe collectible. The tax incentive is denominated in Australian dollars and, therefore, the related receivable is remeasured intoU.S. dollars as of each reporting date.Under certain conditions, research and development activities conducted outside Australia (“overseas finding”) alsoqualify for the research and development tax incentive. Funds received for overseas finding are at a risk of clawback untilsubstantiation that less than 50% of research and development expenditures for a project will be incurred overseas. Adeferred tax incentive is recorded upon the cash receipt of the overseas finding funds and a reduction of research anddevelopment expenses is not recognized until the Company can substantiate that more than 50% of the total projectexpenditure will occur in Australia.When there is reasonable assurance that the grant will be received with remote risk of clawback, the relevantexpenditure has been incurred, and the consideration can be reliably measured, the Company records the research anddevelopment incentive, including the overseas finding funds, as research and development tax incentive receivable and areduction of research and development expenses to reflect that the funds are owed to the Company for the period the eligiblecosts are incurred.SBIR GrantsThe Company has been awarded Small Business Innovation Research (“SBIR”) grants from the National Institute ofDiabetes and Digestive and Kidney Diseases (“NIDDK”) and the National Heart, Lungs and Blood Institute (“NHLBI”) of theNational Institutes of Health (“NIH”) in support of its research activities. The Company records the eligible costs incurredunder the SBIR grants as a reduction of research and development expenses.115 Table of ContentsRedeemable Convertible Preferred Stock Tranche LiabilityThe Company has determined that the Company’s obligation to issue additional shares of the Company’s redeemableconvertible preferred stock represents a freestanding financial instrument, which was accounted for as a liability. Thefreestanding redeemable convertible preferred stock tranche liability was initially recorded at fair value, with fair valuechanges recognized in the consolidated statements of operations. At the time of the exercise or expiration of the option, thefair value of the redeemable convertible preferred stock tranche liability is reclassified to redeemable convertible preferredstock with no further remeasurement required.Redeemable Convertible Preferred Stock Warrant LiabilityThe Company has accounted for its freestanding warrants to purchase shares of the Company’s redeemable convertiblepreferred stock as liabilities at fair value upon issuance. At the end of each reporting period, changes in estimated fair valueduring the period are recorded in the consolidated statements of operations. The Company continued to adjust the warrantliability for changes in fair value until the earlier of the exercise of the warrants or expiration on May 10, 2016, and nofurther remeasurement is required.Stock-based CompensationThe Company measures its stock-based awards made to employees based on the estimated fair values of the awards asof the grant date using the Black-Scholes option-pricing model. Stock-based compensation expense is recognized over therequisite service period and is based on the value of the portion of stock-based payment awards that is ultimately expected tovest. The Company adopted Accounting Standards Update (“ASU”) No. 2016-09, Compensation-Stock Compensation (Topic718): Improvements to Employee Share-Based Payment Accounting effective January 1, 2017 and has elected to recognizeforfeitures of share-based payment awards as they occur on a prospective basis. Prior to January 1, 2017, the Company’sstock-based compensation was reduced for the estimated forfeitures at the date of grant and revised, if necessary, insubsequent periods if actual forfeitures differed from those estimates.Stock-based compensation expense for options granted to non-employees as consideration for services received ismeasured on the date of performance at the fair value of the consideration received or the fair value of the equity instrumentsissued, using the Black-Scholes option-pricing model, whichever can be more reliably measured. Compensation expense foroptions granted to non-employees is periodically remeasured as the underlying options vest.Net Loss per Share Attributable to Common StockholdersBasic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable tocommon stockholders by the weighted average number of shares of common stock outstanding during the period, withoutconsideration of potentially dilutive securities. The net loss attributable to common stockholders is calculated by adjustingthe net loss of the Company for the accretion on the redeemable convertible preferred stock, if applicable. Diluted net lossper share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders forall periods presented since the effect of potentially dilutive securities is anti-dilutive given the net loss of the Company.Recently Adopted Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, which amends theguidance for accounting for revenue from contracts with customers. This ASU supersedes the revenue recognitionrequirements in ASC Topic 605, Revenue Recognition, and creates a new ASC Topic 606, Revenue from Contracts withCustomers. Subsequent to May 2014, the FASB issued additional guidance that delayed the effective date and clarifiedvarious aspects of the new guidance, including principal versus agent considerations, identifying performance obligationsand licensing, and also included other improvements and practical expedients. The Company adopted this new guidanceeffective July 1, 2017 using the full retrospective transition method. The Company did not have any effective contractswithin the scope of this guidance prior to July 1, 2017. Accordingly, the Company did not elect to use116 Table of Contentsany of the practical expedients permitted under the transition guidance, and the adoption had no impact on the Company’spreviously reported financial position, results of operations or liquidity.In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification ofDeferred Taxes, which is intended to simplify and improve how deferred income taxes are classified on the balance sheet.This guidance eliminates the current requirement to present deferred tax assets and liabilities as current and noncurrent in aclassified balance sheet and now requires entities to classify all deferred tax assets and liabilities as noncurrent. The guidanceis effective for annual periods beginning after December 15, 2016 and for interim periods within those annual periods, andearly adoption is permitted. The Company adopted this guidance effective January 1, 2017. The adoption of this guidancedid not have a material impact on the Company’s financial position, results of operations or liquidity.In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements toEmployee Share-Based Payment Accounting, which is intended to simplify several aspects of accounting for employee share-based payment transactions, including income tax consequences, the determination of forfeiture rates, classification ofawards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for fiscalyears and interim periods within those years beginning after December 15, 2016, and early adoption is permitted. TheCompany adopted this guidance effective January 1, 2017 and has elected to recognize forfeitures of share-based paymentawards as they occur on a prospective basis. The impact of the adoption of ASU No. 2016-09 was not material to theCompany’s consolidated financial statements. The adoption of this guidance did not have a material impact on the incometax effects of share-based payment awards as the resulting change in the Company’s deferred income tax assets is fully offsetby a corresponding deferred income tax asset valuation allowance.In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, whichrequires the presentation of changes in restricted cash or restricted cash equivalents on the statement of cash flows. Thisguidance is effective for the fiscal years and interim periods within those years beginning after December 15, 2017, with earlyadoption permitted. The Company early adopted this guidance effective March 31, 2017, and, accordingly, restricted cashamounts are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period totalamounts of cash reflected on the accompanying consolidated statements of cash flows. The Company has adopted ASU No.2016-18 retrospectively and has revised the prior period cash flows from investing activities, beginning cash balance, andending cash balance to reflect the change in presentation of restricted cash. Other than the change in presentation in theaccompanying consolidated statements of cash flows, the adoption of this guidance had no effect on the Company’sfinancial position, results of operations or liquidity.Recently Issued Accounting Pronouncements Not Adopted as of December 31, 2017 In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, (with the exceptionof short-term leases) at the commencement date, lessees will be required to recognize a lease liability and a right-of-use asset.Lessor accounting is largely unchanged, while lessees will no longer be provided with a source of off-balance sheetfinancing. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods withinthose fiscal years. Early adoption is permitted. Lessees (for capital and operating leases) are required to apply the modifiedretrospective transition method for leases existing at, or entered into after, the beginning of the earliest comparative periodpresented in the financial statements. The modified retrospective method does not require any transition accounting forleases that did not exist before the earliest comparative period presented. The Company established a cross-functionalimplementation team to review current lease accounting policies and practices and assess the impact of this guidance on theCompany’s consolidated financial statements and disclosures. While the Company is currently reviewing its lease portfolioand evaluating and interpreting the requirements under the new guidance, including available accounting policy elections, itexpects that its non-cancellable operating lease commitments will be subject to the new guidance and recognized as right-of-use assets and operating lease liabilities on the Company’s consolidated balance sheets, and that the adoption of this newguidance will not have a material impact on its results of operations or liquidity.In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which is intendedto provide financial statement users with more useful information about expected credit losses on financial117 Table of Contentsassets held by a reporting entity at each reporting date. The new standard replaces the existing incurred loss impairmentmethodology with a methodology that requires consideration of a broader range of reasonable and supportable forward-looking information to estimate all expected credit losses. This guidance is effective for fiscal years and interim periodswithin those years beginning after December 15, 2019, and early adoption is permitted for fiscal years and interim periodswithin those years beginning after December 15, 2018. The Company is currently evaluating the impact of this new guidanceon its consolidated financial statements and disclosures.In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of CertainCash Receipts and Cash Payments, which clarifies the classification of certain cash receipts and cash payments in thestatements of cash flow to eliminate the diversity in practice related to eight specific cash flow issues. This guidance iseffective for fiscal years and interim periods within those years beginning after December 15, 2017, and early adoption ispermitted. The Company expects that the adoption of this new guidance will not have a material impact on its consolidatedfinancial statements and disclosures.In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope ofModification Accounting, which provides guidance on the types of changes to the terms and conditions of share-basedpayment awards to which an entity would be required to apply modification accounting. Specifically, an entity would notapply modification accounting if the fair value, vesting conditions and classification of the awards are the same immediatelybefore and after the modification. This guidance is effective for fiscal years and interim periods within those years beginningafter December 15, 2017, and early adoption is permitted. The Company expects that the adoption of this new guidance willnot have a material impact its consolidated financial statements and disclosures.Note 3. Janssen License and Collaboration AgreementAgreement TermsOn May 26, 2017, the Company and Janssen Biotech, Inc., (“Janssen”), one of the Janssen Pharmaceutical Companiesof Johnson & Johnson, entered into an exclusive license and collaboration agreement for the development, manufacture andcommercialization of PTG-200 worldwide for the treatment of Crohn’s disease (“CD”) and ulcerative colitis (“UC”). Janssenis a related party to the Company as Johnson & Johnson Innovation - JJDC, Inc., a significant shareholder of the Company,and Janssen are both subsidiaries of Johnson and Johnson. PTG-200 is the Company’s oral Interleukin 23 receptor (“IL-23R”)antagonist drug candidate currently in development. The Janssen License and Collaboration Agreement became effective onJuly 13, 2017. Upon the effectiveness of the agreement, the Company became eligible for and received a non-refundable,upfront cash payment of $50.0 million from Janssen.Under the Janssen License and Collaboration Agreement, the Company granted to Janssen an exclusive worldwidelicense to develop, manufacture and commercialize PTG-200 and related IL-23R compounds for all indications, includingCD and UC. The Company is responsible, at its own expense, for the conduct of the Phase 1 clinical trial for PTG-200, andJanssen will be responsible for the conduct of a potential Phase 2 clinical trial for PTG-200 in CD, including filing the Phase2 Investigational New Drug (“IND”) application. All such clinical trials will be conducted in accordance with a mutuallyagreed upon clinical development plan and budget. Development costs for the Phase 2 clinical trial will be shared betweenthe parties on an 80%/20% basis, with Janssen assuming the larger share. Should Janssen elect to retain its license followingcompletion of the Phase 2 clinical trial, it will be responsible, at its own expense, for the manufacture, continueddevelopment of, seeking regulatory approval for, and commercialization of PTG-200 worldwide. The parties’ developmentactivities under the Janssen License and Collaboration Agreement through the Phase 2 clinical trial will be overseen by ajoint governance structure which will have equal representation by both parties unless both parties mutually agree to disbandsuch structure or the Company has provided written notice to Janssen of its intention to disband and no longer participate insuch structure.The Company is eligible to receive a $25.0 million payment upon filing of the Phase 2 IND. Following the conclusionof the planned Phase 2a portion of the Phase 2 clinical trial, if Janssen elects to maintain its license rights and continue thedevelopment of PTG-200 in the Phase 2b portion of such clinical trial (the “First Opt-in Election”), the Company would beeligible to receive a $125.0 million payment. Following the conclusion of the planned Phase 2b portion of the Phase 2clinical trial, if Janssen elects again to maintain its license rights (the “Second Opt-in Election”),118 Table of Contentsthe Company would be eligible to receive a $200.0 million payment. In addition to the opt-in fees, the Company is eligibleto receive additional potential development, regulatory and sales milestone payments of up to an aggregate of $590.0million, and tiered royalties paid as a percentage of Janssen’s worldwide net sales at rates ranging from ten to the mid-teens,with certain customary reductions under certain circumstances. If Janssen does not make either the First Opt-in Election orthe Second Opt-in Election, the Janssen License and Collaboration Agreement will terminate. If Janssen does not make theSecond Opt-in Election, or if at any time after the Second Opt-in Election, Janssen terminates the Janssen License andCollaboration Agreement, the Company would be obligated to pay Janssen a low single-digit royalty on worldwide net salesof PTG-200. The Company would also have an option to provide up to 30% of the required U.S. details for PTG-200 toprescribers, using its own sales force personnel, upon commercial launch in the United States. If such right is exercised by theCompany, the Company’s detailing costs would be reimbursed by Janssen at a mutually agreed cost per primary detailingequivalent.The Janssen License and Collaboration Agreement contains customary representations, warranties and covenants bythe Company and Janssen and includes an obligation by the Company not to develop or commercialize other compoundswhich also target IL-23R outside of the Janssen License and Collaboration Agreement until completion of the Phase 2bportion of the Phase 2 clinical trial. Each of the Company and Janssen is required to indemnify the other party against alllosses and expenses related to breaches of its representations, warranties and covenants under the Janssen License andCollaboration Agreement.The Janssen License and Collaboration Agreement remains in effect until the royalty obligations cease followingpatent and regulatory expiry, unless terminated earlier. Either the Company or Janssen may terminate the Janssen Licenseand Collaboration Agreement for uncured material breach. Janssen retains the right to terminate the Janssen License andCollaboration Agreement for convenience and without cause on written notice of a certain period to the Company. Upon atermination of the Janssen License and Collaboration Agreement, all rights revert back to the Company, and in certaincircumstances, if such termination occurs during ongoing clinical trials, Janssen would, if requested, provide certain financialand operational support to the Company for the completion of such trials.Revenue RecognitionThe Company identified the following material promises under the Janssen License and Collaboration Agreement: (1)the license related to PTG-200, (2) the performance of development services, including regulatory support, during the Phase1 clinical trial for PTG-200 through the filing of the IND by Janssen, and (3) compound supply services for Phase 1 and Phase2 activities. The Company considered that the license has standalone functionality and is capable of being distinct. However,the Company determined that the license is not distinct from the development and compound supply services within thecontext of the agreement because the development and compound supply services significantly increase the utility of theintellectual property.Specifically, the Company’s development, manufacturing and commercialization license can only provide benefit toJanssen in combination with the Company’s development services in the Phase 1 study. The intellectual property (“IP”)related to the peptide technology platform, which is proprietary to the Company, is the foundation for the developmentactivities related to the treatment for CD. The compound supply services are a necessary and integral part of the developmentservices as they could only be conducted utilizing the outcomes of these services. Given the development services under theJanssen Collaboration Agreement are expected to involve significant further development of the initial IP, the Company hasconcluded that the development and compound supply services are not distinct from the license, and thus the license,development services and compound supply services are combined into a single performance obligation. The nature of thecombined performance obligation is to provide development and compound supply services to Janssen under thearrangement.The Company also evaluated whether the fees related to the First Opt-in Election and Second Opt-in Election areoptions with material rights. These two options include additional sublicense rights and patent rights transferred to Janssenupon exercising both of these options. The Company concluded that Janssen’s opt in rights are not options with materialrights because the $50.0 million upfront payment to the Company was not negotiated to provide incremental discount for thefuture opt in payments at the end of Phase 2a and Phase 2b. The option to “opt in” provides Janssen with a license for IP thathas been improved from the license initially granted for a term in the case of the opt in after119 Table of Contentscompletion of Phase 2a and then a perpetual license in the case of opt in after completion of Phase 2b. Therefore, the FirstOpt-in Election and Second Opt-in Election options are not considered to be material rights. The option fees will berecognized as revenue when, and if, Janssen exercises its options because the Company has no further performanceobligations at that point.For revenue recognition purposes, the Company determined that the duration of the contract begins on the effectivedate of July 13, 2017 and ends upon completion of Phase 2a activities. The contract duration is defined as the period inwhich parties to the contract have present enforceable rights and obligations. The Company analyzed the impact of Janssenterminating the agreement prior to the completion of Phase 2a and determined that there were significant economic penaltiesto Janssen for doing so. The Company believes that if Janssen terminates the agreement upon completion of Phase 2a, theforfeiture of the remaining license rights and payment of 50% of the remaining Phase 2 costs is not a significant economicpenalty when compared to paying $125.0 million as an opt in license fee to continue the use of the License. Thus, theduration of the contract is limited to the end of Phase 2a.The Company determined that the transaction price of the Janssen License and Collaboration Agreement was $53.9million as of December 31, 2017, a decrease of $0.4 million from the transaction price of $54.3 million as of September 30,2017. In order to determine the transaction price, the Company evaluated all the payments to be received during the durationof the contract. The Company determined that the $50.0 million upfront payment, the $25.0 million payment payable uponfiling of the Phase 2 IND, which is fully constrained as of December 31, 2017, and $3.9 million of estimated variableconsideration for cost-sharing payments from Janssen for agreed upon services related to Phase 2 activities constitutedconsideration to be included in the transaction price, which is to be allocated to the combined performance obligation. Thedecrease in transaction price from September 30, 2017 was due to a decrease in variable consideration related to compoundsupply services. The Company will re-evaluate the transaction price in each reporting period and as uncertain events areresolved or other changes in circumstances occur.As part of the evaluation for determining that the $25.0 million payment upon filing of the Phase 2 IND is fullyconstrained as of December 31, 2017, the Company considered several factors, including the stage of development of PTG-200 and that achievement of the milestone is outside of the Company’s control, and concluded that the filing of the Phase 2IND is not probable at this time. If and when the filing of the Phase 2 IND becomes probable, the $25.0 million payment willbe constrained by contra revenue amounts for payments that the Company expects to make for 20% of the cost of Phase 2activities to be performed by Janssen. The additional potential development, regulatory and sales milestone payments of upto an aggregate of $590.0 million after the completion of Phase 2a activities that the Company is eligible to receive areoutside the contract term and as such have been excluded from the transaction price. Any consideration related to sales-basedmilestones (including royalties) will be recognized when the related sales occur as they were determined to relatepredominantly to the license granted to Janssen and therefore have also been excluded from the transaction price. At the endof each reporting period, the Company will update its assessment of whether an estimate of variable consideration isconstrained and update the estimated transaction price accordingly.Variable consideration for cost-sharing payments related to agreed upon services for Phase 2 activities that theCompany performs within the duration of the contract are included in the transaction price at an amount equal to 80% of theestimated budgeted costs for these activities, including primarily internal full-time equivalent effort and third party contractcosts. The Company is responsible for 20% of the development costs for the Phase 2 clinical trial. Accordingly, a significantportion of this work is expected to be performed by Janssen. Because the Phase 2 clinical trial activity is related to thelicense, it is not capable of being distinct. This is because both the Company and Janssen cannot benefit from these activitiesabsent the Phase 1 activities. As the Phase 2 activities for which the Company will share 20% of the cost activities are notcapable of being distinct and are not separately identifiable within the context of the contract, they are not a distinct servicethat Janssen transfers to the Company. Therefore, the consideration payable to Janssen is accounted for as a reduction in thetransaction price. The Company and Janssen make quarterly cost-sharing payments to one another in amounts necessary toensure that each party bears its contractual share of the overall shared costs incurred. The Company accounts for cost-sharingpayments from Janssen as increases in license and collaboration revenue in its consolidated statements of operations, whilecost-sharing payments to Janssen are accounted for as reductions in license and collaboration revenue, or contra-revenue.Costs incurred by the Company related to agreed upon services for Phase 2 activities under the Janssen License andCollaboration Agreement are recorded as research and development expenses in its consolidated statements of operations.120 Table of ContentsIn summary, the license, the development activities for Phase 1 activities and the agreed upon services for Phase 2activities are combined as one performance obligation that will be performed over the duration of the contract, which is fromthe effective date of the Janssen License and Collaboration Agreement through to the completion of Phase 2a activities.Since the Company has determined that the combined performance obligation is satisfied over time, ASC 606 requires theCompany to select a single revenue recognition method for the performance obligation that faithfully depicts the Company’sperformance in transferring control of the services. The guidance allows entities to choose between two methods to measureprogress toward complete satisfaction of a performance obligation:1.Output methods - recognize revenue on the basis of direct measurements of the value to the customer of the goods orservices transferred to date relative to the remaining goods or services promised under the contract (e.g. surveys ofperformance completed to date, appraisals of results achieved, milestones reached, time elapsed, and units ofproduced or units delivered); and2.Input methods - recognize revenue on the basis of the entity’s efforts or inputs to the satisfaction of a performanceobligation (e.g., resources consumed, labor hours expended, costs incurred, or time elapsed) relative to the totalexpected inputs to the satisfaction of that performance obligation.The Company concluded that it will utilize a cost-based input method to measure proportional performance and tocalculate the corresponding amount of revenue to recognize. The Company believes this is the best measure of progressbecause other measures do not reflect how the Company transfers its performance obligation to Janssen. In applying the cost-based input methods of revenue recognition, the Company uses actual costs incurred relative to budgeted costs to fulfill thecombined performance obligation. These costs consist primarily of internal full-time equivalent effort and third-partycontract costs. Revenue will be recognized based on actual costs incurred as a percentage of total budgeted costs as theCompany completes its performance obligations, which the Company believes will be fulfilled within the next 12 months. Acost-based input method of revenue recognition requires management to make estimates of costs to complete the Company’sperformance obligations. In making such estimates, significant judgment is required to evaluate assumptions related to costestimates. The cumulative effect of revisions to estimated costs to complete the Company’s performance obligations will berecorded in the period in which changes are identified and amounts can be reasonably estimated. A significant change inthese assumptions and estimates could have a material impact on the timing and amount of revenue recognized in futureperiods.For the year ended December 31, 2017, the Company recognized $20.1 million of license and collaboration revenue.This amount included $19.0 million of the transaction price for the Janssen License and Collaboration Agreementrecognized based on proportional performance, and $1.1 million for other services related to Phase 2 activities performed bythe Company on behalf of Janssen that are not included in the performance obligations identified under the Janssen Licenseand Collaboration Agreement.The following table presents changes in the Company’s contract assets and liabilities for the year ended December 31,2017 (in thousands): Balance at Balance at Beginning of End ofYear ended December 31, 2017 Period Additions Deductions PeriodContract assets: Receivable from collaboration partner - related party $— $51,816 $(50,000) $1,816Contract liabilities: Deferred revenue - related party $— $50,708 $(18,956) $31,752Deferred revenue related to the Janssen License and Collaboration Agreement of $31.8 million as of December 31,2017, which was comprised of the $50.0 million upfront payment and $0.7 million of cost sharing payments from Janssen foragreed upon services for Phase 2 activities, less $19.0 million of license and collaboration revenue recognized from theeffective date of the contract, will be recognized as the combined performance obligation is satisfied. The Company alsorecorded a $1.8 million receivable from collaboration partner as of December 31, 2017 for cost sharing amounts payable fromJanssen.121 Table of ContentsDuring the year ended December 31, 2017, the Company did not recognize any revenue from amounts included in thecontract asset and the contract liability balances at the beginning of the period or from performance obligations satisfied inprevious periods. None of the costs to obtain or fulfill the contract were capitalized.Note 4. Fair Value MeasurementsFinancial assets and liabilities are recorded at fair value. The accounting guidance for fair value provides a frameworkfor measuring fair value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fairvalue is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderlytransaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy,which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurementdate.Level 2—Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for theasset or liability through correlation with market data at the measurement date and for the duration of the instrument’santicipated life.Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset orliability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the riskinherent in the inputs to the model.In determining fair value, the Company utilizes quoted market prices, broker or dealer quotations, or valuationtechniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possibleand considers counterparty credit risk in its assessment of fair value.The following table presents the fair value of the Company’s financial assets determined using the inputs definedabove (in thousands). December 31, 2017 Level 1 Level 2 Level 3 TotalAssets:Money market funds $ 48,704 $ — $— $48,704Corporate bonds — 6,247 — 6,247Commercial paper — 58,524 — 58,524Governmental bonds — 40,303 — 40,303Total financial assets $48,704 $105,074 $— $153,778 December 31, 2016 Level 1 Level 2 Level 3 TotalAssets: Money market funds $11,270 $ — $— $11,270Corporate bonds — 21,841 — 21,841Commercial paper — 10,769 — 10,769Governmental bonds — 41,289 — 41,289Total financial assets $11,270 $73,899 $ — $85,169 The Company’s corporate bonds, commercial paper and government bonds are classified as Level 2 as they were valuedbased upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instrumentsin markets that are not active and model-based valuation techniques for which all significant inputs are observable in themarket or can be corroborated by observable market data for substantially the full term of the assets.122 Table of Contents Note 5. Balance Sheet ComponentsCash Equivalents and Available-for-sale SecuritiesCash equivalents and available-for-sale securities consisted of the following (in thousands): December 31, 2017 Amortized Gross Unrealized Cost Gains Losses Fair ValueMoney market funds $48,704 $ — $— $48,704Corporate bonds 6,254 — (7) 6,247Commercial paper 58,524 — — 58,524Government bonds 40,428 — (125) 40,303Total cash equivalents and available-for-sale securities $153,910 $ — $(132) $153,778Classified as: Cash equivalents $104,348Available-for-sale securities - current 37,972Available-for-sale securities - noncurrent 11,458Total cash equivalents and available-for-sale securities $153,778 December 31, 2016 Amortized Gross Unrealized Cost Gains Losses Fair ValueMoney market funds $11,270 $ — $— $11,270Corporate bonds 21,886 — (45) 21,841Commercial paper 10,769 — — 10,769Government bonds 41,316 2 (29) 41,289Total cash equivalents and available-for-sale securities $85,241 $ 2 $(74) $85,169Classified as: Cash equivalents $18,504Available-for-sale securities - current 56,515 Available-for-sale securities - noncurrent 10,150Total cash equivalents and available-for-sale securities $85,169 All available-for-sale securities - current held as of December 31, 2017 and 2016 had contractual maturities of less thanone year. All available securities - noncurrent held as of December 31, 2017 and 2016 had contractual maturities of at leastone year but less than two years. There were no material realized gains or realized losses on available-for-sale securities forthe periods presented.Prepaid Expenses and Other Current AssetsPrepaid expenses and other current assets consisted of the following (in thousands): December 31, 2017 2016Prepaid clinical and research related expenses $2,324 $2,488Prepaid insurance 378 408Other 1,071 498Prepaid expenses and other current assets $3,773 $3,394 123 Table of ContentsProperty and Equipment, NetProperty and equipment, net consisted of the following (in thousands): December 31, 2017 2016Laboratory equipment $2,177 $1,650Furniture and computer equipment 270 163Leasehold improvements 26 62Total property and equipment 2,473 1,875Less: accumulated depreciation and amortization (1,594) (1,313)Property and equipment, net $879 $562 Depreciation expense for the years ended December 31, 2017, 2016, and 2015 was $406,000, $317,000, and $247,000,respectively. As of December 31, 2017 and 2016, $1,200 and $8,000, respectively, of property and equipment, net, waslocated in Australia. The remainder of the Company’s property and equipment is located in the United States.Accrued Expenses and Other PayablesAccrued expenses and other payables consisted of the following (in thousands): December 31, 2017 2016Accrued clinical and research related expenses $6,437 $3,617Accrued employee related expenses 2,718 1,420Accrued professional service fees 267 115Other 124 120Accrued expenses and other payables $9,546 $5,272 Note 6. Research Collaboration and License AgreementIn October 2013, the Company’s former collaboration partner decided to abandon a collaboration program with theCompany and, pursuant to the terms of the agreement between the Company and the former collaboration partner, theCompany elected to assume responsibility for the development and commercialization of the product. Upon the formercollaboration partner’s abandonment, it assigned to the Company certain intellectual property arising from the collaborationand also granted the Company an exclusive license to certain background intellectual property rights of the formercollaboration partner that relate to the products acquired by the Company. The nomination of PTG‑300 as a developmentcandidate triggered a $250,000 payment from the Company to the former collaboration partner. The initiation of a Phase 1clinical trial for PTG‑300 triggered an additional $250,000 payment from the Company to the former collaboration partner.The Company has the right, but not the obligation, to further develop and commercialize the product and, if the Companysuccessfully develops and commercializes PTG‑300 without a partner, the Company will pay to the former collaborationpartner up to an additional aggregate of $128.5 million for the achievement of certain development, regulatory and salesmilestone events. In addition, the Company will pay to the former collaboration partner a low single digit royalty onworldwide net sales of the product until the later of ten years from the first commercial sale of the product or the expiration ofthe last patent covering the product. For each of the years ended December 31, 2017 and 2016, the Company recordedresearch and development expense of $250,000 under this agreement. There were no such costs incurred for the year endedDecember 31, 2015.Note 7. Government ProgramsResearch and Development Tax IncentiveThe Company recognized AUD 1.7 million ($1.3 million), AUD 5.3 million ($4.0 million) and AUD 978,000 ($736,000) as a reduction of research and development expenses for the years ended December 31, 2017, 2016 and124 Table of Contents2015, respectively, in connection with the research and development tax incentive from Australia. As of December 31, 2017and 2016, the research and development tax incentive receivable was AUD 1.7 million ($1.3 million) and AUD 3.1 million($2.2 million), respectively.In March 2016, the Company received AUD 237,000 ($182,000) for overseas findings and recorded the funds asdeferred tax incentive in accrued expenses and other payables on the consolidated balance sheet due to the possibility thatthe funds could have to be repaid. In December 2016, the Company’s research and development project under theAusIndustry research and development tax incentive program was complete and the Company substantiated that more than50% of the total project expenditures occurred in Australia. Therefore, the overseas finding related incentive amounts wereno longer deemed to be at risk of clawback and the Company recognized such amounts in December 2016 as a reduction ofresearch and development expenses for the overseas findings received in 2016.Based on the nature of the amounts received under the Janssen License and Collaboration Agreement, the Companyhas concluded that these amounts should be classified as statutory income for Australian taxation purposes. Accordingly,they should not be included in the calculation of annual turnover for the purposes of determining eligibility for therefundable research and development tax offset.SBIR GrantIn May 2017, the Company was awarded a Phase 2 SBIR Grant from the NIDDK of the NIH in support of research aimedat developing biomarkers that define IL-23R target engagement by oral peptide antagonists and the effects of thatengagement of downstream signaling. The total grant award was $1.3 million and is for the period from May 2017 to April2019.In July 2016, the Company was awarded a Phase 1 SBIR Grant from the NHLBI of the NIH in support of preclinicalresearch aimed at discovering and optimizing lead molecules as novel peptide mimetics of the hepcidin hormone. The totalgrant award was $219,000 and was for the period from August 2016 to January 2017.In September 2015, the Company was awarded a Phase 1 SBIR Grant from the NIDDK of the NIH in support of researchon orally stable peptide antagonists of IL‑23R as potential treatments for IBD. The total grant award was $224,000 and wasfor the period from September 2015 to August 2016.The Company recognizes a reduction to research and development expenses when expenses related to the grants havebeen incurred and the grant funds become contractually due from NIH. The Company recorded $182,000, $169,000 and$155,000 as a reduction of research and development expenses for the years ended December 31, 2017, 2016 and 2015,respectively. The Company recorded a receivable for $58,000 and $100,000 as of December 31, 2017 and 2016, respectively,to reflect the eligible costs incurred under the grants that are contractually due to the Company, and such amounts areincluded in prepaid expenses and other current assets on the consolidated balance sheets.Note 8. Commitments and ContingenciesLease ArrangementsIn March 2017, the Company entered into a lease agreement for office and laboratory space located in Newark,California. The Company relocated its operations to the new facility in May 2017. The Company provided the landlord witha $450,000 letter of credit collateralized by restricted cash as security deposit for the lease, which expires in May 2024. TheCompany is entitled to tenant improvement allowances of approximately $469,000, any unused portion of which expires inDecember 2018. The Company records tenant improvement allowances as deferred rent when funds are received andassociated capital expenditures as leasehold improvements that will be amortized over the shorter of their useful life or theremaining term of the lease. 125 Table of ContentsThe following table summarizes the Company’s future minimum lease payments related to the Newark facility as ofDecember 31, 2017 (in thousands):Year Ending December 31: Amount2018 $1,6672019 1,9412020 2,0002021 2,0602022 2,121Thereafter 3,106Total $12,895 The Company’s rent expense was $1.4 million, $408,000 and $280,000 million for the years ended December 31, 2017,2016 and 2015, respectively. Rent expense is recognized on a straight-line basis over the term of the lease and accordingly,the Company records the difference between cash rent payments and the recognition of rent expense as a deferred rentliability.IndemnificationsIn the ordinary course of business, the Company enters into agreements that may include indemnification provisions.Pursuant to such agreements, the Company may indemnify, hold harmless and defend an indemnified party for losses sufferedor incurred by the indemnified party. Some of the provisions will limit losses to those arising from third party actions. Insome cases, the indemnification will continue after the termination of the agreement. The maximum potential amount offuture payments the Company could be required to make under these provisions is not determinable. The Company has alsoentered into indemnification agreements with its directors and officers that may require the Company to indemnify itsdirectors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullestextent permitted by California corporate law. The Company currently has directors’ and officers’ insurance. To date, theCompany has not incurred material costs to defend lawsuits or settle claims related to the indemnification agreements. TheCompany believes that the fair value of these indemnification agreements is minimal and has not accrued any amounts forthe obligations.Note 9. Preferred Stock WarrantsIn connection with the Series B redeemable convertible preferred stock financing, the Company issued warrants topurchase 4,000,000 shares of Series B redeemable convertible preferred stock at an exercise price of $0.01 per share. Thesewarrants would become exercisable only when certain milestones were met on programs begun as a result of collaborationsentered into in 2011 and 2012. In particular, 50% of the warrants would become exercisable upon the Company publiclyannouncing its first IND candidate to the extent such IND candidate was the result of, or related to, the Company’s previouscollaboration(s) with Ironwood Pharmaceuticals and/or Zealand Pharma A/S, and the balance would become exercisableupon the first dosing of a human patient in a clinical trial that was the result of, or related to, the Company’s previouscollaboration(s) with Ironwood Pharmaceuticals and/or Zealand Pharma A/S. In August 2013, the initial closing date for theSeries B financing, the Company issued 2,000,000 of the warrants (“First Tranche Warrants”). On August 15, 2014, inconnection with the closing of the Series B second tranche financing, the Company issued the balance of the warrants(“Second Tranche Warrants”).The fair value of the warrants outstanding as of December 31, 2015 was remeasured at $480,000, determined using aone-step binomial lattice model in combination with the Option Pricing Model and the following assumptions: risk-freeinterest rate of 0.90%, expected life of 1.6 years and expected volatility of 57.0% and probability of exercisability of 95%and 0% for the first tranche and second tranche, respectively.In March 2016, the Company made a public announcement related to a preclinical candidate which triggered theachievement of the milestone and warrants to purchase 2,000,000 shares of Series B redeemable convertible preferred stockbecame exercisable as of that date. In April 2016, 1,999,998 shares of Series B redeemable convertible preferred stock wereissued for cash proceeds of $20,000 in connection with the exercise of warrants. Immediately prior to the126 Table of Contentsexercise of the warrants, the fair value of the warrants was remeasured at $1.0 million, determined using a hybrid method ofthe Option Pricing Model with a 67% weighted value per share and the probability-weighted expected return method(“PWERM”) with a 33% weighted value per share. The following assumptions were used in the Option Pricing Model: risk-free interest rate of 0.73%, expected life of 2.0 years and expected volatility of 52.0%. The PWERM method includedprobabilities of three IPO scenarios occurring in July 2016. The scenarios were weighted based on the Company’s estimate ofeach event occurring in deriving the estimated fair value. Upon the exercise of warrants, the redeemable convertible preferredstock warrant liability of $1.0 million was reclassified to redeemable convertible preferred stock.In May 2016, the remaining warrants for the purchase of 2,000,000 shares of Series B redeemable convertible preferredstock expired unexercised.The Company recorded a charge of $525,000 for the year ended December 31, 2016, representing the increase in thefair value of the redeemable convertible preferred stock warrant liability in the consolidated statements of operations. TheCompany recorded a gain of $543,000 for the year ended December 31, 2015, representing the decrease in the fair value ofthe redeemable convertible preferred stock warrant liability in the consolidated statements of operations. There were no suchcharges incurred for the year ended December 31, 2017.Note 10. Redeemable Convertible Preferred StockIn April 2016, 1,999,998 shares of Series B redeemable convertible preferred stock were issued in connection with theexercise of warrants for cash proceeds of $20,000.Following the closing of the IPO, all outstanding shares of the redeemable convertible preferred stock converted into8,577,571 shares of common stock and the related carrying value was reclassified to common stock and additional paid-incapital. There were no shares of redeemable convertible preferred stock outstanding as of December 31, 2016 or 2017.The table below provides information on the Company’s redeemable convertible preferred stock as of December 31,2015 (in thousands, except shares and original issue price): Shares Aggregate Original Issued and Carrying Liquidation Issue Price Authorized Outstanding Value PreferenceSeries A $1.00 6,037,500 6,037,500 $1,751 $6,038Series B $0.50 40,000,000 36,000,000 18,825 18,000Series C $0.4979 80,337,411 35,147,617 16,420 17,500Total redeemable convertible preferred stock 126,374,911 77,185,117 $36,996 $41,538 As only the passage of time was required for Series A, B and C to become redeemable, the Company was accreting thecarrying value of Series A, B and C to their redemption value over the period from the respective date of issuance toJuly 2022, (the earliest redemption date) up to the IPO date. In the event of a change of control of the Company, proceedswould be distributed in accordance with the liquidation preferences set forth in the Company’s Amended and RestatedCertificate of Incorporation unless the holders of redeemable convertible preferred stock had converted their redeemableconvertible preferred stock into shares of common stock. Therefore, redeemable convertible preferred stock was classifiedoutside of stockholders’ equity (deficit) on the consolidated balance sheets, as Series A, B and C redeemable convertiblepreferred stock can be redeemed and as events triggering the liquidation preferences were not solely within the Company’scontrol.The Company recorded $558,000 and $75,000 for the accretion of the redeemable convertible preferred stock duringthe years ended December 31, 2016 and 2015, respectively. The accretion was recorded as an offset to the additional paid-incapital until such balance was depleted and any remaining accretion was recorded to accumulated deficit. There were no suchcharges incurred for the year ended December 31, 2017.127 Table of ContentsNote 11. Redeemable Convertible Preferred Stock Tranche LiabilityIn August 2014, the Company completed the closing of the Series B Second Tranche and issued 18,000,000 shares ofSeries B redeemable convertible preferred stock for gross cash proceeds of $9.0 million. At this time the Series B redeemableconvertible preferred stock liability was remeasured at $2.3 million using a one-step binomial lattice model in combinationwith option pricing method based on the following assumptions: 100% probability of achievement of the developmentmilestones, stock price of $0.50 per share, expected term of 0 years and risk-free rate of 0.5%. Upon the closing of theSeries B Second Tranche, the Series B redeemable convertible preferred stock liability was terminated and the balance of theliability of $2.3 million was reclassified to redeemable convertible preferred stock.In July 2015, the Company entered into the Series C Preferred Stock Purchase Agreement (“the Series C Agreement”)for the issuance of up to 80,337,411 shares of Series C redeemable convertible preferred stock at a price of $0.4979 per share,in multiple closings. The initial closing occurred on July 10, 2015, whereby 35,147,617 shares of Series C redeemableconvertible preferred stock were issued for gross proceeds of approximately $17.5 million. According to the initial terms ofthe Series C Agreement, the Company could issue 45,189,794 additional shares under the same terms as the initial closing, ina subsequent closing (“Series C Second Tranche”) contingent upon the achievement of certain development milestones.On the date of the initial closing, the Company recorded a Series C redeemable convertible preferred stock liability of$1.0 million, as the fair value of the obligation/right to complete the Series C Second Tranche. The fair value of the Series Credeemable convertible preferred stock tranche liability on the date of the initial closing was determined using a one-stepbinomial lattice model in combination with the option pricing method based on the following assumptions: 90% probabilityof achievement of the development milestones, stock price of $0.4979 per share, expected term of 1.0 year, and risk-free rateof 0.5%.At December 31, 2015, the fair value of the Series C redeemable convertible preferred stock tranche liability wasremeasured and determined to be $1.6 million using a one-step binomial lattice model in combination with the OptionPricing Model based on the following assumptions: 95% probability of achievement of the development milestones, stockprice of $0.4979 per share, expected term of 0.53 years, and risk-free rate of 0.9%.In March 2016, the Company completed the closing of the Series C Second Tranche and issued 45,189,794 shares ofSeries C redeemable convertible preferred stock for net cash proceeds of $22.5 million. At this time the Series C redeemableconvertible preferred stock liability was remeasured at $5.8 million, determined using a hybrid method of the Option PricingModel with a 67% weighted value per share and the PWERM with a 33% weighted value per share. The followingassumptions were used in the Option Pricing Model: risk-free interest rate of 0.73%, expected life of 2.0 years and expectedvolatility of 52.0%. The PWERM method included probabilities of three IPO scenarios occurring in July 2016. The scenarioswere weighted based on the Company’s estimate of each event occurring in deriving the estimated fair value. Upon theclosing of the Series C Second Tranche, the Series C redeemable convertible preferred stock tranche liability was terminatedand the balance of the liability of $5.8 million was reclassified to redeemable convertible preferred stock.For the years ended December 31, 2016 and 2015, the Company recorded a charge of $4.2 million and $626,000,respectively, for the change in the fair value of the redeemable convertible preferred stock liability in the consolidatedstatements of operations. There were no such charges incurred for the year ended December 31, 2017.128 Table of ContentsNote 12. Common StockThe Company had reserved shares of common stock for issuance as follows: December 31, 2017 2016Options issued and outstanding 2,438,151 2,393,829Options available for future grants 531,039 164,328ESPP shares available for future grants 268,554 150,000Total 3,237,744 2,708,157 Note 13. Equity PlansEquity Incentive PlanIn May 2007, the Company established the 2007 Stock Option and Incentive Plan (“2007 Plan”) which provided forthe granting of stock options to employees and consultants of the Company. Options granted under the 2007 Plan were eitherincentive stock options (ISOs) or nonqualified stock options (NSOs). ISOs were granted only to Company employees(including officers and directors who are also employees). NSOs were granted to Company employees and consultants.Options under the 2007 Plan have a term of ten years and generally vest over a four-year period with one-year cliff vesting.In July 2016, the Company’s board of directors and stockholders approved the 2016 Equity Incentive Plan (“2016Plan”) to replace the 2007 Plan, which became effective upon the IPO. Under the 2016 Plan, 1,200,000 shares of theCompany’s common stock were initially reserved for the issuance of stock options, restricted stock units and other awards toemployees, directors and consultants. Pursuant to the “evergreen” provision contained in the 2016 Plan, the number of sharesreserved for issuance under the 2016 Plan automatically increases on January 1 of each year, starting on January 1, 2017 andcontinuing through (and including) January 1, 2026, by 4% of the total number of shares of the Company’s capital stockoutstanding on December 31 of the preceding fiscal year, or a lesser number of shares determined by the Company’s board ofdirectors. Upon adoption of the 2016 Plan, no additional stock awards were issued under the 2007 Plan. Options grantedunder the 2007 Plan that were outstanding on the date the 2016 Plan became effective remain subject to the terms of the2007 Plan. The number of options available for grant under the 2007 Plan was ceased and the number was added to thecommon stock reserved for issuance under the 2016 Plan. As of December 31, 2017, the Company has reserved 1,868,891shares of common stock for issuance under the 2016 Plan.The 2016 Plan is administered by the board of directors or a committee appointed by the board of directors, whichdetermines the types of awards to be granted, including the number of shares subject to the awards, the exercise price and thevesting schedule. Options granted under the 2016 Plan expire no later than ten years from the date of grant. The exerciseprice of each option may not be less than 100% of the fair market value of the common stock at the date of grant. Optionsmay be granted to stockholders possessing more than 10% of the total combined voting power of all classes of stocks of theCompany at an exercise price at least 110% of the fair value of the common stock at the date of grant and the options are notexercisable after the expiration of 10 years from the date of grant. Employee stock options generally vest 25% upon one yearof continued service to the Company, with the remainder in monthly increments over three additional years. Non-employeedirector initial stock options generally vest monthly over a period of approximately three years, and non-employee directorannual refresher stock options generally vest over a period of approximately one year.129 Table of ContentsStock OptionsActivity under the Company’s equity incentive plans is set forth below: Options Outstanding Weighted- Weighted- Average Average Options Exercise Remaining Aggregate Available for Options Price Per Contractual Intrinsic Grant Outstanding Share Life (years) Value (1) (in millions)Balances at December 31, 2014 116,832 476,006 $1.40 8.04 Additional options authorized 431,411 — Options granted (408,623) 408,623 1.24 Options exercised — (43,852) 1.30 Options forfeited 7,599 (7,599) 1.40 Balances at December 31, 2015 147,219 833,178 1.33 8.56 Additional options authorized 1,697,088 — Options granted (1,679,979) 1,679,979 14.24 Options exercised — (119,328) 1.28 Balances at December 31, 2016 164,328 2,393,829 10.39 8.79 Additional options authorized 668,891 — Options granted (493,500) 493,500 13.20 Options exercised — (257,858) 1.84 Options forfeited 191,320 (191,320) 15.00 Balances at December 31, 2017 531,039 2,438,151 $11.51 8.26 $23.3Options exercisable – December 31, 2017 877,888 $9.70 7.61 $10.0Options vested and expected to vest –December 31, 2017 2,438,151 $11.51 8.26 $23.3____________________The aggregate intrinsic values were calculated as the difference between the exercise price of the options and the closingprice of the Company’s common stock on December 31, 2017. The calculation excludes options with an exercise pricehigher than the closing price of the Company’s common stock on December 31, 2017. The aggregate intrinsic value of options exercised was $3.5 million and $169,000 for the years ended December 31,2017 and 2016, respectively. The aggregate intrinsic value of options exercised was immaterial for the year endedDecember 31, 2015.During the years ended December 31, 2017, 2016 and 2015, the estimated weighted-average grant-date fair value ofcommon stock underlying options granted was $7.74, $8.20 and $0.69 per share, respectively.Employee Stock Options ValuationThe fair value of employee and non-employee director stock option awards was estimated at the date of grant using aBlack-Scholes option-pricing model with the following assumptions: Year Ended December 31, 2017 2016 2015 Expected term (in years) 5.50 – 6.08 4.16 – 5.95 5.89 Expected volatility 61.6% – 65.4% 62.5% – 64.8% 59.8% Risk-free interest rate 1.88% – 2.24% 1.27% – 1.79% 1.57% – 1.58% Dividend yield — — — 130 (1) Table of ContentsIn determining the fair value of the options granted, the Company uses the Black-Scholes option-pricing model andassumptions discussed below. Each of these inputs is subjective and generally requires significant judgment to determine.Expected Term—The Company’s expected term represents the period that the Company’s options granted are expectedto be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and theend of the contractual term). The Company has very limited historical information to develop reasonable expectations aboutfuture exercise patterns and post-vesting employment termination behavior for its stock option grants.Expected Volatility—Since the Company does not have a long trading history for its common stock, the expectedvolatility is estimated based on the average volatility for comparable publicly traded biopharmaceutical companies over aperiod equal to the expected term of the stock option grants. The comparable companies were chosen based on their similarsize, stage in the life cycle or area of specialty.Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the timeof grant for periods corresponding with the expected term of option.Expected Dividend—The Company has never paid dividends on its common stock and has no plans to pay dividendson its common stock. Therefore, the Company used an expected dividend yield of zero.Prior to the completion of the Company’s IPO, the fair value of the Company’s shares of common stock underlying itsstock options had historically been determined by the Company’s board of directors. Because there had been no publicmarket for the Company’s common stock prior to August 2016, the Company’s board of directors had determined fair valueof the common stock at the time of grant of the option by considering a number of objective and subjective factors includingimportant developments in the Company’s operations, valuations performed by an independent third party, sales ofredeemable convertible preferred stock, actual operating results and financial performance, the conditions in thebiotechnology industry and the economy in general, the stock price performance and volatility of comparable publiccompanies, and the lack of liquidity of the Company’s common stock, among other factors. For stock options granted afterthe completion of the IPO, the Company’s board of directors determined the fair value of each share of underlying commonstock based on the closing price of the Company’s common stock as reported on the date of grant.Stock Options Granted to Non-employeesStock-based compensation related to stock options granted to non-employees is recognized as the stock options areearned. The fair value of the stock options granted to non-employees was calculated at each reporting date using the Black-Scholes option-pricing model with the following assumptions: Year Ended December 31, 2017 2016 2015 Expected term (in years) 6.97 – 7.40 6.59 – 9.97 6.80 Expected volatility 61.7% – 65.4% 62.5% – 62.8% 59.8% Risk-free interest rate 2.17% – 2.33% 1.29% – 1.79% 1.95% Dividend yield — — — During the years ended December 31, 2016 and 2015, the Company granted 59,647 and 4,816 shares, respectively, tonon-employee consultants. No options were granted to non-employee consultants during the year ended December 31, 2017.The Company recorded stock-based compensation expense for non-employee awards during the years ended December 31,2017, 2016 and 2015 of $263,000, $505,000 and $15,000, respectively.Employee Stock Purchase PlanIn July 2016, the Company’s board of directors and stockholders approved the 2016 Employee Stock Purchase Plan(“2016 ESPP”), which became effective upon the IPO. The 2016 ESPP is intended to qualify as an employee stock131 Table of Contentspurchase plan under Section 423 of the Internal Revenue Code of 1986, as amended, and is administered by the Company’sboard of directors and the Compensation Committee of the board of directors. Under the 2016 ESPP, 150,000 shares of theCompany’s common stock were initially reserved for employee purchases of the Company’s common stock. Pursuant to the“evergreen” provision contained in the 2016 ESPP, the number of shares reserved for issuance automatically increases onJanuary 1 of each year, starting on January 1, 2017 and continuing through (and including) January 1, 2026 by the lesserof (i) 1% of the total number of shares of common stock outstanding on December 31 of the preceding fiscal year (ii)300,000 shares, or (iii) such other number of shares determined by the board of directors. The 2016 ESPP allows eligibleemployees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% oftheir eligible compensation. At the end of each offering period, eligible employees are able to purchase shares at 85% of thelower of the fair market value of the Company’s common stock at the beginning of the offering period or at the end of eachapplicable purchase period. As of December 31, 2017, a total of 317,222 shares were reserved for issuance under the 2016ESPP, 48,668 shares have been issued, and 268,554 shares are available for issuance.The fair value of the rights granted under the 2016 ESPP was calculated using the Black-Scholes option-pricing modelwith the following assumptions: Year Ended December 31, 2017 2016 Expected term (in years) 0.50 0.60 Expected volatility 52.43% – 52.44% 52.48% Risk-free interest rate 0.89% – 1.16% 0.45% Dividend yield — — Stock-Based CompensationTotal stock-based compensation expense was as follows (in thousands): Year Ended December 31, 2017 2016 2015Research and development $2,008 $1,080 $39General and administrative 2,233 1,050 60Total stock-based compensation expense $4,241 $2,130 $99 As of December 31, 2017, total unrecognized stock-based compensation expense was $10.7 million, which theCompany expects to recognize over a period of approximately 2.46 years.Note 14. 401(k) PlanIn March 2012, the Company adopted a retirement and savings plan under Section of 401(k) of Internal Revenue Code(the 401(k) Plan) covering all employees. The 401(k) Plan allows employees to make pre- and post-tax contributions up tothe maximum allowable amount set by the IRS. The Company does not make matching contributions to the 401(k) Plan onbehalf of participants.Note 15. Income TaxesNo provision for income taxes was recorded for the years ended December 31, 2017, 2016 and 2015. The Company hasincurred net operating losses for all the periods presented. The Company has not reflected any benefit of such net operatingloss carryforwards in the consolidated financial statements. The Company has established a full valuation allowance againstits deferred tax assets due to the uncertainty surrounding the realization of such assets.132 Table of ContentsThe following table presents domestic and foreign components of net loss for the periods presented (in thousands): Year Ended December 31, 2017 2016 2015Domestic $(34,556) $(34,977) $(10,483)Foreign (2,401) (2,200) (4,375)Total net loss $(36,957) $(37,177) $(14,858) The effective tax rate of the provision for income taxes differs from the federal statutory rate as follows: Year Ended December 31, 2017 2016 2015 Federal statutory income tax rate 34.0% 34.0% 34.0% State taxes, net of federal benefit 0.5 6.5 (2.7) Warrant revaluation — (4.3) (0.2) Research credit 2.6 1.8 1.1 Foreign tax rate difference (1.2) (1.6) (11.8) Change in tax law (31.2) — — Change in valuation allowance (5.2) (36.0) (19.9) Other 0.5 (0.4) (0.5) Provision for income taxes —% —% —% On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law making significant changesto the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21%effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide taxsystem to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreignearnings as of December 31, 2017.The corporate tax rate reduction to 21% under the Tax Act is effective January 1, 2018. Consequently, the Companyhas recorded a decrease in net deferred tax assets of $11.5 million, with a corresponding adjustment to the valuationallowance of $11.5 million, for the year ended December 31, 2017. The state deferred tax effect on federal deferred tax assetshas been calculated using 79% rather than the previous 66% federal benefit. The increase in deferred tax assets has beenoffset against an increase to the valuation allowance.The Deemed Repatriation Transition Tax (“Transition Tax”) is a tax on previously untaxed accumulated and currentearnings and profits (“E&P”) of certain foreign subsidiaries. To determine the amount of the Transition Tax, the Companymust determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amountof non-U.S. income taxes paid on such earnings. Since Protagonist Pty Limited, the Company’s only foreign subsidiary, has acumulative deficit in E&P, there is no Transition Tax to be included in the December 31, 2017 tax provision.On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which providesguidance for the tax effect of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one yearfrom the Tax Act’s enactment date for companies to complete the accounting under Accounting Standards CodificationTopic 740, Income Taxes (“ASC 740”). In accordance with SAB 118, the Company must reflect the income tax effects ofthose aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that the Company’saccounting for certain income tax effects of the Tax Act is incomplete, but it is able to determine a reasonable estimate, theCompany must record a provisional estimate in its consolidated financial statements. If the Company cannot determine aprovisional estimate to be included in its consolidated financial statements, it should continue to apply ASC 740 on thebasis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The amounts ofthe tax effects related to the Tax Act described in the paragraphs above represent the Company’s reasonable estimates and areprovisional amounts within the meaning of SAB 118. The provisional transition tax at zero has been determined based on thecumulative deficit foreign E&P as of the relevant measurement date. Any change to such estimate during the measurementperiod should have no material impact on the133 Table of ContentsCompany’s financial statements. Also, it is expected that the U.S. Treasury will issue regulations and other guidance on theapplication of certain provisions of the Tax Act. In subsequent periods, but within the measurement period, the Companywill analyze that guidance and other necessary information to refine its estimates and complete its accounting for the taxeffects of the Tax Act as necessary.In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income(“GILTI”) provisions of the Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return ontangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTIinclusions or treating any taxes on GILTI inclusions as a period cost are both acceptable methods subject to an accountingpolicy election. Effective for the quarter ending March 31, 2018, the Company will elect to treat any potential GILTIinclusions as a period cost as the Company is not projecting any material impact from GILTI inclusions and any deferredtaxes related to any inclusion would be immaterial.The components of the deferred tax assets are as follows (in thousands): December 31, 2017 2016Deferred tax assets: Net operating loss carryforwards $21,682 $21,501Depreciation and amortization 339 419Accruals/other 1,322 908Research and development credits and foreign credits 2,544 1,143Total deferred tax assets 25,887 23,971Valuation allowance (25,887) (23,971)Net deferred tax assets $ — $ — Realization of the deferred tax assets is dependent upon future taxable income, if any, the amount and timing of whichare uncertain. The Company has established a valuation allowance to offset deferred tax assets as of December 31, 2017 and2016 due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred taxassets. The valuation allowance increased by approximately $1.9 million, $13.4 million and $3.0 million during the yearsended December 31, 2017, 2016 and 2015, respectively. The current year change in the valuation allowance is mainlyrelated to the increase in net operating loss carryforwards generated during the year and offset by a decrease in the deferredtax assets related to the reduction of the U.S. corporate income tax rate as provided in the Tax Act. The increase in valuationallowance in the prior years in mainly related to the increase in net operating loss carryforwards incurred during therespective taxable years.At December 31, 2017, the Company had net operating loss carryforwards for federal income tax purposes ofapproximately $79.2 million which are available to offset future taxable income, if any, through 2033 and net operating losscarryforwards for state income tax purposes of approximately $68.0 million which are available to offset future taxableincome, if any, through 2033.At December 31, 2017 the Company also had accumulated Australian tax losses of $10.4 million available for carryforward against future earnings which, under relevant tax laws, do not expire but may be limited under certain circumstances.As of December 31, 2017, the Company also had $2.4 million of federal and $1.3 million of state research anddevelopment tax credit carryforwards available to reduce future income taxes. The federal research and development taxcredits will begin to expire in 2035, if not utilized. The state research and development tax credits have no expiration date.Federal and state laws impose substantial restrictions on the utilization of net operating loss and tax creditcarryforwards in the event of an ownership change for tax purposes, as defined in Section 382 of the Internal Revenue Code.As a result of such ownership changes, the Company’s ability to realize the potential future benefit of tax losses and taxcredits that existed at the time of the ownership change may be significantly reduced. Based on a review of the134 Table of ContentsCompany’s equity transactions since inception, the Company believes a portion of its net operating loss carryforwards andcredit carryforwards may be limited due to an equity financing which occurred in 2015.It is the Company’s policy to include penalties and interest expense related to income taxes as a component of otherexpense, as necessary.A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): Year Ended December 31, 2017 2016 2015Balance at beginning of year $2,131 $805 $ —Additions based on tax positions related to prior years — 707 690Additions based on tax positions related to current year 3,283 619 115Balance at end of year $5,414 $2,131 $805 The Company does not expect that its uncertain tax positions will materially change in the next twelve months. Thereversal of the uncertain tax benefits would not impact the Company’s effective tax rate as the Company continues tomaintain a full valuation allowance against its deferred tax assets.The Company files income tax returns in the United States federal jurisdiction, the State of California and Australia.The Company is not currently under examination by income tax authorities in federal, state or other jurisdictions. TheCompany’s tax returns for 2013 through 2017 remain open for examination due to the carryover of unused net operatinglosses and tax credits.Note 16. Net Loss per Share Attributable to Common StockholdersAs the Company had net losses for the years ended December 31, 2017, 2016 and 2015, all potential common shareswere determined to be anti-dilutive. The following table sets forth the computation of basic and diluted net loss per shareattributable to common stockholders (in thousands, except share and per share data): Year Ended December 31, 2017 2016 2015Numerator: Net loss $(36,957) $(37,177) $(14,858)Accretion of redeemable convertible preferred stock — (558) (75)Net loss attributable to common stockholders $(36,957) $(37,735) $(14,933)Denominator: Weighted-average shares used to compute net loss per common share, basicand diluted 17,694,505 6,501,796 251,717Net loss per share attributable to common stockholders, basic and diluted $(2.09) $(5.80) $(59.32) The following outstanding shares of potentially dilutive securities have been excluded from diluted net loss per sharecalculations for the years ended December 31, 2017, 2016 and 2015 because their inclusion would be anti-dilutive: Year Ended December 31, 2017 2016 2015Options to purchase common stock 2,438,151 2,393,829 833,178ESPP shares 24,938 — —Redeemable convertible preferred stock on an as-converted basis — — 5,323,103Warrants to purchase redeemable convertible preferred stock on an as-convertedbasis — — 275,861Total 2,463,089 2,393,829 6,432,142 135 Table of ContentsNote 17. Supplementary Financial Data (unaudited)The following table presents the selected quarterly financial data for the years ended December 31, 2017 and 2016: Consolidated Statements of Operations Quarter Ended March 31 June 30 September 30 December 31 (In thousands, except per share amounts)2017 License and collaboration revenue - related party $— $— $8,781 $11,282Loss from operations $(14,273) $(15,131) $(4,980) $(3,513)Net loss $(14,101) $(14,979) $(4,825) $(3,052)Net loss per share of common stock attributable to commonstockholders, basic and diluted (1) $(0.84) $(0.89) $(0.29) $(0.15)2016 Loss from operations $(7,040) $(7,091) $(7,138) $(11,397)Net loss $(11,747) $(7,098) $(7,084) $(11,248)Net loss per share of common stock attributable to commonstockholders, basic and diluted (1) $(40.96) $(19.07) $(0.87) $(0.67)136 Table of Contents Item 9.Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone. Item 9A.Controls and Procedures Evaluation of disclosure controls and proceduresManagement, under the supervision and with the participation of our Chief Executive Officer and Chief FinancialOfficer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a‑15(e) and15d‑15(e) under the Exchange Act) as of December 31, 2017. Based on the evaluation of our disclosure controls andprocedures, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls andprocedures as of December 31, 2017 were effective at the reasonable assurance level. Management’s annual report on internal control over financial reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, assuch term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our management, including our ChiefExecutive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control overfinancial reporting based on the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committeeof Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the criteria set forth in InternalControl-Integrated Framework, our management concluded that our internal control over financial reporting was effective asof December 31, 2017. This annual report does not include an attestation report of the Company’s registered public accounting firm regardinginternal control over financial reporting. Management’s report was not subject to attestation by the Company’s registeredpublic accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provideonly management’s report in this Annual Report on Form 10-K. Remediation of Material WeaknessesIn connection with the audit of our consolidated financial statements for the years ended December 31, 2015 and 2014,we and our independent registered public accounting firm identified two material weaknesses in our internal control overfinancial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financialreporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statementswill not be prevented or detected on a timely basis.The first material weakness related to a deficiency in the operation of our internal controls over the accounting for non-routine, complex equity transactions, which resulted in material post-closing adjustments to the convertible preferred stock,additional paid-in capital, interest expense, and gain from modification of the redeemable convertible preferred stockbalances in the consolidated financial statements for the year ended December 31, 2013. Our lack of adequate accountingpersonnel resulted in the identification of a second material weakness in our internal control over financial reporting forthe years ended December 31, 2015 and 2014, which continued to exist as of December 31, 2016. Specifically, we did not,and had not historically, appropriately design and implement controls over the review and approval of manual journal entriesand the related supporting journal entry calculations.Our plan to remediate the material weaknesses, included implementing a new accounting software system, configuringthe software to support the approval of manual journal entries and adding additional accounting personnel was completed asof December 31, 2017. We completed the implementation of a new accounting system during the first quarter of 2017 toimprove our information systems related controls. We have added additional finance and accounting personnel as needed toenhance segregation of duties and we have utilized consultants with technical accounting expertise as needed. Accordingly,management determined that the material weaknesses have been remediated as of December 31, 2017. 137 Table of ContentsChanges in internal control over financial reportingThere have been no changes in our internal control over financial reporting that occurred during our most recent fiscalquarter that have materially affected, or are reasonably likely to materially affect, our internal control over financialreporting. Item 9B.Other InformationNone.138 Table of Contents PART III Item 10.Directors, Executive Officers, and Corporate GovernanceExcept as set forth below, the information required by this item is incorporated by reference from our definitive ProxyStatement to be filed with the SEC in connection with our 2018 Annual Meeting of Stockholders within 120 days after theend of the fiscal year ended December 31, 2017.We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees,including our principal executive officer and principal financial officer. The Code of Business Conduct and Ethics is postedon our website at www.protagonist-inc.com.We intend to satisfy the disclosure requirement under Item 5.05 of Form 8‑K regarding an amendment to, or waiverfrom, a provision of this Code of Business Conduct and Ethics by posting such information on our website, at the address andlocation specified above and, to the extent required by the listing standards of The Nasdaq Global Market, by filing a CurrentReport on Form 8‑K with the SEC, disclosing such information. Item 11.Executive CompensationThe information required by this item is incorporated by reference from our definitive Proxy Statement to be filed withthe SEC in connection with our 2018 Annual Meeting of Stockholders within 120 days after the end of the fiscal year endedDecember 31, 2017. Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this item is incorporated by reference from our definitive Proxy Statement to be filed withthe SEC in connection with our 2018 Annual Meeting of Stockholders within 120 days after the end of the fiscal year endedDecember 31, 2017. Item 13.Certain Relationships and Related Transactions, and Director IndependenceThe information required by this item is incorporated by reference from our definitive Proxy Statement to be filed withthe SEC in connection with our 2018 Annual Meeting of Stockholders within 120 days after the end of the fiscal year endedDecember 31, 2017. Item 14.Principal Accounting Fees and ServicesThe information required by this item is incorporated by reference from our definitive Proxy Statement to be filed withthe SEC in connection with our 2018 Annual Meeting of Stockholders within 120 days after the end of the fiscal year endedDecember 31, 2017.139 Table of Contents PART IV Item 15.Exhibits, Financial Statement Schedules(a) The following documents are filed as part of this report:(1)FINANCIAL STATEMENTSThe financial statements filed as part of this Annual Report on Form 10‑K are included in Part II, Item 8 of thisAnnual Report on Form 10‑K.(2)FINANCIAL STATEMENT SCHEDULESFinancial statement schedules have been omitted in this Annual Report on Form 10‑K because they are notapplicable, not required under the instructions, or the information requested is set forth in the financial statementsor related notes thereto.(3)EXHIBITSThe exhibits listed in the accompanying Exhibit Index are filed as part of, or incorporated by reference into, thisAnnual Report on Form 10‑K. EXHIBIT INDEX Incorporation By ReferenceExhibit FiledNumber Exhibit Description Form SEC File No. Exhibit Filing Date Herewith3.1 Amended and Restated Certificate ofIncorporation 8‑K 00137852 3.1 8/16/2016 3.2 Amended and Restated Bylaws S‑1/A 333212476 3.2 8/1/2016 4.1 Specimen stock certificate evidencing the shares ofcommon stock S‑1/A 333212476 4.1 8/1/2016 4.2 Third Amended and Restated Investor RightsAgreement, by and among ProtagonistTherapeutics, Inc. and the stockholders namedtherein, dated July 31, 2016. S‑1/A 333212476 4.2 8/1/2016 4.3 Form of Indenture S-3 333-220314 4.5 9/1/2017 10.1+ Protagonist Therapeutics, Inc. 2007 Stock Optionand Incentive Plan, as amended and restated, andform of option agreement, exercise notice, joinder,and adoption agreement thereunder. S‑1 333212476 10.1 7/11/2016 10.2+ Protagonist Therapeutics, Inc. 2016 EquityIncentive Plan and forms of stock option grantnotice, option agreement, notice of exercise,restricted stock unit grant notice and restrictedstock unit agreement thereunder. S‑1/A 333212476 10.2 8/1/2016 10.3+ Protagonist Therapeutics, Inc. 2016 EmployeeStock Purchase Plan. S‑1/A 333212476 10.3 8/1/2016 10.4+ Form of Indemnity Agreement for Directors andOfficers. S‑1/A 333212476 10.4 8/1/2016 10.5 Lease, dated September 30, 2013, by and betweenthe Registrant and Berrueta Family Partnership. S‑1 333212476 10.5 7/11/2016 140 Table of Contents Incorporation By ReferenceExhibit FiledNumber Exhibit Description Form SEC File No. Exhibit Filing Date Herewith10.6 First Amendment to Lease, dated March 24, 2014,by and between the Registrant and BerruetaFamily Partnership. S‑1 333212476 10.6 7/11/2016 10.7 Second Amendment to Lease, dated May 4 2015,by and between the Registrant and BerruetaFamily L.P. S‑1 333212476 10.7 7/11/2016 10.8 Third Amendment to Lease, dated August 11,2015, by and between the Registrant and BerruetaFamily L.P. S‑1 333212476 10.8 7/11/2016 10.9 Lease, dated March 6, 2017, by and between theRegistrant and BMR-Pacific Research Center LP. 10-K 001-37852 10.9 3/7/2017 10.10+ Severance Agreement, dated August 1, 2016, byand between the Registrant and Dinesh Patel. S‑1/A 333212476 10.9 8/1/2016 10.11+ Severance Agreement, dated August 1, 2016, byand between the Registrant and David Y. Liu,Ph.D. S‑1/A 333212476 10.10 8/1/2016 10.12+ Severance Agreement, dated August 1, 2016, byand between the Registrant and Tom O’Neil. S‑1/A 333212476 10.12 8/1/2016 10.13+ Severance Agreement, dated August 1, 2016, byand between the Registrant and Richard Shames,M.D. S‑1/A 333212476 10.13 8/1/2016 10.14† Research and Collaboration Agreement, datedJune 16, 2012, by and among the Registrant,Protagonist Pty. Ltd. and Zealand Pharma A/S. S‑1 333212476 10.17 7/11/2016 10.15† Contract Extension Letter of Agreement, datedJune 1, 2013, by and among the Registrant,Protagonist Pty. Ltd. and Zealand Pharma A/S. S‑1 333212476 10.18 7/11/2016 10.16† Agreement on Addition of AdditionalCollaboration Program, dated September 16,2013, by and among the Registrant, ProtagonistPty. Ltd. and Zealand Pharma A/S. S‑1 333212476 10.19 7/11/2016 10.17† Protagonist Assumption of Responsibility, datedJanuary 28, 2014, by and between the Registrantand Zealand Pharma A/S. S‑1 333212476 10.20 7/11/2016 10.18† Agreement to Assign Patent Applications, datedFebruary 7, 2014, by and between the Registrant,Protagonist Pty. Ltd. and Zealand Pharma A/S. S‑1 333212476 10.21 7/11/2016 10.19† Abandonment Agreement, dated February 28,2014, by and among the Registrant, ProtagonistPty. Ltd. and Zealand Pharma A/S. S‑1 333212476 10.22 7/11/2016 10.20† Exclusive License and Collaboration Agreement,dated May 26, 2017, by and between theRegistrant and Janssen Biotech, Inc. 8-K/A 001-37852 10.1 7/31/2017 10.21 Sales Agreement, dated September 1, 2017, byand between the Registrant and Cantor Fitzgerald& Co. S-3 333-220314 1.2 9/1/2017 21.1 List of Subsidiaries X23.1 Consent of Independent Registered PublicAccounting Firm X24.1 Power of Attorney (included in signature page ofthis Form 10‑K) X141 Table of Contents Incorporation By ReferenceExhibit FiledNumber Exhibit Description Form SEC File No. Exhibit Filing Date Herewith31.1 Certification of Chief Executive Officer requiredby Rule 13a‑14(a) or Rule 15d‑14(a) of theSecurities Exchange Act of 1934, as adoptedpursuant to Section 302 of the Sarbanes-OxleyAct of 2002 X31.2 Certification of Chief Financial Officer requiredby Rule 13a‑14(a) or Rule 15d‑14(a) of theSecurities Exchange Act of 1934, as adoptedpursuant to Section 302 of the Sarbanes-OxleyAct of 2002 X 32.1* Certification of Chief Executive Officer and ChiefFinancial Officer, as required byRule 13a‑14(b) or Rule 15d‑14(b) andSection 1350 of Chapter 63 of Title 18 of theUnited States Code (18 U.S.C. §1350), as adoptedpursuant to Section 906 of the Sarbanes-OxleyAct of 2002 X101.INS XBRL Instance Document X101.SCH XBRL Taxonomy Extension Schema Document X101.CAL XBRL Taxonomy Extension Calculation LinkbaseDocument X101.DEF XBRL Taxonomy Extension Definition LinkbaseDocument X101.LAB XBRL Taxonomy Extension Labels LinkbaseDocument X101.PRE XBRL Taxonomy Extension PresentationLinkbase Document X+ Indicates management contract or compensatory plan, contract or agreement.† Confidential treatment has been granted for a portion of this exhibit.* This certification attached as Exhibit 32.1 that accompanies this Annual Report on Form 10‑K is not deemed filed withthe Securities and Exchange Commission and is not to be incorporated by reference into any filing of ProtagonistTherapeutics, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended,whether made before or after the date of the Form 10‑K, irrespective of any general incorporation language contained insuch filing. 142 Table of Contents SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized. PROTAGONIST THERAPEUTICS, INC. Date: March 7, 2018By: /s/ Dinesh V. Patel, Ph.D. Dinesh V. Patel, Ph.D. President, Chief Executive Officer and Director (Principal Executive Officer) POWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes andappoints Dinesh V. Patel and Thomas P. O’Neil, and each of them, his true and lawful attorneys-in-fact, with full power ofsubstitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10‑K, and tofile the same, with exhibits thereto and other documents in connection therewith with the Securities and ExchangeCommission, hereby ratifying and confirming all that said attorneys-in-fact or any of them or their substitute or substitutesmay lawfully do or cause to be done by virtue thereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant in the capacities and on the dates indicated:Signature Title Date /s/ Dinesh V. Patel, Ph.D. President, Chief Executive Officer and Director March 7, 2018Dinesh V. Patel, Ph.D. (Principal Executive Officer) /s/ Thomas P. O’Neil Chief Financial Officer March 7, 2018Thomas P. O’Neil (Principal Financial and Accounting Officer) /s/ Harold E. Selick, Ph.D. Chairman of the Board of Directors March 7, 2018Harold E. Selick, Ph.D. /s/ Chaitan Khosla, Ph.D. Director March 7, 2018Chaitan Khosla, Ph.D. /s/ Sarah M. Noonberg, M.D., Ph.D. Director March 7, 2018Sarah M. Noonberg, M.D., Ph.D. /s/ Armen Shanafelt, Ph.D. Director March 7, 2018Armen Shanafelt, Ph.D. /s/ William D. Waddill Director March 7, 2018William D. Waddill /s/ Lewis T. Williams, M.D., Ph.D. Director March 7, 2018Lewis T. Williams, M.D., Ph.D. Exhibit 21.1SUBSIDIARIES OF PROTAGONIST THERAPEUTICS, INC.Subsidiary Jurisdiction of Formation/OrganizationProtagonist Pty Limited Australia Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (No. 333-213120 and No.333-216532) and Form S-3 (No. 333-220314) of Protagonist Therapeutics, Inc. of our report dated March 7, 2018 relating tothe consolidated financial statements, which appears in this Form 10-K./s/ PricewaterhouseCoopers LLPSan Jose, CAMarch 7, 2018 Exhibit 31.1CERTIFICATION OF CHIEF EXECUTIVE OFFICERPursuant to Section 302 of the Sarbanes-Oxley Act of 2002I, Dinesh V. Patel, certify that:1. I have reviewed this Annual Report on Form 10-K of Protagonist Therapeutics, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly presentin all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this report;4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly during the period in which this reportis being prepared;b)Designed such internal control over financial reporting, or caused such internal control over financial reporting tobe designed under our supervision, to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples;c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered bythis report based on such evaluation; andd) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred duringthe registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an Annual Report) thathas materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting; and5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions):a) All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize andreport financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting. /s/ Dinesh V. Patel, Ph.D.Date: March 7, 2018 Dinesh V. Patel, Ph.D. President, Chief Executive Officer Exhibit 31.2CERTIFICATION OF CHIEF FINANCIAL OFFICERPursuant to Section 302 of the Sarbanes-Oxley Act of 2002I, Thomas P. O’Neil, certify that:1. I have reviewed this Annual Report on Form 10-K of Protagonist Therapeutics, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly presentin all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this report;4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly during the period in which this reportis being prepared;b)Designed such internal control over financial reporting, or caused such internal control over financial reporting tobe designed under our supervision, to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered bythis report based on such evaluation; andd) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred duringthe registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an Annual Report) thathas materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting; and5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions):a) All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize andreport financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting. /s/ Thomas P. O’NeilDate: March 7, 2018 Thomas P. O’Neil Chief Financial Officer Exhibit 32.1CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICERPursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the “ExchangeAct”) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Dinesh V. Patel, ChiefExecutive Officer of Protagonist Therapeutics, Inc. (the “Company”), and Thomas P. O’Neil, Chief Financial Officer of theCompany, each hereby certify that, to the best of his knowledge:1. The Company’s Annual Report on Form 10-K for the period ended December 31, 2017 (the “Annual Report”), to whichthis Certification is attached as Exhibit 32.1, fully complies with the requirements of Section 13(a) or Section 15(d) of theExchange Act; and2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition and resultsof operations of the Company. /s/ Dinesh V. Patel, Ph.D.Date: March 7, 2018 Dinesh V. Patel, Ph.D. President, Chief Executive Officer /s/ Thomas P. O’NeilDate: March 7, 2018 Thomas P. O’Neil Chief Financial OfficerThis certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and ExchangeCommission and is not to be incorporated by reference into any filing of Protagonist Therapeutics, Inc. under the SecuritiesAct of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of theForm 10-K), irrespective of any general incorporation language contained in such filing. 

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