Protagonist Therapeutics, Inc.
Annual Report 2018

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, 2018or☐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.)7707 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 every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐Indicate by check mark 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 an 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☐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 $96.0 million as of June 30, 2018, based upon theclosing sale price on The Nasdaq Global Market reported on June 30, 2018. Excludes an aggregate of 6,926,690 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, 2018, the registrantassumed that a stockholder was an affiliate of the registrant at June 30, 2018 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 30,2018. 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 23,347,066 shares of registrant’s Common Stock, par value $0.00001 per share, outstanding as of February 28, 2019. 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, 2018. Table of ContentsPROTAGONIST THERAPEUTICS, INC.2018 FORM 10‑K ANNUAL REPORTTABLE OF CONTENTS PagePART I Item 1. Business1Item 1A. Risk Factors30Item 1B. Unresolved Staff Comments76Item 2. Properties76Item 3. Legal Proceedings76Item 4. Mine Safety Disclosures76 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities77Item 6. Selected Financial Data79Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations80Item 7A. Quantitative and Qualitative Disclosures about Market Risk95Item 8. Financial Statements and Supplementary Data97Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure131Item 9A. Controls and Procedures131Item 9B. Other Information131 PART III Item 10. Directors, Executive Officers, and Corporate Governance132Item 11. Executive Compensation132Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters132Item 13. Certain Relationships and Related Transactions, and Director Independence132Item 14. Principal Accounting Fees and Services132 PART IV Item 15. Exhibits, Financial Statement Schedules133SIGNATURES 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.OverviewWe are a clinical-stage biopharmaceutical company developing peptide-based product candidates to addresssignificant unmet medical needs in hematology and gastroenterology. Figure 1: Our Product Pipeline1 Table of ContentsIn hematology, our most advanced clinical product candidate, PTG-300, is under development for the treatment ofcertain rare blood disorders characterized by ineffective erythropoiesis, excessive red blood cells or iron overload. PTG-300is an injectable compound that mimics the effect of the natural hormone hepcidin, but with greater potency, solubility andstability. Hepcidin is a key hormone in regulating iron equilibrium and is critical to the proper development of red bloodcells. We are currently developing PTG-300 for the treatment of chronic anemia and iron overload, with an initial focus onbeta-thalassemia non-transfusion dependent and transfusion dependent patients where the primary endpoints arehemoglobin increases and transfusion reductions, respectively. PTG-300 has received an orphan drug designation from theU.S. Food and Drug Administration (“FDA”) and European Union (“EU”) regulatory authorities. The FDA has granted FastTrack designation to PTG-300 for the treatment of beta-thalassemia. In the first quarter of 2019, we began dosing patients in aglobal Phase 2 study of PTG-300 in beta-thalassemia. We plan to initiate a Phase 2 study in a second indication in the secondhalf of 2019.In gastroenterology our clinical stage product candidates, PTG-200 and PN-943, are potential first-in-class oral drugscurrently in development for inflammatory bowel disease (“IBD”), a GI disease consisting primarily of ulcerative colitis(“UC”) and Crohn’s disease (“CD”), that block biological pathways currently targeted by marketed injectable antibodydrugs. Our orally stable peptide approach offers targeted delivery to the gastrointestinal (“GI”) tissue compartment. Webelieve that, compared to antibody drugs, these product candidates have the potential to provide improved safety due tominimal exposure in the blood, increased convenience and compliance due to oral delivery, and the opportunity for theearlier introduction of targeted therapy. As a result, if approved, they may transform the existing treatment paradigm for IBD. PTG-200 is a potential first-in-class oral Interleukin-23 receptor (“IL-23R”) antagonist for the treatment of IBD. Wehave entered into a worldwide license and collaboration agreement with Janssen Biotech, Inc. (“Janssen”), a Johnson &Johnson company, to co-develop and co-detail PTG-200 for all indications, including IBD. See “Item 7. Management’sDiscussion and Analysis – Overview” and Note 3 to the Consolidated Financial Statements included elsewhere in thisAnnual Report on Form 10-K for additional information. In 2018, we completed a Phase 1 clinical study to evaluate thesafety, pharmacokinetics and pharmacodynamics of PTG-200 in healthy volunteers. We expect Janssen to file a U.S.Investigational New Drug application (“IND”) for PTG-200 in CD in the first half of 2019.PN-943, a potential first-in-class oral, alpha-4-beta-7 (“α4β7”) specific integrin antagonist, is currently in a Phase 1single and multiple ascending dose clinical trial in healthy volunteers to evaluate safety, pharmacokinetics andpharmacodynamics. We developed PN-943 as a more potent oral gut-restricted α4β7 backup compound to PTG-100, our firstgeneration oral gut-restricted α4β7 inhibitor that was being developed for treatment of ulcerative colitis. In March 2018, weannounced the discontinuation of a global Phase 2 clinical trial of PTG-100 in patients with moderate to severe UC due tofutility following a planned interim analysis by an independent Data Monitoring Committee. In August 2018, we announcedthat an independent, blinded re-read of endoscopies from the study had demonstrated signals of clinical efficacy. A humanerror in the initial endoscopy reads by the original vendor which was characterized by an unusually high placebo effect ledto the original futile outcome. In addition, a pre-specified blinded histopathology analysis of colon biopsies from the trialindicated dose-dependent high rates of histologic remission which supported the observations of clinical remission andendoscopy responses for PTG-100. During 2018 we replaced PTG-100 with PN-943 as a development candidate for thetreatment of IBD based on an assessment of preclinical data from PN-943 suggesting that PN-943 is a more potent compoundthan PTG-100.We anticipate reporting top-line results of the PN-943 Phase 1 study in the first half of 2019. After having establishedpreliminary clinical efficacy with PTG-100 in UC patients, the PN-943 Phase 1 study is designed to evaluate potency andtarget engagement of PN-943 in comparison to the historical Phase 1 data with PTG-100. If this study is successful, weanticipate filing an IND in the second half of 2019 in preparation for initiating a Phase 2 proof-of-concept (“POC”) study inUC in the first half of 2020.Our clinical development programs are all derived from our proprietary discovery platform. Our platform enables us toengineer novel, structurally constrained peptides that retain key advantages of both oral small molecules and injectableantibody drugs, while overcoming many of their limitations as therapeutic agents. Importantly, constrained peptides can bedesigned to alleviate the fundamental instability inherent in traditional peptides to allow different delivery forms, such asoral, subcutaneous, intravenous, and rectal.2 Table of ContentsIn addition, we continue to use our peptide technology platform to discover product candidates against targets indisease areas with significant unmet medical needs.Our Product Candidates PTG-300 PTG-300 is an injectable hepcidin mimetic. Hepcidin is a natural hormone that regulates iron metabolism. We aredeveloping PTG-300 for the treatment of patients with beta-thalassemia by targeting the chronic anemia that arises frominsufficient production and decreased survival of red blood cells known as ineffective erythropoiesis. In diseases ofineffective erythropoiesis, excessive quantities of iron in the bone marrow contribute to oxidative stress and premature celldeath causing anemia. In healthy individuals, hepcidin regulates iron levels by inhibiting iron absorption from the GI tractand by limiting macrophage release of iron in the bone marrow. Individuals with beta-thalassemia and myelodysplasticsyndromes (“MDS”) can have insufficient hepcidin to maintain appropriate iron levels that result in chronic anemia. Becauseof stability issues, complexity of synthesis and solubility limitations, direct replacement with native hepcidin is not apractical therapeutic approach. We developed PTG-300 as a stable, soluble, more readily manufactured injectable hepcidinmimetic that could potentially prevent iron toxicity and anemia with chronic sub-cutaneous injections.We completed a Phase 1 single ascending and repeat dose clinical trial in normal healthy volunteers during the fourthquarter of 2017. In the study, PTG-300 produced dose-dependent increases in blood exposure and was well tolerated, with noserious adverse 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 and absent of pain. The Phase 1 studydemonstrated that PTG-300 induced dose-related reductions in serum iron, which persisted beyond 72 hours at higher doselevels. PTG-300 has received orphan drug designation from the FDA and EU regulatory authorities, and Fast Trackdesignation from the FDA for the treatment of beta-thalassemia. Fast Track designation is an expedited review to facilitatedevelopment of investigational drugs which treat a serious or life-threatening condition and fill an unmet medical need. In2018, we successfully filed an IND in the United States and related clinical trial applications outside the United States andinitiated enrollment in a global Phase 2 single-arm open label study of PTG-300 in patients with beta-thalassemia. In the first quarter of 2019, we began dosing patients in the Phase 2 study in beta-thalassemia. The primary objectivesof this study are to evaluate the safety, tolerability and preliminary efficacy of PTG-300 and identify an appropriate startingdose and titration regimen for registration studies. We plan to initiate an additional Phase 2 study in a second indication in the second half of 2019. PTG-200 PTG-200 is a potential first-in-class GI-restricted IL‑23R specific antagonist peptide product candidate for the treatmentof IBD. Interleukin‑23 (“IL-23”), a member of the IL‑12 family of pro-inflammatory cytokines, is a protein that regulatesinflammatory and immune function and plays a key role in the development of IBD. By blocking the IL‑23 receptor withPTG‑200 in the GI tissue compartment, we hope to improve disease symptoms and reduce bowel wall damage whilepotentially minimizing the risk of systemic side effects due to its GI-restricted nature. The IL-23 pathway is targeted by thedual IL-12 and IL‑23 antagonist antibody ustekinumab, administered as an infusion and marketed as Stelara‑®, for psoriasis,psoriatic arthritis, and moderate-to-severe CD.We completed a Phase 1 clinical trial in normal healthy volunteers in the fourth quarter of 2018. This Phase 1 study,conducted in Australia, was a randomized, double-blind, placebo-controlled, single and multiple dose-escalation trial ineighty healthy volunteers. The primary endpoint was safety and tolerability. Secondary endpoints included the identificationof the maximally tolerated dose and the evaluation of pharmacokinetic parameters.3 Table of ContentsWe 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. Together with Janssen, we currently plan todevelop PTG-200 for the treatment of moderate-to-severe CD, potentially followed by UC. We continue to providecompound supply services and expect Janssen to file an IND during the first half of 2019 to support a Phase 2 clinical studyin patients with Crohn’s disease.PTG-100 PTG-100 is our first generation α4β7 inhibitor that shares the same α4β7 integrin target as the injectable antibody drugvedolizumab, marketed as Entyvio®, for the treatment of moderate-to-severe UC and CD. We completed extensive pre-clinical studies of PTG-100 in which we established pharmacological POC, and completed a Phase 1 clinical trial in Australiain 2016. We initiated a global Phase 2 study of PTG-100 in patients with moderate to severe ulcerative colitis. In March2018, we announced the discontinuation of the Phase 2 clinical trial due to futility following a planned interim analysis byan independent Data Monitoring Committee. The interim data revealed an unusually high placebo rate of clinical remissionthat led to a futility decision and discontinuation of the trial. A human error in the initial endoscopy reads by the originalvendor led to the original futile outcome. In August 2018, we announced that an independent, blinded re-read ofendoscopies from the study had demonstrated signals of clinical efficacy. In addition, a pre-specified blinded histopathologyanalysis of colon biopsies from the trial indicated dose-dependent high rates of histologic remission which supported theobservations of clinical remission and endoscopy responses for PTG-100.PN-943 PN-943 has the potential to be a first-in-class oral, α4β7 antagonist for the treatment of IBD. Based on preclinical data,we believe that PN-943 may be a more potent α4β7 integrin antagonist compound than PTG-100 without sacrificing its otherpositive attributes, such as selectivity and tolerability. The α4β7 integrin is one of the most GI-specific biological targets forIBD. It is a cell surface protein present on T cells that plays an important role in the trafficking of T cells to the GI tissuecompartment by binding to MAdCAM‑1, an extracellular protein that resides mostly in the GI vasculature. We are leveraging several factors to inform and guide the clinical development of PN-943 for the treatment of IBD.First, PN-943 (as with PTG-100) shares the same α4β7 integrin target as the injectable antibody drug vedolizumab, marketedas Entyvio®, for the treatment of moderate-to-severe UC and CD. Second, we have completed extensive pre-clinical studiesof PN-943 in which we established pharmacodynamic target engagement POC, including effects on receptor occupancy, Tcell trafficking and mucosal healing in rodents and/or monkeys. Based on preclinical data, we believe that PN-943 may be amore potent α4β7 integrin antagonist compound than PTG-100 without sacrificing its other positive attributes, such asselectivity and tolerability. Third, we are utilizing pharmacodynamic (“PD”) biomarker assays similar to those used withPTG-100 and described in scientific publications with Entyvio® and other antibodies as indicators of target engagement toevaluate POC in our Phase 1 clinical trial with PN-943. These PD data include assessment of receptor occupancy and receptorexpression as observed with PTG-100 in a previous Phase 1 healthy volunteer study. We believe that we can leverage thedevelopment and regulatory path of Entyvio® and other approved antibody drugs for IBD to help inform the design of ourclinical development studies. Finally, we demonstrated that our first generation α4β7 integrin antagonist peptide compoundPTG-100 was safe and well-tolerated and showed evidence of clinical activity in the Phase 2 study in UC patients (n=83),which can inform the clinical development of PN-943.We initiated a Phase 1 single ascending dose (“SAD”) and multiple ascending dose (“MAD”) clinical trial of PN-943 inAustralia to evaluate the safety and tolerability, pharmacokinetics (“PK”), and PD-based POC in healthy subjects. We expectto announce results from the Phase 1 clinical trial in the first half of 2019. Additional Product CandidatesWe are currently researching potential oral and injectable peptide-based product candidates for a range of conditionsincluding, but not restricted to, hematology and GI diseases. 4 Table of ContentsOur IBD Solution: Oral, GI-Restricted Peptides as Targeted TherapiesFor the IBD targets of interest, the size and nature of our peptides are carefully selected and modified so as to acquirethe desired 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 anti-drug antibodies are less likely to be elicitedagainst constrained peptides, due to their small size, lack of epitope density, resistance to proteolysis, oraltolerance, and minimal 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 injectable antibodydrugs. This targeted delivery to the site of action may lead to more immediate and significant target engagementat 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, payors, and physicians.PTG‑300: AN INJECTABLE HEPCIDIN MIMETIC PTG-300 was discovered through our peptide technology platform and is being developed as a novel injectablemimetic of the hormone hepcidin to potentially treat chronic anemia due to ineffective erythropoiesis in certain rare blooddisorders with an initial focus on beta-thalassemia. In these diseases, excessive quantities of iron in the bone marrow inhibitthe production and decrease the survival of red blood cells, causing anemia. In healthy individuals, hepcidin regulates ironlevels in the serum and the bone marrow. Because of stability issues, complexity of synthesis and solubility limitations,direct hepcidin replacement is not a practical therapeutic approach. We designed PTG-300 as a stable, soluble,manufacturable hepcidin mimetic that can treat anemia with weekly or less frequent subcutaneous delivery.5 Table of ContentsMechanism of Action and Rationale The molecular target of the hormone hepcidin is the cellular trans-membrane protein ferroportin, which functions as anexport channel for intracellular iron in macrophages, liver hepatocytes, and duodenal enterocytes. By binding to theextracellular domain of ferroportin, hepcidin prevents uptake of iron from the duodenal enterocytes and redistributes iron byreducing the export of iron from inside the cells to the systemic circulation. Excessive quantities of iron relative to the lowerlevels of beta-globin chains in the bone marrow induce ineffective erythropoiesis resulting in anemia. As a hepcidin mimetic,PTG-300 may redistribute iron to the bone marrow macrophages, reduce iron-induced oxidative stress in the bone marrow,and allow for sufficient production of red blood cells. In addition, by limiting the release of iron into the blood, PTG-300may inhibit the damage caused by excessive absorption of iron by vital organs such as the liver and heart (i.e. secondary ironoverload).Overview of Beta-Thalassemia and Current TherapiesWe anticipate our initial clinical indication for PTG-300 will be the treatment of chronic anemia in beta-thalassemia.As a result of the underlying genetic defect in b-globin production, beta-thalassemia patients may be severely anemicresulting in the need for lifelong supportive care with regular red blood cell transfusions. Repeated transfusions can causesecondary iron overload in the heart and liver which results in shortened lifespan in patients. In the bone marrow, elevatedlevels of iron can prevent red blood cells from fully developing, resulting in anemia. In addition, the resulting immature redblood cells can aggregate in the spleen causing organ enlargement that may require surgical removal. In conditions ofineffective erythropoiesis, such as beta-thalassemia and MDS, hepcidin levels are suppressed leading to increases in ironabsorption from the GI tract and iron export from macrophages which may be toxic to developing erythrocytes. It has beenproposed that agents with hepcidin activity may help correct the iron distribution abnormalities in thalassemia withbeneficial effects on erythropoiesis.Existing treatment options for iron-loading anemia and secondary iron overload are limited. Patients with transfusion-dependent thalassemia (“TDT”) require lifelong regular red blood cell transfusions and general supportive care. Red bloodcell transfusions can treat a patient’s anemia but exacerbate the patient’s iron overload and are burdensome. The ironoverload caused by transfusions may require treatment with chelating agents, which can have adverse effects. Transfusionand iron chelation therapy have significantly improved the survival of TDT patients over the last few decades. However,these agents work very slowly and have significant kidney and liver toxicity issues. We believe that PTG-300 may be able torestore iron homeostasis in the bone marrow as well as reduce excess circulating iron, improving anemia and therebyreducing or eliminating the need for red blood cell 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 Disease Control.The disease is rarer in the United States where Decision Resources Group (“DRG”) estimates there are approximately 3,000patients. In the major markets of the United States, Italy, Germany, UK, Spain, and France, DRG estimates there areapproximately 16,000 diagnosed patients. Most patients with beta-thalassemia suffer from anemia caused by hepcidindeficiency and a significant number are dependent on transfusions and chelating agents, which can cost between $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 native hepcidin andmaintain reduced serum iron levels for at least 24 hours following a single subcutaneous injection (Figure 2). We have alsodemonstrated that PTG-300 in a dose dependent manner can reduce serum iron in healthy mice, rats, and cyno, thusestablishing pre-clinical POC.6 Table of ContentsFigure 2: Significant Difference Between PTG-300 and Synthetic Hepcidin in Lowering Serum Iron in Healthy Mice PTG‑300 was also able to address the underlying anemia in a mouse genetic model of beta-thalassemia, as shown mostprominently by the significant increase in red blood cell number (“RBC”) and hemoglobin (“HGB”) with the correspondingdecrease in reticulocyte content (Figure 3). Consequently, we also observed a significant reduction in the pathologicalincreases in spleen weight (splenomegaly) by addressing the underlying ineffective erythropoiesis. Furthermore, PTG‑300was effective in reducing the increase in liver iron content. In contrast the oral iron chelator deferiprone (“DFP”) did notcorrect the anemia or the splenomegaly.7 Table of ContentsFigure 3: PTG-300 Addresses Ineffective Erythropoiesis in Mouse Beta-thalassemia8 Table of ContentsPTG-300’s Phase 1 Clinical Trial Overview We completed a Phase 1 clinical trial in Australia during the fourth quarter of 2017. The Phase 1 randomized, placebo-controlled single ascending- and repeat-dose study was conducted to evaluate the safety, tolerability, pharmacokinetics andpharmacodynamics of PTG-300 in 62 normal healthy male volunteers. The Phase 1 study demonstrated that PTG-300 induced dose-related reductions in serum iron, which persisted beyond72 hours at higher dose levels. These results were consistent with known activities of hepcidin and pre-clinical studies ofPTG-300. In the study, PTG-300 produced dose-dependent increases in blood exposure, and was well tolerated, with noserious adverse 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 and absent of pain. The study provided apharmacodynamic POC and established a range of doses that could be evaluated in the treatment of beta-thalassemia. PTG‑300’s Development Program In 2018, we successfully filed a U.S. IND as well as ex-U.S. clinical trial applications and initiated enrollment in aglobal Phase 2 single-arm open label study of PTG-300 in patients with non-transfusion dependent and transfusiondependent beta-thalassemia. The primary objectives of this study are to evaluate the safety, tolerability and preliminaryefficacy of PTG-300 and identify an appropriate starting dose and titration regimen for registration studies.In addition to the potential treatment of anemia in rare blood disorders, such as beta-thalassemia and myelodysplasticsyndromes, PTG-300 therapy may also have potential benefit in other diseases of iron dysregulation such as hereditaryhemochromatosis, polycythemia vera, siderophilic infections, and liver fibrosis and we are evaluating potential developmentpathways for those indications.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. In UC, inflammation may be limited to part of the colon or extend through itsentirety. UC is primarily characterized by ulceration of the intestinal surface, accompanied by rectal bleeding and frequent,urgent bowel movements. CD occurs anywhere along the GI tract, commonly affecting the small intestine and the proximallarge intestine. CD complications may include strictures and fistula, which penetrate all layers of the intestine. UC is usuallydiagnosed earlier than CD, due to bleeding symptoms. Patients with CD may initially present with abdominal pain, fatigueand anorexia, which can be misdiagnosed. Both diseases’ peak diagnosis years are in young adulthood and are found aboutequally in both males and females. Management is lifelong and affects school attendance, graduation rates, childbearing andwork productivity. IBD prevalence is increasing worldwide and is correlated with the adoption of western diets and lifestyle,as well as genetic factors (5 to 20% of affected patients have a first degree relative with the disease). Market OverviewIn 2017, GlobalData estimated that the UC market was approximately $5.4 billion across the United States, France,Germany, Italy, Spain, the United Kingdom and Japan (the “7MM”). By the end of 2025, the UC market in the 7MM isexpected to reach $6.9 billion. During the same time period, GlobalData estimated that the CD market will grow from $9.0billion to $13.8 billion. Greater than 84% of UC product sales are from injectable biologic products, including biosimilars.Conventional small molecule therapies, such as aminosalicylates are not effective in CD, therefore once patients arediagnosed, they are even more likely to be treated with biologics than UC patients. Current Standard of Care in IBD In the last five years, treatment of IBD has evolved from a focus on successful symptom management to an emphasis onmodifying the underlying disease to achieve long-term remission. New technologies and outcome measures have beendeveloped to improve staging definitions and assessments of treatment benefit. Nonetheless, halting or9 Table of Contentsreversing IBD progression has not yet been achieved with any single agent therapy and attaining and maintaining long-termremission in most patients remains an unmet medical need. Across therapeutic classes, 15 to 25% rates of clinical remissionrepresent the current ceiling in patients with moderate-to-severely active disease. Biosimilar infliximab and other tumor necrosis factor (“TNF”) inhibitors are the first line standard of care in moderate-to-severe IBD. Anti-TNFs bind to and neutralize a central pro-inflammatory cytokine in the gut via systemicimmunosuppression. As a result, they can be associated with infection and malignancy risk. Although the magnitude of theserisks is relatively low, they are significant for the young IBD population who must continue on lifelong treatment. Inaddition, more than 10% of patients treated with anti-TNF agents lose response with each year of treatment. In 2014, a novelanti-trafficking mechanism launched with vedolizumab (Entyvio®), which blocks migration of leukocytes into the gut viaα4β7 integrins. This mechanism remains the only true “gut selective” approach in the IBD market today, althoughformulation technologies can limit systemic exposure from oral agents. Five years post-launch Entyvio® has shown anexcellent safety profile, although it requires intravenous administration. Entyvio® was followed by the launch ofustekinumab (Stelara®) in CD in 2016, which blocks inflammation produced through the IL-12 and IL-23 pathways, andtofacitinib (Xeljanz®), an oral pan-Janus kinase (JAK) inhibitor was recently approved in UC.No head-to-head trials comparing the long-term safety and efficacy of the marketed mechanisms of action has beencompleted, although two are in progress to compare outcomes of anti-integrins and anti-TNFs. The first formal combinationtrials in IBD were initiated in the last year, adding new mechanisms such as integrin inhibitors or IL-23 inhibitors to anti-TNFs. Most IBD experts now believe that combining treatment classes with additive or synergistic mechanisms of action willbe required to attain the disease-modifying effects and lasting remissions documented in other areas of immunology, such aspsoriasis or rheumatoid arthritis.We believe the development of new, potent and targeted oral therapies for IBD may offer safer and more effectivetreatment options, alone or in combination, for moderate-to-severe IBD patients. In addition, many clinicians continue toadvocate for earlier introduction of targeted therapeutics in mild-to-moderate IBD in order to prevent disease progression andirreversible gastrointestinal damage. Our oral, GI-restricted, peptide drugs PN-943 and PTG-200 work on the same specificvalidated targets as FDA-approved injectable antibodies and have the potential to offer improved safety and compliance andto minimize the risk of immunogenicity associated with antibodies. Taken together, we believe that our product candidates,if approved, have the potential to be used more broadly, including treatment of mild-to-moderate IBD.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 local 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 may 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, we10 ®Table of Contentsbelieve PTG‑200 may restore proper immune function in the GI tissue compartment where there is active disease whileminimizing the risk of systemic side effects. Several key cell types that reside in gut-associated lymphoid tissue (“GALT”),including T cells, innate lymphoid cells, and natural killer cells, increase their expression of IL-23R during the progressionof IBD. Therefore, the high concentrations of PTG‑200 in GALT will facilitate access and binding to IL‑23R expressed in thesame tissue.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 colonmacroscopic score which is comprised of assessments of colon adhesions, strictures, ulcers, and wall thickness in a dosedependent manner (Figure 4). 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.11 Table of ContentsFigure 4: 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 and cyno, PTG-200 was well-tolerated with no adverse events at thehighest dose levels tested.Clinical Development Plans In November 2018, we announced the completion of a Phase 1 clinical trial of PTG-200 in 80 normal healthyvolunteers. Results of the randomized, double-blind, placebo-controlled, single- and multiple-dose escalation studydemonstrated that administration of PTG-200 was well-tolerated. No serious adverse events or dose-limiting toxicities wereobserved. The pharmacokinetic and pharmacodynamic parameters were consistent with the gastrointestinal-restricted designof PTG-200. We are developing PTG-200 in collaboration with Janssen. We continue to provide compound supply servicesand expect Janssen to file an IND during the first half of 2019 to support a Phase 2 clinical study in patients with Crohn’sdisease. See “Item 7. Management’s Discussion and Analysis – Overview” and Note 3 to the Consolidated FinancialStatements included elsewhere in this Annual Report on Form 10-K for additional information.12 Table of ContentsPN-943: AN ORAL α4β7 INTEGRIN ANTAGONISTPN-943 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. Based on preclinicaldata, we believe that PN-943 may be a more potent α4β7 integrin antagonist compound than PTG-100 without sacrificing itsother positive attributes, such as selectivity and tolerability. 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 protein-protein interactions(“PPI”) between the α4β7 integrin and its corresponding ligand, MAdCAM‑1, which is primarily expressed in the GI tissuecompartment. Hence, the binding of α4β7 to MAdCAM‑1 can be categorized as a GI-specific interaction and has beenidentified as an IBD-specific targeted therapeutic approach. By blocking the binding of α4β7 integrin to MAdCAM‑1, PN-943 may prevent T cells from entering the GI tissue compartment, thereby reducing the inflammation that leads to theclinical manifestations and long-term implications 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 PN-943 targets the same biological pathway as Entyvio, we are utilizingsimilar PD-based POC in our pre-clinical studies and Phase 1 clinical trial to inform and guide our Phase 2 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 PN-943’s Pre-Clinical POC to Clinical POC We established a potentially efficacious dose range of PN-943 in mice by demonstrating similar pharmacologic activitybetween oral PN-943 and the first-generation antagonist, PTG‑100, and an injectable α4β7 antibody in mouse models of IBD.Concurrently, we employed a complementary pharmacodynamics approach for establishing a potentially efficacious humandose range and early POC. This involved specific blood PD response markers that reflect α4β7 integrin target engagement ofPN-943 in the GI tissue compartment and then establishing a correlation of those PD measurements with efficacy responses inmouse colitis models. Target engagement is a critical feature for demonstrating that PN-943 can reach its intended target,thus leading to the inhibition of T cell trafficking into the GI tissue compartment. Our PD markers were monitored in miceand cyno and are being similarly evaluated in normal healthy volunteers in our Phase 1 clinical trial. These blood PDresponses in pre-clinical studies have demonstrated that PN-943 engaged its intended α4β7 target and combined with PDdata from the Phase 1 trial will help guide dosing for our Phase 2 UC trial.PN-943’s Pre-Clinical Proof-of-Concept Studies Pre-clinical studies have demonstrated that PN-943 is a potent and highly selective α4β7 antagonist with minimalsystemic absorption. Rodent colitis models have further demonstrated that PN-943 can inhibit T cell trafficking in the gutsimilar to the actions of the first generation α4β7 antagonist, PTG-100, and the mouse α4β7 antagonist antibody.PN-943 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 (Figure 5). PN-943 exhibited greater than a50,000-fold selectivity against other structurally similar integrins, α4β1 and αLβ2, in cell adhesion assays which iscomparable to the selectivity of vedolizumab (Figure 5). PN-943 was stable in in vitro assays simulating the GI tissuecompartment, such as the small intestine and gastric stomach, with half-lives exceeding 12 hours and in human livermicrosomes suggesting strong oral stability and the potential for once daily dosing in humans. PN-943 did not affect thegrowth of and was not metabolized by common members of the human intestinal microflora. In13 ®®Table of Contentstotal, these drug properties provide evidence to characterize PN-943 as a potential first-in-class orally stable α4β7‑specificantagonist. Furthermore, these drug properties allowed us to demonstrate POC in animal colitis studies.Figure 5: PN-943: More Potent Than PTG-100Non-clinical metabolism and PK studies demonstrated that much greater amounts of PN-943 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, PN-943 has an oral systemic bioavailability of less than 0.5%.We designed rodent colitis studies similar to those used for antibody drugs targeting this pathway to specificallymonitor pre-clinical blood PD responses to PTG-100 and PN-943, specifically receptor occupancy (“RO”) increases reflectingtarget engagement (Figure 6) and receptor expression (“RE”) decreases reflecting subsequent pharmacologic activity. Inaddition, we measured increases in T cell numbers in the blood as a surrogate of T cell trafficking to and from the GI tissuecompartment as affected by PTG-100 and PN-943 treatments (Figure 6). Under inflammatory conditions in the GI tissuecompartment PN-943 showed similar responses to PTG-100 at 3-fold lower dose. Further treatment benefit was demonstratedthrough analysis for colon and mucosal damage which are characteristics of UC in humans.14 Table of ContentsFigure 6: PN-943: Similar RO% and T Cell Trafficking at Lower Doses 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 2 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 colitis mice. In translating the pre-clinical observations into aclinical setting, we will focus on evaluating dose- and time-dependent trends in RO and RE in our Phase 1 clinical trial thatcan be benchmarked to the animal data to give us greater confidence in progressing PN-943 in clinical trials. Emphasis isplaced on trends and not on absolute numbers owing to differences in GI transit times in different species and absence ofabsolute scaling methods from animals to humans for GI-restricted drugs.PN-943’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 28 days of dosing showed that PN-943 was well-tolerated at alldose levels with no dose-limiting toxicities. No adverse effects were seen in either rat or cyno studies at all doses tested.Standard safety pharmacology and genotoxicity studies were similarly negative. We are initiating 12 week GLP toxicologystudies to support our anticipated Phase 2 program.PN-943’s Phase 1 Clinical Trial Overview Following the submission and approval of a Clinical Trial Notification (“CTN”), we initiated a Phase 1 randomized,double-blind, placebo-controlled clinical trial of PN-943 in normal healthy male volunteers in Australia.15 Table of ContentsThe Phase 1 SAD and MAD components are being conducted with a solution-based liquid formulation. In addition todetermining the safety and tolerability and PK of PN-943, the SAD and MAD components of the trial will evaluate PD-basedPOC through the assessment of α4β7 receptor occupancy and α4β7 target expression that indicate target engagement onperipheral blood memory T cells similar to what was done in the pre-clinical studies and in the Phase 1 trial with PTG-100. Inboth the SAD and MAD portions of the clinical trial, dose escalation will proceed from 100 mg up to the planned 1,400 mgdose level.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 new chemical entities, including our clinical-stage product candidates,for a variety of clinical indications. Our platform is comprised of a series of tools and methods, including a combination ofmolecular design, phage display, oral stability, medicinal chemistry, and in vivo pharmacology approaches.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 peptides havethe required surface complexity to match or complement the large flat surfaces of PPI targets to provide potent and selectivedrug candidates. We believe existing commercial molecular design software is not suitable, as it has been developed toidentify 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 of16 Table of Contentsstructurally diverse DRPs that sample greater than 85% of their known structural diversity and 14 proprietary libraries thatsample different protein loop geometries. Collectively these libraries provide immense potential for discovering hits atdiverse targets 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 PN-943 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 We 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.17 Table of ContentsSee “Item 7. Management’s Discussion and Analysis – Overview” and Note 3 to the Consolidated Financial Statementsincluded elsewhere 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. We amended this agreement on February 28,2014, at which point Protagonist assumed responsibility for the development program. See “Item 7. Management’sDiscussion and Analysis – Contractual Obligations and Other Commitments” and Note 6 to the Consolidated FinancialStatements included elsewhere in 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.We believe our principal competition in the treatment of chronic iron overload disorders such as beta-thalassemia willbe luspatercept (Acceleron/Celgene-BMS) and La Jolla Pharmaceutical’s LJPC-401, a synthetic human hepcidin. Althoughgene therapy is potentially curative for beta-thalassemia, we believe that Bluebird Bio’s LentiGlobin will have limitedapplication due to safety risks associated with its required “pre-conditioning” regimen, which is similar to allogeneichematopoietic stem cell transplantation. Hematopoietic stem cell transplantation is infrequently utilized in beta-thalassemiadue to its risk benefit profile in a younger patient population. Luspatercept and LentiGlobin are in Phase 3 development forbeta-thalassemia and MDS and LJPC-401 is in Phase 2 studies for beta-thalassemia and hereditary hemochromatosis.There are currently no approved oral peptide-based α4β7 or IL‑23R products for IBD. We believe our principalcompetition in the treatment of IBD will come from companies with injectable agents in the anti-integrin class that are or willbe approved by 2028, including:·Takeda’s Vedolizumab (Entyvio®) IV and SC (IV approved, SC Phase 3);·Roche’s Etrolizumab SC (Phase 3); and·Shire’s SHP-647 SC (Phase 3; divested as part of the Takeda acquisition of Shire - buyer to bedetermined).In addition, oral agents with novel mechanisms of action are approved or in development, and may be approved for UCand/or CD prior to the launch of PTG-200 and PN-943. These include JAK inhibitors, pan-JAK tofacitinib (Xeljanz) recentlyapproved in UC and next-generation JAK1 inhibitors filgotinib and upadacitinib, as well as S1P inhibitors, ozanimod andetrasimod. The anti-IL-23 antibodies are also demonstrating positive data in IBD. Our product, PTG-200, will compete as theonly oral IL-23 receptor antagonist.Intellectual PropertyWe 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.18 Table of ContentsOur 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 eleven 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. Specifically, our patentsand patent applications are directed to compositions of α4β7 integrin peptides, IL-23R antagonist peptides, and hepcidinand enkephalin mimetics peptides, as well as methods of synthesizing and using these peptides to treat inflammatorydisorders. Applications are currently pending in the United States and other major jurisdictions, including Australia, Canada,China, Japan, and Europe. We expect our patents and patent applications, if issued, and if the appropriate maintenance,renewal, annuity, or other governmental fees are paid, to expire from October 2033 to February 2039 (worldwide, excludingpossible patent term extensions).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.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 a patentee for administrativedelays by the U.S. Patent and Trademark Office in granting a patent or may be shortened if a patent is terminally disclaimedover 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, we expect toapply for patent term extensions for patents covering our product candidates and their methods of use.19 Table of ContentsTrade 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 for pre-clinical, clinical studiesand eventually for commercial supplies, 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. We expect third-partymanufacturers to be capable of providing needed quantities of our product candidates to meet anticipated full-scalecommercial 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 our 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, labeling,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.20 Table of ContentsThe 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 current good manufacturing practices (“cGMP”) requirements and toassure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, qualityand 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 Clinical 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.21 Table of ContentsHuman 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 communication plans,assessment plans, and/or elements to assure safe use, such as restricted distribution methods, patient registries, or other riskminimization 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.22 Table of ContentsThe 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.In 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 product as defined by the FDA or if our product candidate is determined to be contained withinthe competitor’s product for the same indication or disease. If a drug or biological product designated as an orphan productreceives marketing approval for an indication broader than what is designated, it may not be entitled to orphan productexclusivity.23 Table of ContentsPost-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; or·injunctions or the imposition of civil or criminal penalties.The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market.Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label. 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-24 Table of Contentsparty payors do not consider our products to be cost-effective compared to other therapies, they may not cover our productsafter approval as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell ourproducts on a profitable basis.There is no uniform policy requirement for coverage and reimbursement for drug products among third-party payors inthe United States. Therefore, coverage and reimbursement for drug products can differ significantly from payor to payor. Thecoverage determination process can be a time-consuming and costly process that may require us to provide scientific andclinical support for the use of our products to each payor separately, with no assurance that coverage and adequatereimbursement will be obtained or applied consistently. Even if reimbursement is provided, market acceptance of ourproducts 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 resolution on appropriations for fiscal year2018 that delayed the implementation of certain ACA-mandated fees, including the so-called “Cadillac” tax on certain highcost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on marketshare, and the medical device excise tax on non-exempt medical devices. Further , the Bipartisan Budget Act of 2018, or theBBA, among other things, amends the ACA, effective January 1, 2019, to close the coverage gap in most Medicare drugplans, commonly referred to as the “donut hole”, and increase from 50% to 70% the point-of-sale discount that is owed bypharmaceutical manufacturers who participate in the Medicare Part D program. There may be additional challenges andamendments to the ACA in the future. The ACA is likely to continue the downward pressure on pharmaceutical pricing andmay 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 limitations25 Table of Contentsperiod for the government to recover overpayments to providers from three to five years. These new laws may result inadditional reductions 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 payment may be made under federal health care programs such as theMedicare and Medicaid programs; federal false claims laws and civil monetary penalties laws that prohibit, among otherthings, any person or entity from knowingly presenting, or causing to be presented, a false claim for payment to the federalgovernment, or knowingly making, or causing to be made, a false statement to have a false claim paid; and the PhysicianPayments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics, and medical supplies for whichpayment is available under Medicare, Medicaid, or Children’s Health Insurance Program to report annually to the U.S.Department of Health and Human Services information related to payments and other transfers of value made to physicians(defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and ownership andinvestment interests held by physicians and their immediate family members.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 not26 Table of Contentspreempted by HIPAA, thus complicating compliance efforts. In addition, we may be subject to reporting requirements understate transparency laws, as well as state laws that require pharmaceutical companies to comply with the industry’s voluntarycompliance guidelines and the applicable compliance guidance promulgated by the federal government that otherwiserestricts certain payments that may 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. 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, operatingrestrictions and criminal prosecution.The requirements for conducting clinical trials in Australia, where we conduct Phase 1 trials for our product candidates,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.Typically, 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.27 Table of ContentsThe 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;·receipt of written advice from the TGA regarding the application; and·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 be conducted. AnHREC is an independent review committee set up under guidelines of the Australian National Health and Medical ResearchCouncil. The role of an HREC is to ensure the protection of rights, safety and wellbeing of human subjects involved in aclinical trial by, among other things, reviewing, approving and providing continuing review of trial protocols andamendments, 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.28 Table of ContentsEmployees As of December 31, 2018, we had 64 full-time employees, 49 of whom were in research and development, of whichthree hold an M.D. and 18 hold Ph.D. degrees. The remaining 15 employees worked in finance, business development,human resources and administrative support, of which three hold a Ph.D. None of our employees are represented by a laborunion or covered 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.”We 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).29 Table of Contents Item 1A.Risk FactorsWe 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 Clinical DevelopmentWe 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 early stage clinical trials of ourpipeline candidates and conducting research to identify additional product candidates.As an early clinical-stage company, we have not yet demonstrated an ability to generate product revenue orsuccessfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolvingfields such as biopharmaceutical drug discovery and development. Consequently, the ability to accurately assess our futureoperating results or business prospects is significantly more limited than if we had a longer operating history or approvedproducts on the 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, prevent further development or approval or causean approved drug to be 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 or biosimilar 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;30 Table of Contents·the ability of third party manufacturers to manufacture in accordance with current good manufacturing practices(“cGMP”) our product candidates, conduct clinical trials with good clinical practices (“GCP”) and, if approved, forsuccessful commercialization;·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;·our ability to raise additional funds and/or enter into collaboration agreements to allow us to continue to fund ouroperations; and·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 are heavily dependent on the success of our product candidates in early-stage clinical development, and if any of theseproducts fail to receive regulatory approval or are not successfully commercialized, our business would be adverselyaffected.We currently have no product candidates that are in registrational or pivotal clinical trials or are approved forcommercial sale, and we may never be able to develop a marketable product. We expect that a substantial portion of ourefforts and expenditures over the next few years will be devoted to our current product candidates and the development ofother product candidates. We cannot be certain that our product candidates will receive regulatory approval or, if approved,be successfully commercialized. The research, testing, manufacturing, labeling, approval, sale, marketing and distribution ofour product candidates will remain subject to extensive regulation by the U.S. Food and Drug Administration (“FDA”) andother regulatory authorities in the United States and other countries, each of which has differing regulations. In addition,even if approved, our pricing and reimbursement will be subject to further review and discussions with payors. We are notpermitted to market any product candidate in the United States until after approval of a new drug application (“NDA”) fromthe FDA, or in any foreign countries until after approval of a marketing application by corresponding regulatory authorities.We will need to conduct larger, more extensive clinical trials in the target patient populations to support a potentialapplication for regulatory approval by the FDA or corresponding regulatory authorities, and we do not expect to be in aposition to do so for the near term. We may not receive any preferential or expedited review of any application for regulatoryapproval by virtue of the fact that our product candidates target biological pathways that are also targeted by currentlymarketed injectable antibody drugs, and our product candidates will be subject to the regulatory review processes applicableto 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;31 Table of Contents·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;·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 product candidates will require additional research, clinical development, manufacturing activities, regulatoryapproval 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 our product candidates will be initiated or completed in a timely manner or successfully, or at all. Further we cannotbe certain that we plan to advance any other peptide-based product candidates into clinical trials. Moreover, any delay orsetback in the development of any product candidate would be expected to adversely affect our business and cause our stockprice to fall. For example, the announcement of the premature discontinuation of the global Phase 2 clinical trial of PTG-100for the treatment of moderate-to-severe UC in March 2018 due to the interim analysis meeting futility criteria on the primaryendpoint of clinical remission (that was subsequently confirmed to be due to human error in endoscopy reads by the originalvendor) significantly depressed our stock price.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.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 initiated a Phase 2clinical trial in PTG-100, which we prematurely discontinued, and have never conducted a Phase 3 clinical trial or submittedan NDA, and as a result, we have no history or track record to rely on when entering these phases of the development cycle.Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite havingprogressed through pre-clinical studies and initial clinical trials. Clinical trial failures may result from a multitude of factorsincluding, but not limited to, flaws in trial design, dose selection, placebo effect,32 Table of Contentspatient enrollment criteria and failure to demonstrate favorable safety and/or efficacy traits of the product candidate. Anumber of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due tolack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Based upon negative orinconclusive results, we may decide, or regulators may require us, to conduct additional clinical trials 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;·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. 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 in33 Table of ContentsIBD that are currently ongoing, especially in Phases 2 and 3, making it highly competitive and challenging to recruitsubjects. More broadly, we are aware of a number of therapies that are commercialized or are being developed for IBD and weexpect to face competition from these investigational drugs or approved drugs for potential subjects in our clinical trials,which may delay the pace of enrollment in our planned clinical trials. Furthermore, any negative results we may report inclinical trials of our product candidates, such as the premature termination of our Phase 2 clinical trial of PTG-100 for thetreatment of moderate-to-severe UC, may make it difficult or impossible to recruit and retain patients in other clinical trials ofthat same product candidate. 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 renderfurther development impossible.All of our peptide-based product candidates other than PTG-300, PTG-200 and PN-943 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 seek to discover, develop and commercialize a portfolio of new peptide-based productcandidates in addition to PTG-300, PTG-200, and PN-943. 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.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, we seek to develop peptide-based product candidatesagainst validated biological targets and pathways that have been targeted by approved or later stage products indevelopment. While we utilize pre-clinical in vivo and in vitro models as well as clinical biomarkers to assess potential safetyand efficacy early in the candidate selection and development process, this strategy necessarily relies upon clinical data andother results obtained by third parties that may ultimately prove to be inaccurate or unreliable or otherwise not applicable tothe indications in which we develop our peptide-based product candidates. We will have to conduct clinical trials to showthe safety and efficacy of our peptide-based product candidates against the identified biological targets and pathways toshow that our peptide-based product candidates can address the identified mechanism of action shown by these third partyresults. If our interpretation of the third party clinical data and results from molecules directed against the same biologicaltarget or pathway or our pre-clinical in vivo and in vitro models prove inaccurate or our assumptions and conclusionsabout the applicability of our peptide-based product candidates against the same biological targets or pathways are incorrector inaccurate, then our development efforts may prove unsuccessful or longer and more extensive and our research anddevelopment strategy and business and operations could be significantly harmed.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 thesepotential 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.34 Table of ContentsOur 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, an independent data monitoring committee or regulatoryauthorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial ofregulatory approval by the FDA or other comparable foreign authorities. Results of our clinical trials could reveal a high andunacceptable severity and prevalence of side effects or adverse events related to our product candidates. In such an event, ourclinical trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us tocease further development of our product candidates for any or all targeted indications. In addition, drug-related side effectscould negatively affect patient recruitment or the ability of enrolled patients to complete the trial and even if our clinicaltrials are completed and our product candidate is approved, drug-related side effects could restrict the label or result inpotential product liability claims. Any of these occurrences could significantly harm our business, financial condition andprospects significantly.Moreover, since our product candidates PTG-200 and PN-943 have been developed for indications for which injectableantibody drugs have been approved, we expect that our clinical trials would need to show a risk/benefit profile that iscompetitive with those existing products and product candidates in order to obtain regulatory approval or, if approved, aproduct 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.We 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 mainly on the development of PTG-300 for treatment of anemia associated with certain rare blood disorders andthe discovery and development of PTG-200 and PN-943, GI-restricted drugs that target the same biological pathways ascurrently marketed injectable antibody drugs for the treatment of IBD,. As a result, we may forego or delay pursuit ofopportunities with other product candidates or for other indications that later prove to have greater commercial potential. Ourresource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable marketopportunities. Our spending on current and future research and development programs and product candidates for specificindications may not yield any commercially viable products. If we do not accurately evaluate the commercial potential ortarget market for a particular product candidate, we may relinquish valuable rights to that product candidate35 Table of Contentsthrough collaboration partnerships, licensing or other royalty arrangements in cases in which it would have been moreadvantageous for us to retain sole development and commercialization rights to such product candidate.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, 2018and 2017 was $38.9 million and $37.0 million, respectively. As of December 31, 2018, we had an accumulated deficit of$140.5 million. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effecton our stockholders’ equity and working capital. We expect to continue to incur significant research, development and otherexpenses related to our ongoing operations and product development, including clinical development activities under ourexclusive license and collaboration agreement (the “Janssen License and Collaboration Agreement”) with Janssen Biotech,Inc., a Pennsylvania corporation (“Janssen”), and as a result, we expect to continue to incur losses in the future as wecontinue our development of, and seek regulatory approvals for, our peptide-based product candidates.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.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. 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 FDA or any foreign regulatory agency, such as the European Medicines Agency (“EMA”), requiresthat we perform studies or trials in addition to those that we currently anticipate with respect to the development of any ofour product candidates, or repeat studies or trials, our expenses would further increase beyond what we currently expect, andany delay resulting from such further 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, 2018, we had cash, cash equivalents and available-for-sale securities of $128.9 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 will36 Table of Contentsneed to raise substantial additional funds in the future in order to complete clinical development or commercialize any of ourproduct candidates. Our funding requirements and the timing of our need for additional capital are subject to change basedon a number of factors, including:·the rate of progress and the cost of our studies of our product candidates;·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 our product candidates on a scale sufficient to enable large-scale clinicaltrials and commercial supply;·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 any current or future product candidate is approved, including theformation 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 coverage and adequate third-party reimbursement for our product candidates thatmay receive regulatory 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 existing and 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 meet37 Table of Contentsfuture capital requirements, and if we are unable to obtain additional funding from equity offerings or debt financings,including on a timely 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. The incurrence ofindebtedness and/or the issuance of certain equity securities could result in fixed payment obligations and could also resultin certain additional restrictive covenants, such as limitations on our ability to incur debt and/or issue additional equity,limitations on our ability to acquire or license intellectual property rights and other operating restrictions that couldadversely impact our ability to conduct our business. In addition, the issuance of additional equity securities by us, or thepossibility of such issuance, may cause the market price of our common stock to decline. In the event that we enter intocollaborations and/or licensing arrangements in order to raise capital, we may be required to accept unfavorable terms,including relinquishing or licensing to a third party on unfavorable terms our rights to our proprietary technology platformor peptide-based product candidates that we otherwise would seek to develop or commercialize ourselves or potentiallyreserve for future potential arrangements when we might be able to achieve more favorable terms.Risks Related to Our Reliance on Third PartiesIf 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 License and Collaboration 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 2a Activities are terminated early, suspended for an extended period of time, or are otherwise unsuccessful,Janssen may determine not to elect to continue further clinical development of PTG-200, in which case, the Janssen Licenseand Collaboration Agreement would terminate and our business and business prospects would be materially adverselyaffected.If 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 treatment38 Table of Contentsis unacceptable, and the clinical development of PTG-200 would be delayed or halted. Any of these events would severelyharm our business and prospects.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.The occurrence of these events may cause Janssen to abandon their development of PTG-200 entirely and terminate theJanssen License and Collaboration Agreement. Any termination of the Janssen License and Collaboration Agreement byJanssen would have a material adverse effect on our results of operations, financial condition, business prospects and thefuture of PTG-200.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.The 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.We may not be successful in obtaining or maintaining development and commercialization collaborations, anycollaboration arrangements we enter into in the future may not be successful, and any potential partner may not devotesufficient resources to the development or commercialization of our product candidates or may otherwise fail indevelopment or commercialization efforts, which could adversely affect our ability to develop certain of our productcandidates and our financial condition and operating results.Other than our Janssen License and Collaboration Agreement, we have no active 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. We will face, to the extent that we decide to enter into collaborationarrangements, significant competition in seeking appropriate collaborators. In addition, the terms of any potentialcollaboration or other arrangement that we may establish may not be favorable to us or may not be perceived as favorable,which may negatively impact the price of our common stock. In some cases, we may be responsible for continuingdevelopment of a product candidate or research program under a collaboration, and the payments we receive from our partnermay be insufficient to cover the cost of this development or39 Table of Contentsmay result in a dispute between the parties. Moreover, collaborations and sales and marketing arrangements are complex andtime consuming to negotiate, document and implement, and they may require substantial resources to maintain, which maybe 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.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;·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;40 Table of Contents·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.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.Some 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 of41 Table of Contentsoperations and the commercial prospects for our peptide-based product candidates would be harmed, our costs could increasesubstantially and our ability to generate 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 cGMP and for Europe and other major regions,International Council for Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use(“ICH”) guidelines, and we rely on contract manufactures to manufacture and provide product for us that meet theserequirements. We do not currently have nor do we plan to acquire the infrastructure or capability internally to manufactureour pre-clinical and clinical drug supplies and we lack the resources and the capability to manufacture any of our peptide-based product candidates on a clinical or commercial scale. We expect to continue to depend on contract manufacturers forthe foreseeable future. As we proceed with the development and potential commercialization of our product candidates, wewill need to increase the scale at which the drug is manufactured which will require the development of new manufacturingprocesses to potentially reduce the cost of goods. We will rely on our internal process research and development efforts andthose of contract manufacturers to develop the GMP manufacturing processes required for cost-effective and large scaleproduction. If these efforts are not successful in developing cost-effective processes and if the contract manufacturers are notsuccessful in converting it to commercial scale manufacturing, then our development and/or commercialization of ourproduct candidates could be materially adversely affected. In addition, we have no control over the ability of our contractmanufacturers to maintain adequate quality control, quality assurance and qualified personnel. Moreover, our contractmanufacturers are the sole source of supply for our clinical product candidates. If we were to experience an unexpected lossof supply for any reason, whether as a result of manufacturing, supply or storage issues or otherwise, we could experiencedelays, disruptions, suspensions or termination of our clinical study and planned development program, or be required torestart 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 of a peptide-based productcandidate, or the raw material components thereof, for an ongoing clinical trial due to the need to replace a contractmanufacturer or other third party manufacturer could considerably delay completion of our clinical trials, product testing andpotential regulatory approval of our peptide-based product candidates. If our contract manufacturers or we are unable topurchase these raw materials after regulatory approval has been obtained for our peptide-based product candidates, thecommercial launch of our peptide-based product candidates would be delayed or there would be a shortage in supply, whichwould 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 maintain42 Table of Contentsregulatory 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.Risks Related to Regulatory ApprovalThe 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 peptide-based product candidates. We are not permitted tomarket or promote any of our peptide-based product candidates before we receive regulatory approval from the FDA, theEMA or any other foreign regulatory authority, and we may never receive such regulatory approval for any of our peptide-based product candidates. The time required to obtain approval by the FDA and comparable foreign authorities isunpredictable, typically takes many years following the commencement of clinical trials and depends upon numerousfactors, including the substantial discretion of regulatory authorities. Approval policies, regulations and the types andamount of clinical and manufacturing data necessary to gain approval may change during the course of clinical developmentand may vary among jurisdictions. We have not obtained regulatory approval for any product candidate and it is possiblethat none of our existing product candidates or any product candidates we have in development or may seek to develop inthe future will ever obtain regulatory approval.Our product candidates could fail to receive regulatory approval for many reasons, including the following:·the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of ourclinical 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.43 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 our current product candidates, or any other product candidate, which wouldharm 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.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 United States, including additional pre-clinicalstudies or clinical trials. In many countries outside the United States, a product candidate must be approved forreimbursement before it can be approved for sale in that country. In some cases, the price that we intend to charge for ourproducts is also subject to approval. 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. Obtaining foreign regulatory approvals andcompliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and coulddelay or prevent the introduction of our products in certain countries. Further, clinical trials conducted in one country maynot be accepted by regulatory authorities in other countries and regulatory approval in one country does not ensure approvalin any other country, while a failure or delay in obtaining regulatory approval in one country may have a negative effect onthe regulatory approval process in others. Also, regulatory approval for any of our peptide-based product candidates may bewithdrawn. If we fail to comply with the regulatory requirements in international markets and or receive applicable marketingapprovals, our target market will be reduced and our ability to realize the full market potential of our peptide-based productcandidates will be harmed and our business will be adversely affected.We may fail to obtain orphan drug designations from the FDA and/or EU for our product candidates, as applicable, andeven if we obtain such designations, we may be unable to maintain the benefits associated with orphan drug designation,including the 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, tax44 Table of Contentsadvantages and user-fee waivers. In addition, if a product that has orphan drug designation subsequently receives the firstFDA approval for the disease for which it has such designation, the product is entitled to orphan drug exclusivity, whichmeans that the FDA may not approve any other applications, including a full NDA or BLA, to market the same drug orbiologic for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority tothe product with orphan drug exclusivity or where the manufacturer is unable to assure sufficient product quantity.PTG-300 has received orphan drug designation for the treatment of patients with beta-thalassemia from the FDA andEU. Despite this designation, we may be unable to maintain the benefits associated with orphan drug designation status,including market exclusivity. We may 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 withdeveloping pharmaceutical products. In addition, exclusive marketing rights in the United States may be limited if we seekapproval for an indication broader than the orphan-designated indication or may be lost if the FDA later determines that therequest for designation was materially defective or if we are unable to assure sufficient quantities of the product to meet theneeds of patients with the orphan-designated disease or condition. Further, even if we obtain orphan drug designationexclusivity for a product, that exclusivity may not effectively protect the product from competition because different drugswith different active moieties may receive and be approved for the same condition, and only the first applicant to receiveapproval will receive the benefits of marketing exclusivity. Even after an orphan-designated product is approved, the FDAcan subsequently approve a later drug with the same active moiety for the same condition if the FDA concludes that the laterdrug is clinically superior if it is shown to be safer, more effective or makes a major contribution to patient care. Orphan drugdesignation neither shortens the development time or regulatory review time of a drug, nor gives the drug any advantage inthe regulatory review or approval process. In addition, while we may seek orphan drug designation for our productcandidates, we may never receive such designations.Risks Related to Commercialization of our Product CandidatesWe 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-based product candidates, we may choose to partner withthird parties that have direct sales forces and established distribution systems, either to augment our own sales force anddistribution systems or in lieu of our own sales force and distribution systems, and in the case of the Janssen License andCollaboration Agreement, we may elect to exercise our Co-Detailing Option, which would require us to establish a U.S. salesteam. If we are unable to enter into collaborations with third parties for the commercialization of approved products, if any,on acceptable terms or at all, or if any such partner does not devote sufficient resources to the commercialization of ourproduct or otherwise fails in commercialization efforts, we may 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-basedproduct candidates, either on our own or through collaborations with one or more third parties, our future revenue will bematerially and adversely impacted.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 an option, which, if PTG-200 is approved forcommercial sale, allows us to elect to provide up to 30% of the PTG-200 selling effort in the United States with sales45 Table of Contentsforce personnel (the “Co-Detailing Option”). While the Janssen License and Collaboration Agreement includes the materialterms of our Co-Detailing Option, Janssen and we mutually agreed to negotiate a separate agreement specifying the detailedactivities and responsibilities in respect of the marketing and co-promotion of PTG-200 following our election to exerciseour Co-Detailing Option. We will need to negotiate this separate agreement with Janssen and, as a result, Janssen may placerestrictions or additional obligations on us, including financial obligations. Any restrictions or additional obligations mayrestrict our co-detailing activities or involve more significant financial or other obligations than we currently anticipate. Inaddition, we have no sales experience as a company. There are risks involved with establishing our own sales forcecapabilities. Developing an internal sales force and function will require substantial expenditures and will be time-consuming, may expose us to unforeseen costs and expenses, and we may not be able to effectively recruit, train or retainsales personnel. Accordingly, we may be unable to establish our own sales force which could effectively preclude our abilityto take any advantage of participating in co-detailing PTG-200 in the United States. In addition, any sales force we establishmay not be effective, or may be less effective than the any sales force that Janssen utilizes to promote PTG-200. In suchevent, the commercialization of PTG-200 may be adversely affected, which could materially and adversely affect any salesmilestone payments or royalties we may receive under the Janssen License and Collaboration Agreement.Even if our product candidates receive marketing approval, they may fail to achieve market acceptance by physicians,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 product candidates receive marketing approval, they may nonetheless fail to gain sufficient marketacceptance by physicians, patients, government payors, other third-party payors and other healthcare providers. If any of ourapproved products fail to achieve an adequate level of acceptance, we may not generate significant revenue to becomeprofitable. The degree of market acceptance, if approved for commercial sale, will depend on a number of factors, includingbut 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 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 product candidates in addition to or in the placeof 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 our46 Table of Contentsbusiness and could require us to seek collaborations or undertake additional financings sooner than we would otherwiseplan.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.For 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 replace47 Table of Contentscertain aspects of the ACA. Since January 2017, the President has signed two Executive Orders and other directives designedto delay the implementation of 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, the annual fee imposed on certain health insuranceproviders based on market share, and the medical device excise tax on non-exempt medical devices. Further, the BipartisanBudget Act of 2018, among other things, amends the ACA, effective January 1, 2019, to close the coverage gap in mostMedicare drug plans, commonly referred to as the “donut hole.” Congress may consider other legislation to repeal or replaceother elements of the ACA.In 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.48 Table of ContentsGovernments 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 our product candidates are unavailable or limited inscope or amount, or if pricing is set at unsatisfactory levels, our business could be harmed, possibly materially.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;·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; and49 Table of Contents·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.Risks Related to Our Business and IndustryWe 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.Many 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, there would be a material adverseimpact on the future prospects for our product candidates and business.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;·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.50 Table of ContentsBecause 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.If we fail to comply with state and federal healthcare regulatory laws, we could face substantial penalties, damages, fines,disgorgement, integrity oversight and reporting obligations, exclusion from participation in governmental healthcareprograms, and the curtailment of our operations, any of which could adversely affect our business, operations, andfinancial 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 of healthcare servicesor bill directly to Medicare, Medicaid or other third-party payors, federal and state healthcare laws and regulations pertainingto fraud and abuse and patients’ rights are and will be applicable to our business. The laws that may affect our ability tooperate 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;51 Table of Contents·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 members;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; state and local lawsthat require the registration of pharmaceutical sales representatives; and state and foreign laws governing theprivacy and security of health information in some circumstances, many of which differ from each other insignificant 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. Any violations of these laws, or any action against us forviolation of these laws, even if we successfully defend against it, could result in a material 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 we52 Table of Contentsexpect to do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil oradministrative sanctions, including exclusions from government funded healthcare programs. The imposition of any of thesepenalties or other commercial limitations could negatively impact our collaboration with Janssen or cause Janssen toterminate the Janssen License and Collaboration Agreement, either of which would materially and adversely affect ourbusiness, financial condition and results of operations. 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 andSamuel Saks, M.D., our Chief Development Officer. In order to induce valuable employees to continue their employmentwith us, we have provided stock options that vest over time. The value to employees of stock options that vest over time issignificantly affected by movements in our stock price that are beyond our control and may at any time be insufficient tomaintain retention incentives or counteract more lucrative offers from other companies. All of our employees may terminatetheir employment with us at any time, with or without notice. The loss of the services of any of our executive officers or otherkey employees 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 may need to expand the size of our organization, and we may experience difficulties in managing this growth.As of December 31, 2018, we had 64 full-time employees, including 49 employees engaged in research anddevelopment. As our development and commercialization plans and strategies develop and continue to operate as a publiccompany, we expect to need additional managerial, operational, scientific, sales, marketing, development, regulatory,manufacturing, financial and other resources. Future growth would impose significant added responsibilities on members ofmanagement, 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 to53 Table of Contentsdevelop and commercialize our peptide-based product candidates and to compete effectively will depend, in part, on ourability 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.54 Table of ContentsIf 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, chemicals andvarious radioactive compounds, considerable additional costs or liabilities could be assessed that would have a materialadverse effect on our financial condition. We, our collaborators, contractors or agents may be required to incur significantcosts to comply with current or future environmental laws and regulations and may be adversely affected by the cost ofcompliance 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;55 Table of Contents·withdrawal of clinical trial participants;·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.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.56 Table of ContentsThe 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 forMedicare & 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, but also have their own methods and approval process. Therefore, coverage andreimbursement can differ significantly from payor to payor. It is difficult to predict what CMS will decide with respect toreimbursement for novel products such as ours since there is no body of established practices and precedents for these newproducts. Reimbursement agencies 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 prosecution57 Table of Contentsprocess is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patentapplications at a reasonable cost, in a timely manner, or in all jurisdictions. The patent applications that we own or licensemay fail to result in issued patents in the United States or in other foreign countries, or they may fail to result in issuedpatents with claims that cover our product candidates or technologies in the United States or in other foreign countries. Thereis no assurance that all the potentially relevant prior art relating to our patent and patent applications has been found, whichcan invalidate a patent or 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 scopethereof, which may result in such patents being narrowed, invalidated or held unenforceable. Furthermore, even if they areunchallenged, our patent and patent applications may not adequately protect our intellectual property, provide exclusivityfor our product candidates and technologies, 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 patents will be foundinvalid and unenforceable or will be threatened by third parties. Any successful opposition or other challenge to thesepatents or any other patents owned by or, if applicable in the future, licensed to us could deprive us of rights necessary for thesuccessful commercialization of any product candidates and technologies that we may develop. Since patent applications inthe United 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.In addition, patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 yearsafter it is filed. Various extensions may be available however the life of a patent, and the protection it affords, is limited. Evenif patents covering our product candidates are obtained, once the patent life has expired for a product, we may be open tocompetition from generic medications. For example, our granted U.S. patents covering PTG-100 and PTG-200 expire in2035, and our granted U.S. patent covering PTG-300 expires in 2034. In addition, although upon issuance in the UnitedStates the life of a patent can be increased based on certain delays caused by the U.S. Patent and Trademark Office (the“PTO”), this increase can be reduced or eliminated based on certain delays caused by the patent applicant during patentprosecution. Further, if we encounter delays in our clinical trials or in gaining regulatory approval, the period of time duringwhich we could market any of our product candidates under patent protection, if approved, would be reduced.We may not be able to protect our intellectual property rights throughout the world. Filing, prosecuting and defendingpatents on all of our product candidates throughout the world would be prohibitively expensive, and our intellectualproperty rights in some countries outside the United States may be less extensive than those in the United States. Manycompanies have encountered significant problems in protecting and defending intellectual property rights in certain foreignjurisdictions. The requirements for patentability differ, in varying degrees, from country to country. The legal systems ofsome countries, particularly developing countries, do not favor the enforcement of patent and other intellectual propertyrights, especially those relating to life sciences. In addition, the laws of some foreign countries do not protect intellectualproperty rights, including trade secrets, to the same extent as federal and state laws of the United States. This could make itdifficult for us to stop the infringement of any patents we obtain or the misappropriation of our other intellectual propertyrights. In addition, many countries limit the enforceability of patents against third parties, including government agencies orgovernment contractors. In these countries, patents may provide limited or no benefit. Moreover, our ability to protect andenforce our intellectual property rights may be adversely affected by unforeseen changes in foreign intellectual propertylaws.Proceedings to enforce our patent rights and other intellectual property rights in foreign jurisdictions, regardless ofwhether successful, would result in substantial costs and divert our efforts and attention from other aspects of our business.Furthermore, while we intend to protect our intellectual property rights in our expected significant markets, we cannot ensurethat we will be able to initiate or maintain similar efforts in all jurisdictions in which we may wish to market our productcandidates. Accordingly, our efforts to protect our intellectual property rights in such countries may58 Table of Contentsbe inadequate, which may have an adverse effect on our ability to successfully commercialize our product candidates in allof 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. Also, if our trade secrets are disclosed in a foreign jurisdiction, competitors worldwidecould have access to our proprietary information and we may be without satisfactory recourse. Such disclosure could have amaterial adverse effect on our business. If, in the future, we obtain licenses from third parties, in some circumstances, we maynot have the right to control the preparation, filing and prosecution of patent applications or to maintain any patents,covering technology that we license from third parties. We may also require the cooperation of our licensors to enforce anylicensed patent rights, and such cooperation may not be provided. Therefore, these patents and applications may not beprosecuted and enforced in a manner consistent with the best interests of our business. Moreover, if we do obtain necessarylicenses, we will likely have obligations under those licenses, and any failure to satisfy those obligations could give ourlicensor the right to terminate the license. Termination of a necessary license could have a material adverse impact on ourbusiness.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. If we are unable to protectthe confidentiality of our trade secrets and proprietary know-how or if competitors independently develop viable competingproducts, our business and competitive position may be harmed.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 not protect proprietaryrights to the same extent or in the same manner as the laws of the United States. The enforceability of confidentialityagreements may vary from jurisdiction to jurisdiction. As a result, we may encounter significant problems in protecting anddefending our intellectual property both in the United States and abroad. Additionally, if the steps taken to maintain ourtrade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating the tradesecret. We cannot guarantee that our employees, former employees or consultants will not file59 Table of Contentspatent 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. Our defense of litigation, interference or derivation proceedings may fail and, even if successful, may result insubstantial costs and distract our management and other employees. An unfavorable outcome could require us to cease usingthe related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if theprevailing party does not offer us a license on commercially reasonable terms, if any license is offered at all.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 stockholders. 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.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.60 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 partes 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.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, areunpredictable and generally expensive and time-consuming and, even if resolved in our favor, are likely to divert significantresources from our core business, including distracting our technical and management personnel from their normalresponsibilities. In addition, there could be public announcements of the results of hearings, motions or other interimproceedings or developments and if securities analysts or investors perceive these results to be negative, it could have asubstantial adverse effect on the market price of our common stock. Such litigation or proceedings could substantiallyincrease our operating losses and reduce the resources available for development activities or any future sales, marketing ordistribution activities. We may not have sufficient financial or other resources to adequately conduct61 Table of Contentssuch litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedingsmore effectively than we can because of their greater financial resources and more mature and developed intellectualproperty portfolios. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon ormisappropriating or from successfully challenging our intellectual property rights. Uncertainties resulting from the initiationand continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete inthe marketplace.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,62 Table of Contentsincluding our competitors, may initiate legal proceedings against us alleging that we are infringing or otherwise violatingtheir patent or other intellectual property rights. Given the vast number of patents in our field of technology, we cannotassure you that marketing of our product candidates or practice of our technologies will not infringe existing patents orpatents 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.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.The 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.63 Table of ContentsWe may not be successful in obtaining or maintaining necessary rights to protect our product candidates throughacquisitions and in-licenses. We may find that our programs require the use of proprietary rights held by third parties or thegrowth of our business may depend in part on our ability to acquire, in-license or use these proprietary rights. We may beunable to acquire or in-license compositions, methods of use, processes or other third party intellectual property rights fromthird parties we identify as necessary for our product candidates. The licensing and acquisition of third party intellectualproperty rights is a competitive area, and a number of more established companies are also pursuing strategies to license oracquire third party intellectual property rights that we may consider attractive. These established companies may have acompetitive advantage over us due to their size, financial resources or and greater clinical development andcommercialization capabilities. In addition, companies that perceive us to be a competitor may be unwilling to assign orlicense rights to us. We also may be unable to license or acquire third party intellectual property rights on terms that wouldallow us to make an appropriate return on our investment. Even if we are able to obtain a license to intellectual property ofinterest, we may not be able to secure 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.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.64 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, consultantsor independent contractors have used or disclosed intellectual property, including trade secrets or other proprietaryinformation, of any such employee’s or consultant’s former or other employer. We are not aware of any threatened or pendingclaims related to these matters or concerning the agreements with our senior management or scientific founders, but in thefuture litigation may be necessary to defend against such claims. If we fail in defending any such claims, in addition topaying monetary damages, we may lose valuable intellectual property rights or personnel.65 Table of ContentsEven if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction tomanagement.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.66 Table of ContentsRisks 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;·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;67 Table of Contents·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 experienced significant shareprice volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’sattention 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.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, 2018, we had a total of 23,187,219 shares of common stock68 Table of Contentsoutstanding, notwithstanding any potential exercises of outstanding options and issuance of shares under the employeestock purchase plan.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 sales of up to $50.0 million worth of sharesof our common stock pursuant to our sales agreement with Cantor Fitzgerald & Co. (the “Sales Agreement”). The number ofshares of our new common stock issued in connection with raising additional capital could constitute a material portion ofour 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. For example, onAugust 6, 2018 we entered into a stock purchase agreement with investors including BVF Partners L.P., and their affiliates,pursuant to which we agreed to sell an aggregate of 2,750,000 shares of our common stock at a price of $8.00 per share forgross proceeds of $22.0 million. In a concurrent private placement, we issued warrants to purchase an aggregate of 2,750,000shares of our common stock. The exercise of some or all of the warrants will dilute the ownership interests of existingstockholders and any sales in the public market of the common stock issuable upon such exercise could adversely affectprevailing market prices of our common stock. To the extent that we raise additional capital through the sale of equitysecurities, including sales of up to $50.0 million worth of shares of our common stock pursuant to our Sales Agreement withCantor Fitzgerald & Co. (the “Sales Agreement”), or convertible debt securities, your ownership interest will be diluted, andthe terms may include liquidation or other preferences that adversely affect your rights as a stockholder. If we issue commonstock or securities convertible into common stock, our common stockholders would experience additional dilution and, as aresult, our stock price may decline.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.69 Table of ContentsWe 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, which means themarket value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th, and (2) thedate 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.”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 committees or to serve as executive officers, or toobtain certain types of insurance, including directors’ and officers’ insurance, on acceptable 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.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 are required, pursuant to Section 404 of the Sarbanes-Oxley Act (Section 404), to furnish a report by managementon the effectiveness of our internal control over financial reporting. This assessment needs to include disclosure of anymaterial weaknesses identified by our management in our internal control over financial reporting. Our independentregistered public accounting firm will not be required to attest to the effectiveness of our internal control over financialreporting until our first Annual Report required to be filed with the SEC following the date we are no longer an “emerginggrowth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). At such time as we arerequired to obtain auditor attestation, if we then have a material weakness, we would70 Table of Contentsreceive an adverse opinion regarding our internal control over financial reporting from our independent registeredaccounting firm.Our compliance with Section 404 requires that we incur substantial accounting expense and expend significantmanagement efforts. We currently do not have an internal audit group, and we will need to hire additional accounting andfinancial staff with appropriate public company experience and technical accounting knowledge and continue the costly andchallenging process of compiling the system and processing documentation necessary to perform the evaluation needed tocomply with Section 404. We may not complete our continued evaluation, testing and any required remediation in a timelyfashion.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.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, we may not detect errors on a timely basis and our financial statements maybe materially misstated. We or our independent registered public accounting firm may not be able to conclude on an ongoingbasis that we have effective internal control over financial reporting, which could harm our operating results, cause investorsto lose confidence in our reported financial information and cause the trading price of our stock to fall. In addition, as apublic company we will be required to file accurate and timely quarterly and Annual Reports with the SEC under theExchange Act. Any failure to report our financial results on an accurate and timely basis could result in sanctions, lawsuits,delisting of our shares from The Nasdaq Global Market or other adverse consequences that would materially harm ourbusiness.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 us71 Table of Contentsto modify a current tax or accounting position may adversely affect our reported financial results or the way we conduct ourbusiness.Nasdaq 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;72 Table of Contents·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;·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.73 Table of ContentsOur 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:·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.In December 2017, the Tax Act was enacted which significantly changes the Internal Revenue Code, as amended (the“Code”). The Tax Act, among other things, contains significant changes to corporate taxation, including reduction of thecorporate tax rate from a top marginal rate of 35% to a flat rate of 21%; limitation of the tax deduction for interest expense to30% of adjusted earnings; for net operating losses generated after 2017, limitation of the deduction to 80% of current yeartaxable income, indefinite carryforward of net operating losses and elimination of net operating loss carrybacks; changes inthe treatment of offshore earnings regardless of whether they are repatriated; mandatory capitalization of research anddevelopment expenses beginning in 2022; immediate deductions for certain new investments instead of deductions fordepreciation expense over time; further deduction limits on executive compensation; and modifying, repealing and creatingmany other business deductions and credits, including the reduction in the orphan drug credit from 50% to 25% ofqualifying expenditures. We continue to examine the impact this tax reform legislation may have on our business.Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Act is uncertain and ourbusiness and financial condition could be adversely affected. The impact of this tax reform on holders of our common stockis also uncertain and could be adverse. This annual report does not discuss any such tax legislation or the manner in which itmight affect us or our stockholders in the future. We urge our stockholders to consult with their legal and tax advisors withrespect 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 net74 Table of Contentsoperating loss carryforwards and credit carryforwards may be limited due to certain of our equity financing transactions. Wemay experience ownership changes in the future or subsequent shifts in our stock ownership, some of which are outside ourcontrol. As of December 31, 2018, we had federal net operating loss carryforwards of approximately $109.1 million thatcould be limited if we have experienced, or if in the future we experience, an ownership change, which could have an adverseeffect on our future results of operations.We may have additional tax liabilities.Our effective income tax rate in the future could be adversely affected by a number of factors, including: interpretationsof existing tax laws, changes in tax laws and rates, future levels of research and development expenditures, changes in thevaluation of deferred tax assets and liabilities, our ability to use some or all of our accumulated net operating losses, changesin accounting standards and other items. The impact of our income tax provision resulting from these items may besignificant and could have a negative impact on our net operating results. We are also subject to non-income based taxes,such as payroll, sales, use, property, and goods and services taxes in the United States. We may have additional exposure tonon-income based tax liabilities.We are regularly subject to audits by tax authorities in the jurisdictions in which we conduct business. Although webelieve our tax positions are reasonable, the final outcome of tax audits and related litigation could be materially differentthan that reflected in our historical income tax provisions and accruals, and we could be subject to assessments of additionaltaxes and/or substantial fines or penalties. The resolution of any audits or litigation could have an adverse effect on ourfinancial position and results of operations. We and our subsidiary are engaged in intercompany transactions, the terms andconditions of which may be scrutinized by tax authorities, which could result in additional tax and/or penalties becomingdue.Provisions 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. 75 Table of Contents 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 ProceedingsWe 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”). The Court dismissed the case without prejudice to MDL tofiling an amended complaint by March 9, 2018. MDL declined to file an amended complaint. On March 14, 2018, the Courtissued a judgement ending the case in our favor. The deadline for filing an appeal has lapsed and MDL did not appeal theCourt’s decision. Item 4.Mine Safety DisclosuresNot applicable.76 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. StockholdersAs of the close of business on February 28, 2019, there were 6 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 graph77 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, 2018. Sale of Unregistered SecuritiesNone.Repurchases of Shares or of Company Equity SecuritiesNone. 78 Table of Contents Item 6.Selected Financial DataThe following selected consolidated statement of operations data for the years ended December 31, 2018, 2017, and2016 and the consolidated balance sheet data as of December 31, 2018 and 2017 are derived from our audited consolidatedfinancial statements that are included elsewhere in this report. The selected consolidated statement of operations data for theyears ended December 31, 2015 and 2014 and the consolidated balance sheet data at December 31, 2016, 2015 and 2014have been derived from our audited consolidated financial statements which are not included in this report. The data set forthbelow is not necessarily indicative of results of future operations and should be read in conjunction with “Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statementsand Supplementary 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, 2018 2017 2016 2015 2014 (In thousands, except for share and per share data)Consolidated Statement of Operations Data: License and collaboration revenue - related party $30,925 $20,063 $ — $ — $ —Operating expenses: Research and development 59,497 46,181 25,705 11,831 7,459General and administrative 13,697 11,779 6,961 2,963 1,860Total operating expenses 73,194 57,960 32,666 14,794 9,319Loss from operations (42,269) (37,897) (32,666) (14,794) (9,319)Interest income 2,546 940 242 19 16Change in fair value of redeemable convertiblepreferred stock tranche and warrant liabilities — — (4,719) (83) (1,769)Other expense — — (34) — —Loss before income tax benefit (39,723) (36,957) (37,177) (14,858) (11,072)Income tax benefit 799 — — — —Net loss $(38,924) $(36,957) $(37,177) $(14,858) $(11,072)Net loss attributable to common stockholders $(38,924) $(36,957) $(37,735) $(14,933) $(11,218)Net loss per share attributable to commonstockholders, basic and diluted $(1.74) $(2.09) $(5.80) $(59.32) $(49.38)Weighted-average shares used to compute net loss pershare attributable to common stockholders, basic anddiluted 22,364,515 17,694,505 6,501,796 251,717 227,197 December 31, 2018 2017 2016 2015 2014 (In thousands)Consolidated Balance Sheet Data: Cash, cash equivalents and available-for-sale securities $128,853 $155,459 $87,749 $11,923 $9,324Working capital 111,345 108,392 76,809 11,080 8,563Total assets 139,472 163,734 93,990 14,845 10,328Deferred revenue - related party 8,223 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 (140,474) (101,550) (64,593) (27,416) (12,558)Total stockholders’ equity (deficit) 112,515 120,632 87,555 (27,400) (12,621) 79 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 developing peptide-based product candidates to addresssignificant unmet medical needs in hematology and gastroenterology. In hematology, our most advanced clinical product candidate, PTG-300, is under development for the treatment ofcertain rare blood disorders characterized by ineffective erythropoiesis, excessive red blood cells or iron overload. PTG-300is an injectable compound that mimics the effect of the natural hormone hepcidin, but with greater potency, solubility andstability. Hepcidin is a key hormone in regulating iron equilibrium and is critical to the proper development of red bloodcells. We are currently developing PTG-300 for the treatment of chronic anemia and iron overload, with an initial focus onbeta-thalassemia non-transfusion dependent and transfusion dependent patients where the primary endpoints arehemoglobin increases and transfusion reductions, respectively. PTG-300 has received an orphan drug designation from theU.S. Food and Drug Administration (“FDA”) and European Union (“EU”) regulatory authorities. The FDA has granted FastTrack designation to PTG-300 for the treatment of beta-thalassemia. In the first quarter of 2019, we began dosing patients in aglobal Phase 2 study of PTG-300 in beta-thalassemia. We plan to initiate a Phase 2 study in a second indication in the secondhalf of 2019.In gastroenterology our clinical stage product candidates, PTG-200 and PN-943, are potential first-in-class oral drugscurrently in development for inflammatory bowel disease (“IBD”), a GI disease consisting primarily of ulcerative colitis(“UC”) and Crohn’s disease (“CD”), that block biological pathways currently targeted by marketed injectable antibodydrugs. Our orally stable peptide approach offers targeted delivery to the gastrointestinal (“GI”) tissue compartment. Webelieve that, compared to antibody drugs, these product candidates have the potential to provide improved safety due tominimal exposure in the blood, increased convenience and compliance due to oral delivery, and the opportunity for theearlier introduction of targeted therapy. As a result, if approved, they may transform the existing treatment paradigm for IBD. PTG-200 is a potential first-in-class oral Interleukin-23 receptor (“IL-23R”) antagonist for the treatment of IBD. Wehave entered into a worldwide license and collaboration agreement with Janssen Biotech, Inc. (“Janssen”), a Johnson &Johnson company, to co-develop and co-detail PTG-200 for all indications, including IBD. See “Item 7. Management’sDiscussion and Analysis – Overview” and Note 3 to the Consolidated Financial Statements included elsewhere in thisAnnual Report on Form 10-K for additional information. In 2018, we completed a Phase 1 clinical study to evaluate thesafety, pharmacokinetics and pharmacodynamics of PTG-200 in healthy volunteers. We expect Janssen to file a U.S.Investigational New Drug application (“IND”) for PTG-200 in CD in the first half of 2019.PN-943, a potential first-in-class oral, alpha-4-beta-7 (“α4β7”) specific integrin antagonist, is currently in a Phase 1single and multiple ascending dose clinical trial in healthy volunteers to evaluate safety, pharmacokinetics andpharmacodynamics. We developed PN-943 as a more potent oral gut-restricted α4β7 backup compound to PTG-100, our firstgeneration oral gut-restricted α4β7 inhibitor that was being developed for treatment of ulcerative colitis. In March 2018, weannounced the discontinuation of a global Phase 2 clinical trial of PTG-100 in patients with moderate to severe UC due tofutility following a planned interim analysis by an independent Data Monitoring Committee. In August 2018, we announcedthat an independent, blinded re-read of endoscopies from the study had demonstrated signals of clinical efficacy. A humanerror in the initial endoscopy reads by the original vendor which was characterized by an unusually high placebo effect ledto the original futile outcome. In addition, a pre-specified blinded histopathology analysis of colon biopsies from the trialindicated dose-dependent high rates of histologic remission which supported the observations of clinical remission andendoscopy responses for PTG-100. During 2018 we replaced PTG-100 with PN-80 Table of Contents943 as a development candidate for the treatment of IBD based on an assessment of preclinical data from PN-943 suggestingthat PN-943 is a more potent compound than PTG-100. We will continue to experience costs related to winding downdevelopment and trials for PTG-100 in 2019.We anticipate reporting top-line results of the PN-943 Phase 1 study in the first half of 2019. After having establishedpreliminary clinical efficacy with PTG-100 in UC patients, the PN-943 Phase 1 study is designed to evaluate potency andtarget engagement of PN-943 in comparison to the historical Phase 1 data with PTG-100. If this study is successful, weanticipate filing an IND in the second half of 2019 in preparation for initiating a Phase 2 proof-of-concept study in UC in thefirst half of 2020.Our clinical development programs are all derived from our proprietary discovery platform. Our platform enables us toengineer novel, structurally constrained peptides that retain key advantages of both oral small molecules and injectableantibody drugs, while overcoming many of their limitations as therapeutic agents. Importantly, constrained peptides can bedesigned to alleviate the fundamental instability inherent in traditional peptides to allow different delivery forms, such asoral, subcutaneous, intravenous, and rectal.In addition, we continue to use our peptide technology platform to discover product candidates against targets indisease areas with significant unmet medical needs.We have never been profitable and have incurred net losses in each year since inception and we do not anticipate thatwe will achieve sustained profitability in the near term. Our net loss was $38.9 million, $37.0 million and $37.2 million forthe years ended December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, we had an accumulated deficitof $140.5 million. Substantially all of our net losses have resulted from costs incurred in connection with our research anddevelopment programs and from general and administrative costs associated with our operations. We expect to continue toincur significant research, development and other expenses related to our ongoing operations and product development,including clinical development activities under the Janssen License and Collaboration Agreement, and, as a result, we expectto continue to incur losses in the future as we continue our development of, and seek regulatory approval for, our productcandidates.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.On August 6, 2018, we entered into a Securities Purchase Agreement with certain accredited investors (each, an“Investor” and, collectively, the “Investors”), pursuant to which we sold an aggregate of 2,750,000 shares of our commonstock at a price of $8.00 per share. Aggregate net proceeds were $21.7 million, after deducting offering expenses payable byus. In a concurrent private placement, we issued the Investors warrants to purchase an aggregate of 2,750,000 shares of ourcommon stock (each, a “Warrant” and, collectively, the “Warrants”). Each Warrant is exercisable from August 8, 2018through August 8, 2023. Warrants to purchase 1,375,000 shares of our common stock have an exercise price of $10.00 pershare and Warrants to purchase 1,375,000 shares of our common stock have an exercise price of $15.00 per share. Theexercise price and number of shares of common stock issuable upon the exercise of the Warrants (the “Warrant Shares”) aresubject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization orsimilar transaction, as described in the Warrants. Under certain circumstances, the Warrants may be exercisable on a“cashless” basis. In connection with the issuance and sale of the common stock and Warrants, we granted the Investorscertain registration rights with respect to the Warrants and the Warrant Shares. As of December 31, 2018, none of the Warrantshave been exercised.81 Table of ContentsOn December 21, 2018, we entered into an exchange agreement (the “Exchange Agreement”) with an Investor and itsaffiliates (the “Exchanging Stockholders”), pursuant to which we exchanged an aggregate of 1,000,000 shares of ourcommon stock, par value $0.00001 per share, owned by the Exchanging Stockholders for pre-funded warrants (the“Exchange Warrants”) to purchase an aggregate of 1,000,000 shares of common stock (subject to adjustment in the event ofany stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in theExchange Warrants), with an exercise price of $0.00001 per share. The Exchange Warrants will expire ten years from the dateof issuance. The Exchange Warrants are exercisable at any time prior to expiration except that the Exchange Warrants cannotbe exercised by the Exchanging Stockholders if, after giving effect thereto, the Exchanging Stockholders would beneficiallyown more than 9.99% of our common stock, subject to certain exceptions. As of December 31, 2018, none of the ExchangeWarrants have been exercised.During the year ended December 31, 2018, we sold 151,273 shares of our common stock pursuant to an at-the-market(“ATM”) financing facility under a Sales Agreement with Cantor Fitzgerald & Co for net proceeds of $1.5 million, afterdeducting commissions and offering costs. As of December 31, 2018, $48.3 million of common stock remained available forsale under the ATM financing facility.Janssen License and Collaboration AgreementOn May 26, 2017, we and Janssen, one of the Janssen Pharmaceutical Companies of Johnson & Johnson, entered intoan exclusive license and collaboration agreement (the “Janssen License and Collaboration Agreement”) for the clinicaldevelopment, manufacture and potential commercialization of PTG-200 worldwide for the treatment of CD and UC. Janssenis a related party to us as Johnson & Johnson Innovation - JJDC, Inc., a significant stockholder of ours, and Janssen are bothsubsidiaries of Johnson & Johnson. During the third quarter of 2017, we received a non-refundable, upfront cash payment of$50.0 million from Janssen. We are eligible to receive a $25.0 million payment upon Janssen’s filing of the IND for PTG-200,which is expected during the first half of 2019. We can also receive up to an additional $915.0 million in payments,including potential license option payments of $125.0 million at the Phase 2 interim analysis and $200.0 million at Phase 2completion, and $590.0 million in other potential clinical development, regulatory approval and sales milestones. We andJanssen will co-develop and co-fund PTG-200 through Phase 2 clinical development. Janssen will be responsible for fundingPhase 3 studies in CD and UC. We will receive double-digit tiered royalties on future net sales and retain the option to co-detail PTG-200 in the United States. See Note 3 to the Consolidated Financial Statements included elsewhere in this AnnualReport on Form 10-K for additional information.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. This standard applies to all contracts withcustomers, except for contracts that are within the scope of other standards, such as leases, insurance, collaborationarrangements under Accounting Standards Codification Topic 808, and financial instruments. Under ASC 606, we recognizerevenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration whichwe expect to receive in exchange for those goods or services. To determine revenue recognition82 Table of Contentsfor arrangements 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 we transfer 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 each promised good or service is distinct. We thenrecognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (oras) the performance obligation is satisfied.We entered into a license and collaboration agreement that became effective upon the 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 a83 Table of Contentscontract has a significant financing component if the expectation at contract inception is such that the period betweenpayment by the customer 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 sheets and within research anddevelopment expense in the consolidated statements of operations. These costs are a significant component of our researchand development expenses. We record accrued expenses for these costs based on factors such as estimates of the workcompleted 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. We estimate the fair value, and the resulting stock-based compensation expense, using theBlack-Scholes option-pricing model. The estimated fair value of the stock-based awards is generally recognized on astraight-line basis over the requisite service period, which is generally the vesting period of the respective 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 limited historical information to develop reasonable expectations about future exercise patternsand post-vesting employment termination behavior for our stock option grants.Expected Volatility— Our expected volatility is estimated based on the average volatility for comparable publiclytraded biopharmaceutical 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.We adopted Accounting Standards Update (“ASU”) No. 2016-09, Compensation-Stock Compensation (Topic 718):Improvements to Employee Share-Based Payment Accounting effective January 1, 2017 and have elected to recognizeforfeitures of share-based payment awards as they occur on a prospective basis. Prior to January 1, 2017, our84 Table of Contentsstock-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.For the years ended December 31, 2018, 2017, and 2016, stock-based compensation expense was $6.9 million, $4.2million and $2.1 million, respectively. As of December 31, 2018, we had $15.6 million of total unrecognized stock-basedcompensation costs, which we expect to recognize over a weighted-average period of 2.1 years.Income 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.At December 31, 2018, our total gross deferred tax assets were $34.7 million. Due to our lack of earnings history anduncertainties surrounding our ability to generate future taxable income, our U.S. net deferred tax assets have been fully offsetby a valuation allowance. The deferred tax assets were primarily comprised of federal and state tax net operating loss and taxcredit carryforwards. At December 31, 2018, our net operating loss carryforwards for federal income tax purposes wereapproximately $109.1 million, $78.7 million of which are available to offset future taxable income, if any, through 2037 and$30.4 million of which do not expire. At December 31, 2018, we had net operating loss carryforwards for state income taxpurposes of approximately $97.1 million which are available to offset future taxable income, if any, through 2038. As ofDecember 31, 2018, we also had accumulated Australian tax losses of AUD 13.9 million ($9.8 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.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. The impact of the Tax Act was finalized during the yearended December 31, 2018 and no change was made from the previously reported provisional transition amount of zero.Utilization 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 certain of our equity financing transactions.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 on Form 10-K. 85 Table of ContentsComponents of Our Results of OperationsLicense and Collaboration RevenueOur license and collaboration revenue is derived from payments we receive under the Janssen License andCollaboration Agreement. See Note 3 to the Consolidated Financial Statements included elsewhere in this Annual Report onForm 10-K for additional information.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. 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 generally non-refundable, the amounts have been recorded as a reduction of research and developmentexpenses. The Australian research and development tax incentive is recognized when there is reasonable assurance that theincentive will be received, the relevant expenditure has been incurred and the amount of the consideration can be reliablymeasured.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 administrative86 Table of Contentssupport 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. During 2018, we elected to halt further development of PTG-100 and concurrently electedto replace further development of PTG-100 with PN-943 based on an assessment of preclinical data from PN-943. We willcontinue to experience costs related to the winding down of development and trials for PTG-100 in 2019. We initiated aPhase 1 study of PN-943 during the fourth quarter of 2018. We have presented separately in the table below costs associatedwith the PN-943 program beginning in December 2018.The following table summarizes our research and development expenses incurred during the respective periods: Year Ended December 31, 2018 2017 2016 Clinical and development expense — PTG-300 $14,304 $4,246 $ —Clinical and development expense — PTG-200 16,120 2,079 —Clinical and development expense — PN-943 523 — —Clinical and development expense — PTG-100 20,443 25,825 17,738Milestone payment obligation to former collaboration partner 500 250 250Pre-clinical and drug discovery research expense 9,837 15,292 11,849Less: Reimbursement of expenses under grants and incentives (2,230) (1,511) (4,132)Total research and development expenses $59,497 $46,181 $25,705 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 of salaries,benefits and stock-based compensation. Allocated expenses consist of expenses for rent and maintenance of facilities,information technology, depreciation and amortization expense and other supplies. We expect to incur additional expensesto support the growth of our operations and as a result of operating as a public company, including expenses related tocompliance with the rules and regulations of the SEC, and those of the national securities exchange on which our securitiesare traded, additional insurance expenses, investor relations activities and other administrative and professional services.Interest IncomeInterest income consists of interest earned on our cash, cash equivalents, and available-for-sale securities.87 Table of ContentsChange in Fair Value of Redeemable Convertible Preferred Stock Tranche and Warrant Liabilities Change 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, 2018 and 2017 Year Ended December 31, Dollar % 2018 2017 Change Change (Dollars in thousands) License and collaboration revenue - related party $30,925 $20,063 $10,862 54Operating expenses: Research and development 59,497 46,181 13,316 29General and administrative 13,697 11,779 1,918 16Total operating expenses 73,194 57,960 15,234 26Loss from operations (42,269) (37,897) (4,372) 12Interest income 2,546 940 1,606 171Loss before income tax benefit (39,723) (36,957) (2,766) 7Income tax benefit 799 — 799 100Net loss $(38,924) $(36,957) $ (1,967) 5Includes $3.4 million and $2.0 million of non-cash stock-based compensation expense for the year ended December 31,2018 and 2017, respectively.Includes $3.5 million and $2.2 million of non-cash stock-based compensation expense for the year ended December 31,2018 and 2017, respectively. License and Collaboration Revenue License and collaboration revenue increased $10.8 million, or 54%, from $20.1 million for the year ended December31, 2017 to $30.9 million for the year ended December 31, 2018. The increase was primarily due to deferred revenue and costsharing revenue recognized in connection with the completion of Phase 1 activities and delivery of88 (1)(2)(1) (2) Table of Contentscompound supply services for Phase 2a activities under the Janssen License and Collaboration Agreement, which becameeffective in July 2017. We determined that the transaction price of the Janssen License and Collaboration Agreement was $60.7 million as ofDecember 31, 2018, an increase of $6.8 million from the transaction price of $53.9 million at December 31, 2017. In order todetermine the transaction price, we evaluated all payments to be received during the duration of the contract. We determinedthat the $50.0 million upfront payment, the $25.0 million payment payable upon filing of the IND, which was fullyconstrained as of December 31, 2018, and $10.7 million of estimated variable consideration for cost-sharing payments fromJanssen for agreed upon services related to Phase 2a activities as of December 31, 2018 constituted consideration to beincluded in the transaction price, which is to be allocated to the combined performance obligation. The increase intransaction price was due to an increase in variable consideration related to compound supply services, which wasrecognized as a cumulative catch-up adjustment. During the year ended December 31, 2018, this increased overall variableconsideration by $6.8 million and extended our projected completion date into the first half of 2019. We will re-evaluate thetransaction price at each reporting period and as uncertain events are resolved or other changes in circumstances occur. Research and Development Expenses Research and development expenses increased $13.3 million, or 29%, from $46.2 million for the year ended December31, 2017 to $59.5 million for the year ended December 31, 2018. The increase was primarily due to $14.0 million for PTG-200 Phase 1 clinical trial and development expenses, $10.1 million for PTG-300 Phase 1 clinical trial and developmentexpenses, $0.5 million for PN-943 Phase 1 clinical trial and development expenses and an increase of $0.3 million inmilestone payments to a former collaboration partner. These increases were partially offset by a decrease of $5.5 million inpre-clinical and discovery research expense, including pre-clinical development activities for PTG-200, PTG-300 PN-943and our other product candidates, a decrease of $5.4 million in PTG-100 Phase 1 clinical trial and development expenses anda decrease of $0.7 million in expense reimbursement under grants and incentives. Research and development expenses forthe year ended December 31, 2018 include an increase in personnel costs due to increased research and developmentheadcount from 44 employees at December 31, 2017 to 49 employees at December 31, 2018. General and Administrative Expenses General and administrative expenses increased $1.9 million, or 16%, from $11.8 million for the year ended December31, 2017, to $13.7 million for the year ended December 31, 2018. The increase was primarily due to an increase of $2.4million in personnel costs to support the growth of our operations, partially offset by a $0.5 million decrease in legal feesprimarily related to the Janssen License and Collaboration Agreement. The increase in personnel costs for the year endedDecember 31, 2018 reflected an increase in general and administrative headcount from 11 employees at December 31, 2017to 15 employees at December 31, 2018 and included a $1.3 million increase in stock-based compensation expense. Interest Income Interest income increased $1.6 million, or 171%, from $0.9 million for the year ended December 31, 2017 to $2.5million for the year ended December 31, 2018. The increase in interest income was primarily due to the increasing interestrate environment during the year ended December 31, 2018. Income Tax BenefitIncome tax benefit for the year ended December 31, 2018 was $0.8 million. The income tax benefit was due primarilyto the 2018 release of the valuation allowance related to Protagonist Australia. We believe these deferred tax assets will berealized in the future due to expected profitability for this subsidiary. No income tax provision was recorded for the yearended December 31, 2017. 89 Table of ContentsComparison of the years 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 *Operating 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 1Includes $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. 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. 90 (1)(2)(1) (2) Table of ContentsInterest 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 C redeemableconvertible preferred stock tranche liability in March 2016 and the fair value remeasurement of the outstanding warrantliability. There were no such items for the year ended December 31, 2017. Liquidity and Capital ResourcesLiquidity and Capital ExpendituresAs of December 31, 2018, we had $128.9 million of cash, cash equivalents and available-for-sale securities and anaccumulated deficit of $140.5 million. Our operations have been financed by net proceeds from the sale of shares of ourcapital stock and payments under 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, as amended, which permits the offering, issuance, and sale by us of up to amaximum aggregate offering price of $200.0 million of our common stock. Up to a maximum of $50.0 million of themaximum aggregate offering price of $200.0 million may be issued and sold pursuant to an ATM financing facility under theSales Agreement. We pay up to 3% of gross proceeds for any common stock sold pursuant to the Sales Agreement. We sold151,273 shares of our common stock pursuant to the Sales Agreement during the year ended December 31, 2018 for netproceeds of $1.5 million, after deducting commissions and offering costs. As of December 31, 2018, $48.3 million ofcommon stock remained available for sale under the ATM financing facility.In October 2017, we completed an underwritten public offering of 3,530,000 shares of our common stock at a publicoffering price of $17.00 per share. In November 2017, we issued an additional 529,500 shares of our common stock at a priceof $17.00 per share following the underwriters’ exercise of their option to purchase additional shares. Net proceeds, afterdeducting underwriting commissions and offering costs, were $64.5 million. On August 6, 2018, we entered into a Securities Purchase Agreement with the Investors, pursuant to which we sold anaggregate of 2,750,000 shares of our common stock for a price of $8.00 per share, for aggregate net proceeds of $21.7 million,after deducting offering expenses payable by us. In a concurrent private placement, we agreed to issue the investors Warrantsto purchase an aggregate of 2,750,000 shares of our common stock. Each Warrant is exercisable from August 8, 2018 throughAugust 8, 2023. Warrants to purchase 1,375,000 shares of our common stock have an exercise price of $10.00 per share andWarrants to purchase 1,375,000 shares of our common stock have an exercise price of $15.00 per share. The exercise priceand number of Warrant Shares are subject to adjustment in the event of any stock dividends and splits, reverse stock split,recapitalization, reorganization or similar transaction, as described in the Warrants. Under certain circumstances, the Warrantsmay be exercisable on a “cashless” basis. In connection with the issuance and sale of the common stock and the Warrants, wegranted the Investors certain registration rights with respect to the Warrants and the Warrant Shares. As of December 31,2018, none of the Warrants have been exercised.On December 21, 2018, we entered into an Exchange Agreement with the Exchanging Stockholders, pursuant towhich we exchanged an aggregate of 1,000,000 shares of our common stock, par value $0.00001 per share, owned by theExchanging Stockholders for pre-funded warrants (the “Exchange Warrants”) to purchase an aggregate of 1,000,000 shares ofcommon stock (subject to adjustment in the event of any stock dividends and splits, reverse stock split,91 Table of Contentsrecapitalization, reorganization or similar transaction, as described in the Exchange Warrants), with an exercise price of$0.00001 per share. The Exchange Warrants will expire ten years from the date of issuance. The Exchange Warrants areexercisable at any time prior to expiration except that the Exchange Warrants cannot be exercised by the ExchangingStockholders if, after giving effect thereto, the Exchanging Stockholders would beneficially own more than 9.99% ofour common stock, subject to certain exceptions. As of December 31, 2018, none of the Exchange Warrants have beenexercised.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 as well as seek additional collaborative or other arrangements with corporate sources inorder to further advance our product candidates towards potential regulatory approval. We will continue to require additionalfinancing to advance our current product candidates through clinical development, to develop, acquire or in-license otherpotential product candidates and to fund operations for the foreseeable future. We will continue to seek funds through equityor debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing, butsuch financing may not be available at terms acceptable to us, if at all. We expect that we will need to raise substantialadditional 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 current 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; ·the amount and timing of sales and other revenues from our current 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;92 Table of Contents ·the costs of maintaining, expanding and protecting our intellectual property portfolio; and ·the costs of ongoing general and administrative activities to support the growth of our business. 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, 2018 2017 2016 (In thousands)Cash provided by (used in) operating activities $ (49,947) $3,872 $(29,972)Cash provided by (used in) investing activities2,21315,823(59,328)Cash provided by financing activities24,11565,554106,307 Cash Flows from Operating ActivitiesCash used in operating activities for the year ended December 31, 2018 was $49.9 million, consisting of our net loss of$38.9 million and a net change of $18.0 million in net operating assets and liabilities, partially offset by non-cash charges of $7.0 million. The change in net operating assets and liabilities was primarily due to a net decrease of $23.5 million indeferred revenue related to the Janssen License and Collaboration Agreement and an increase of $2.8 million in receivablefrom collaboration partner, partially offset by an increase of $4.4 million in accounts payable, an increase of $1.9 million inaccrued expenses and other payables, an increase of $1.1 million in payable to collaboration partner and a decrease of $1.1million in prepaid expenses and other assets. Non-cash charges were primarily comprised of $6.9 million of stock-basedcompensation, $0.5 million of depreciation and amortization and $0.2 million of net amortization of premium on available-for-sale securities, partially offset by a $0.7 million increase in deferred tax assets.Cash 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 value93 Table of Contentsassociated 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 tax incentives, offset by a$3.3 million increase in our accounts payable and accrued expenses and other payables related to an increase in research anddevelopment activities.Cash Flows from Investing ActivitiesCash provided by investing activities for the year ended December 31, 2018 was $2.2 million, consisting of proceedsfrom available-for-sale securities of $73.8 million, partially offset by purchases of available-for-sale securities of $71.1million and purchases of property and equipment of $0.5 million. Purchases of property and equipment were primarilyrelated to purchases of scientific equipment.Cash 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 Flows from Financing ActivitiesCash provided by financing activities for the year ended December 31, 2018 was $24.1 million, consisting of $21.7million of net proceeds from issuance of our common stock and warrants in a private placement, $1.5 million of net proceedsfrom sales through our ATM financing facility and $0.9 million from the issuance of common stock upon exercise of stockoptions and purchases of common stock under our employee stock purchase plan.Cash 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.Contractual Obligations and Other CommitmentsIn March 2017, we entered into a lease agreement for office and laboratory space located in Newark, California. Werelocated our operations to the new facility in May 2017. We provided the landlord with a $450,000 letter of creditcollateralized by restricted cash as security deposit for the lease which expires in May 2024. Under the terms of the lease, weare responsible for certain taxes, insurance and maintenance expenses.94 Table of ContentsThe following table summarizes our future minimum contractual obligations as of December 31, 2018: 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 $1,941 $4,059 $4,306 $922 $11,228Total contractual obligations $1,941 $4,059 $4,306 $922 $11,228 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 an additional $250,000 payment from us to Zealand, which was recognizedwithin research and development expense in our consolidated statement of operations for the year ended December 31,2017. The initiation of a Phase 2 clinical trial for PTG-300 triggered an additional $500,000 payment obligation from us toZealand, which was recognized within research and development expense in our consolidated statement of operations for theyear ended December 31, 2018. We have the right, but not the obligation, to further develop and commercialize the productcandidate and, if we successfully develop and commercialize PTG‑300 without a partner, we will pay to Zealand up to anadditional aggregate of $128.0 million for the achievement of certain development, regulatory and sales milestone events. Inaddition, we will pay to Zealand a low single digit royalty on worldwide net sales of the product. Future development,regulatory and sales payments to Zealand are not included in the table above as the timing and amounts of such payments arenot 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 $128.9 million and $155.5 million in cash, cash equivalents and available-for-sale securities at December 31,2018 and December 31, 2017, 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 longer95 Table of Contentsthan 365 days as of the balance sheet date. Long-term available-for-sale securities have maturities of 365 days or longer as ofthe balance sheet date. A portion of our investments may be subject to interest rate risk and could fall in value if marketinterest rates increase. However, we believe that our exposure to interest rate risk is not significant as the majority of ourinvestments are short-term in duration and due to the low risk profile of our investments, a 1% change in interest rates wouldnot have a material impact on the total market value of our portfolio. We have the ability to hold our short-term investmentsuntil maturity, and therefore we do not expect that our results of operations or cash flows would be adversely affected by anychange in market interest rates on our investments. We had no outstanding debt as of December 31, 2018. Approximately $0.4 million and $1.2 million of our cash balance was located in Australia at December 31, 2018 andDecember 31, 2017, 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. 96 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 98Consolidated Balance Sheets 99Consolidated Statements of Operations 100Consolidated Statements of Comprehensive Loss 101Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) 102Consolidated Statements of Cash Flows 103Notes to the Consolidated Financial Statements 104Supplementary Financial Data (unaudited) 130 97 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. (the “Company”) andits subsidiary as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive loss,redeemable convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in theperiod ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financialstatements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financialposition of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in theUnited States of America. 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 12, 2019 We have served as the Company’s auditor since 2015. 98 Table of ContentsPROTAGONIST THERAPEUTICS, INC.Consolidated Balance Sheets(In thousands, except share data) December 31, 2018 2017Assets Current assets: Cash and cash equivalents $82,233 $106,029Restricted cash - current 10 10Available-for-sale securities - current 46,620 37,972Receivable from collaboration partner and contract asset - related party 4,587 1,816Research and development tax incentive receivable 1,429 1,347Prepaid expenses and other current assets 2,624 3,773Total current assets 137,503 150,947Property and equipment, net 861 879Restricted cash - noncurrent 450 450Available-for-sale securities - noncurrent — 11,458Deferred tax asset - noncurrent 658 —Total assets $139,472 $163,734Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $5,711 $1,257Payable to collaboration partner - related party 1,061 —Accrued expenses and other payables 11,163 9,546Deferred revenue - related party 8,223 31,752Total current liabilities 26,158 42,555Deferred rent - noncurrent 799 547Total liabilities 26,957 43,102Commitments 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; 23,187,219 and 21,088,306 sharesissued and outstanding as of December 31, 2018 and December 31, 2017, respectively — —Additional paid-in capital 253,222 222,188Accumulated other comprehensive loss (233) (6)Accumulated deficit (140,474) (101,550)Total stockholders’ equity 112,515 120,632Total liabilities and stockholders’ equity $139,472 $163,734 The accompanying notes are an integral part of these consolidated financial statements.99 Table of ContentsPROTAGONIST THERAPEUTICS, INC.Consolidated Statements of Operations(In thousands, except share and per share data) Year Ended December 31, 2018 2017 2016 License and collaboration revenue - related party $30,925 $20,063 $ —Operating expenses: Research and development 59,497 46,181 25,705General and administrative 13,697 11,779 6,961Total operating expenses 73,194 57,960 32,666Loss from operations (42,269) (37,897) (32,666)Interest income 2,546 940 242Change in fair value of redeemable convertible preferred stock tranche and warrantliabilities — — (4,719)Other expense — — (34)Loss before income tax benefit (39,723) (36,957) (37,177)Income tax benefit 799 — —Net loss $(38,924) $(36,957) $(37,177)Net loss attributable to common stockholders $(38,924) $(36,957) $(37,735)Net loss per share attributable to common stockholders, basic and diluted $(1.74) $(2.09) $(5.80)Weighted-average shares used to compute net loss per share attributable to commonstockholders, basic and diluted 22,364,515 17,694,505 6,501,796 The accompanying notes are an integral part of these consolidated financial statements.100 Table of ContentsPROTAGONIST THERAPEUTICS, INC.Consolidated Statements of Comprehensive Loss(In thousands) Year Ended December 31, 2018 2017 2016Net loss $(38,924) $(36,957) $(37,177)Other comprehensive loss: Gain (loss) on translation of foreign operations (322) 298 (76)Unrealized gain (loss) on available-for-sale securities 95 (59) (67)Comprehensive loss $(39,151) $(36,718) $(37,320) The accompanying notes are an integral part of these consolidated financial statements. 101 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, 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 convertible preferredstock to common stock at closing of initialpublic 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) 120,632Issuance of common stock and warrants uponprivate placement, net of issuance costs — — 2,750,000 — 21,673 — — 21,673Issuance of common stock pursuant to at-the-market offering, net of issuance costs — — 151,273 — 1,508 — — 1,508Retirement of common stock in exchange forcommon stock warrant — — (1,000,000) — (6,670) — — (6,670)Issuance of common stock warrant in exchangefor retirement of common stock — — — — 6,670 — — 6,670Stock-based compensation expense — — — — 6,919 — — 6,919Issuance of common stock upon the exercise ofoptions and purchases under employee stockpurchase plan — — 197,640 — 934 — — 934Other comprehensive loss — — — — — (227) — (227)Net loss — — — — — — (38,924) (38,924)Balance at December 31, 2018 — $ — 23,187,219 $ — $253,222 $ (233) $(140,474) $112,515 The accompanying notes are an integral part of these consolidated financial statements. 102 Table of ContentsPROTAGONIST THERAPEUTICS, INC.Consolidated Statements of Cash Flows(In thousands) Year Ended December 31, 2018 2017 2016CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(38,924) $(36,957) $(37,177)Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Stock-based compensation 6,919 4,241 2,130Depreciation and amortization 527 406 317Net amortization of premium on available-for-sale securities 206 687 117Change in deferred tax asset (658) — —(Loss) gain on disposal of property and equipment — (62) 34Change in fair value associated with redeemable convertible preferred stock tranche liability — — 4,194Change in fair value of redeemable convertible preferred stock warrant liability — — 525Changes in operating assets and liabilities: Research and development tax incentive receivable (236) 1,070 (1,588)Receivable from collaboration partner - related party (2,771) (1,816) —Prepaid expenses and other assets 1,117 (333) (1,804)Accounts payable 4,430 91 (115)Payable to collaboration partner - related party 1,061 — —Accrued expenses and other payables 1,911 4,793 3,395Deferred revenue - related party (23,529) 31,752 —Net cash provided by (used in) operating activities (49,947) 3,872 (29,972)CASH FLOWS FROM INVESTING ACTIVITIES Purchase of available-for-sale securities (71,060) (39,546) (73,169)Proceeds from maturities of available-for-sale securities 73,759 56,035 14,188Purchases of property and equipment, net (486) (666) (347)Net cash provided by (used in) investing activities 2,213 15,823 (59,328)CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock and warrants in private placement, net of issuancecosts 21,673 64,547 83,648Proceeds from at-the-market offering, net of issuance costs 1,508 — —Proceeds from issuance of common stock upon exercise of stock options and purchases underemployee stock purchase plan 934 1,007 151Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs — — 22,508Net cash provided by financing activities 24,115 65,554 106,307Effect of exchange rate changes on cash, cash equivalents and restricted cash (177) 146 22Net (decrease) increase in cash, cash equivalents and restricted cash (23,796) 85,395 17,029Cash, cash equivalents and restricted cash, beginning of year 106,489 21,094 4,065Cash, cash equivalents and restricted cash, end of period $82,693 $106,489 $21,094SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING AND INVESTINGINFORMATION: Fair value of common stock retired in exchange for issuance of common stock warrant $6,670 $ — $ —Purchases of property and equipment in accounts payable $24 $ — $21Acquisition 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 $ — $ — $66,904Settlement of fair value of redeemable convertible preferred stock liability $ — $ — $5,837Reclassification of preferred stock warrant liability to equity $ — $ — $1,005Accretion of redeemable convertible preferred stock $ — $ — $558The accompanying notes are an integral part of these consolidated financial statements. 103 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 $140.5 millionas of December 31, 2018. 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, 2018, the Company has financed its operations through privateplacements of redeemable convertible preferred stock, offerings of common stock and payments received under a license andcollaboration agreement.On August 10, 2016, the Company’s registration statement on Form S-1 (File Nos. 333-212476 and 333-213071)related to its initial public offering (“IPO”) became effective. The IPO closed on August 16, 2016, at which time theCompany issued 7,500,000 shares of its common stock at a price of $12.00 per share. In addition, upon closing the IPO, alloutstanding shares of the Company’s redeemable convertible preferred stock converted into 8,577,571 shares of commonstock. There were no shares of redeemable convertible preferred stock outstanding at December 31, 2018 or 2017. InSeptember 2016, the Company issued an additional 252,972 shares of its common stock at a price of $12.00 per sharefollowing the underwriters’ exercise of their option to purchase additional shares. The Company received an aggregate of$83.6 million in cash, net of underwriting discounts 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 (File No. 333-220314), effective as of October 5, 2017, as amended, which permits the offering, issuance, andsale by the Company of up to a maximum aggregate offering price of $200.0 million of its common stock, includingwarrants. Up to a maximum of $50.0 million of the maximum aggregate offering price of $200.0 million may be issued andsold pursuant to an at-the-market (“ATM”) financing facility under a sales agreement with Cantor Fitzgerald & Co. (the“Sales Agreement”). The Company pays Cantor Fitzgerald & Co. up to 3% of gross proceeds for any common stock soldthrough the Sales Agreement. The Company sold 151,273 shares of its common stock pursuant to the Sales Agreementduring the year ended December 31, 2018 for net proceeds of $1.5 million, after deducting commissions and offering costs.As of December 31, 2018, $48.3 million of common stock remained available for sale under the ATM financing facility.In October 2017, the Company completed an underwritten public offering of 3,530,000 shares of common stock at apublic offering price of $17.00 per share. In November 2017, the Company issued an additional 529,500 shares of itscommon stock at a price of $17.00 per share following the underwriters’ exercise of their option to purchase additionalshares. Net proceeds, after deducting underwriting commissions and offering costs paid by the Company, were $64.5 million.On August 6, 2018, the Company entered into a Securities Purchase Agreement with certain accredited investors (each,an “Investor” and, collectively, the “Investors”), pursuant to which the Company sold an aggregate of 2,750,000 shares of itscommon stock at a price of $8.00 per share, for aggregate net proceeds of $21.7 million, after deducting offering expensespayable by the Company. In a concurrent private placement, the Company issued the Investors104 Table of Contentswarrants to purchase an aggregate of 2,750,000 shares of its common stock (each, a “Warrant” and, collectively, the“Warrants”). Each Warrant is exercisable from August 8, 2018 through August 8, 2023. Warrants to purchase 1,375,000shares of the Company’s common stock have an exercise price of $10.00 per share and Warrants to purchase 1,375,000 sharesof the Company’s common stock have an exercise price of $15.00 per share. The exercise price and number of shares ofcommon stock issuable upon the exercise of the Warrants (the “Warrant Shares”) are subject to adjustment in the event of anystock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in theWarrants. Under certain circumstances, the Warrants may be exercisable on a “cashless” basis. In connection with theissuance and sale of the common stock and Warrants, the Company granted the Investors certain registration rights withrespect to the Warrants and the Warrant Shares. The common stock and warrants are classified as equity in accordance withAccounting Standards Codification Topic 480, Distinguishing Liabilities from Equity, and the net proceeds from thetransaction were recorded as a credit to additional paid-in capital. As of December 31, 2018, none of the Warrants have beenexercised.On December 21, 2018, the Company entered into an exchange agreement (the “Exchange Agreement”) with anInvestor and its affiliates (the “Exchanging Stockholders”), pursuant to which the Company exchanged an aggregate of1,000,000 shares of the Company’s common stock, par value $0.00001 per share, owned by the Exchanging Stockholders forpre-funded warrants (the “Exchange Warrants”) to purchase an aggregate of 1,000,000 shares of common stock (subject toadjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similartransaction, as described in the Exchange Warrants), with an exercise price of $0.00001 per share. The Exchange Warrantswill expire ten years from the date of issuance. The Exchange Warrants are exercisable at any time prior to expiration exceptthat the Exchange Warrants cannot be exercised by the Exchanging Stockholders if, after giving effect thereto, theExchanging Stockholders would beneficially own more than 9.99% of the Company’s common stock, subject to certainexceptions. In accordance with Accounting Standards Codification Topic 505, Equity, the Company recorded the retirementof the common stock exchanged as a reduction of common shares outstanding and a corresponding debit to additional paid-in-capital at the fair value of the Exchange Warrants on the issuance date. The Exchange Warrants are classified as equity inaccordance with Accounting Standards Codification Topic 480, Distinguishing Liabilities from Equity, and fair value of theExchange Warrants was recorded as a credit to additional paid-in capital and is not subject to remeasurement. The Companydetermined that the fair value of the Exchange Warrants is substantially similar to the fair value of the retired shares on theissuance date due to the negligible exercise price for the Exchange Warrants. As of December 31, 2018, none of theExchange Warrants have been exercised.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 Australia and have been prepared in conformity with accounting principles generally accepted in theUnited States of America (“GAAP”). All intercompany balances and transactions have been eliminated in consolidation.The financial statements of Protagonist Australia use the Australian dollar as the functional currency since the majorityof expense transactions occur in such currency. Gains and losses from foreign currency transactions were not material for allperiods 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, 2018 and 2017 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.105 Table of ContentsForeign 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, income taxes and available-for-sale securities. Estimates related to revenue recognition include actualcosts incurred versus total estimated budgeted cost of the Company’s deliverables, actual costs versus total estimated budgetto determine percentage of completion, and application of constraint in the determination of transaction price under itslicense and collaboration agreement with Janssen Biotech Inc. (the “Janssen License and Collaboration Agreement”).Management bases these estimates on historical and anticipated results, trends, and various other assumptions that theCompany believes are reasonable under the circumstances, including assumptions as to forecasted amounts and futureevents. 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 the U.S.government and its agencies, money market instruments including commercial paper and negotiable certificates of deposit,and highly rated corporate debt obligations and money market funds. The Company has not experienced any material creditlosses 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 a letter of credit related to theCompany’s facility lease entered into in March 2017 and the Company’s corporate credit card.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):106 Table of Contents December 31, 2018 2017 2016Cash and cash equivalents $82,233 $106,029 $21,084Restricted cash - current 10 10 10Restricted cash - noncurrent 450 450 —Cash balance in consolidated statements of cash flows $82,693 $106,489 $21,094Available-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 greater than three months but not longer than 365 days as of thebalance sheet date. Long-term marketable securities have maturities of 365 days or longer as of the balance sheet date.Unrealized gains and losses are excluded from earnings and are reported as a component of comprehensive loss. Realizedgains and losses and declines in fair value judged to be other than temporary, if any, on available-for-sale securities areincluded in interest income. The cost of securities sold is based on the specific-identification method. Interest on marketablesecurities 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, payable to collaborationpartner and accrued expenses and other payables approximate fair value due to their short-term maturities. See Note 4. to theConsolidated Financial Statements for additional information regarding the fair value of the Company’s other financialassets 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 and accumulated depreciation areremoved from the consolidated balance sheet and any resulting gain or loss is reflected in operations 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.107 Table of ContentsIncome 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 a 50% likelihood ofbeing realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.The Company records interest and penalties related to unrecognized tax benefits in income tax expense. To date, there havebeen no interest or penalties recorded in relation to unrecognized tax benefits.Revenue RecognitionEffective July 1, 2017, the Company early adopted Accounting Standards Codification Topic 606, Revenue fromContracts with Customers (“ASC 606”) using the full retrospective transition method. The Company did not have anyeffective contracts within the scope of this guidance prior to July 1, 2017. Accordingly, the Company did not elect to use anyof the practical expedients permitted related to adoption, and the adoption of ASC 606 had no impact on the Company’sfinancial position, results of operations or liquidity. This standard applies to all contracts with customers, except for contractsthat are within the scope of other standards, such as leases, insurance, collaboration arrangements under AccountingStandards Codification Topic 808, and financial instruments. Under ASC 606, the Company recognizes revenue when itscustomer obtains control of promised goods or services, in an amount that reflects the consideration which the Companyexpects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that theCompany determines are within the scope of ASC 606, the Company performs 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) theCompany satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probablethat the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to thecustomer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assessesthe goods or services promised within each contract and determines those that are performance obligations and assesseswhether 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 of108 Table of Contentsproportional performance each reporting period and, if necessary, adjusts the measure of performance and related revenuerecognition.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.Research and Development CostsResearch and development costs are expensed as incurred, unless there is an alternate future use in other research anddevelopment projects or otherwise. Research and development costs include salaries and benefits, stock-based compensationexpense, laboratory supplies and facility-related overhead, outside contracted services including clinical trial costs,manufacturing and process development costs for both clinical and preclinical materials, research costs, developmentmilestone payments under 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 the109 Table of ContentsCompany’s estimates, resulting in adjustments to expense in future periods. Changes in these estimates that result in materialchanges to the Company’s accruals 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. The tax incentive is available to the Company on the basis of specific criteriawith which the Company must comply. Specifically, the Company must have annual turnover of less than AUD 20.0 millionand cannot be controlled by income tax exempt entities. The research and development tax incentive is recognized as areduction to research and development expense when the right to receive has been attained and funds are considered to becollectible. 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.Redeemable 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. During the year ended December 31, 2016, the fair value ofthe redeemable convertible preferred stock tranche liability was reclassified to redeemable convertible preferred stock withno further remeasurement required.Redeemable Convertible Preferred Stock Warrant LiabilityThe Company has accounted for its freestanding warrants issued prior to 2016 to purchase shares of the Company’sredeemable convertible preferred stock as liabilities at fair value upon issuance. At the end of each reporting period, changesin estimated fair value during the period are recorded in the consolidated statements of operations. The Company continuedto adjust the liability for these warrants for changes in fair value until the earlier of the exercise of the warrants or expirationon May 10, 2016, and no further 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. For stock option awards, the Company uses the Black-Scholes option-pricing model. For110 Table of Contentsrestricted stock unit awards, the estimated fair value is generally the fair market value of the underlying stock on the grantdate. Stock-based compensation expense is recognized over the requisite service period and is based on the value of theportion of stock-based payment awards that is ultimately expected to vest. The Company adopted Accounting StandardsUpdate (“ASU”) No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-BasedPayment Accounting effective January 1, 2017 and has elected to recognize forfeitures of stock-based awards as they occuron a prospective basis. Prior to January 1, 2017, the Company’s stock-based compensation was reduced for the estimatedforfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differed from thoseestimates.Stock-based compensation expense for awards 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, whichever can be more reliably measured. Compensation expense for awards granted to non-employees isperiodically remeasured as the underlying awards 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 and Exchange Warrantsoutstanding during the period, without consideration of potentially dilutive securities. In accordance with AccountingStandards Codification Topic 260, Earnings Per Share, the Exchange Warrants are included in the computation of basic netloss per share because the exercise price is negligible and they are fully vested and exercisable at any time after the originalissuance date. The net loss attributable to common stockholders is calculated by adjusting the net loss of the Company forthe accretion on the redeemable convertible preferred stock, if applicable. Diluted net loss per share attributable to commonstockholders is the same as basic net loss per share attributable to common stockholders for all periods presented since theeffect of potentially dilutive securities is anti-dilutive given the net loss of the Company.Recently Issued Accounting Pronouncements Adopted During the Year Ended December 31, 2018In 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, with early adoptionpermitted. The Company adopted this guidance effective January 1, 2018. The adoption of this guidance had no effect on theCompany’s consolidated financial 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, with early adoption permitted. The Company adopted this guidance effective January 1, 2018. Theadoption of this guidance had no effect on the Company’s consolidated financial statements and disclosures.Recently Issued Accounting Pronouncements Not Yet Adopted as of December 31, 2018In February 2016, the FASB issued ASU No. 2016‑02, Leases (Topic 842). In July 2018, the FASB issued ASU No.2018-10, Codification Improvements to Topic 842, Leases, which provides clarification to ASU 2016-02. These ASUs(collectively, the new lease standard) require an entity to recognize a lease liability and a right-of-use asset on the balancesheet for leases with lease terms of more than twelve months. Lessor accounting is largely unchanged, while lessees will nolonger be provided with a source of off-balance sheet financing. This guidance is effective for fiscal years beginning afterDecember 15, 2018, including interim periods within those fiscal years. Initial guidance required the adoption of the newlease standard using the modified retrospective transition method. In July 2018, the FASB issued ASU No. 2018-11, Leases(Topic 842) - Targeted Improvements, which allows entities to elect an optional transition111 Table of Contentsmethod where entities may continue to apply the existing lease guidance during the comparative periods and apply the newlease requirements through a cumulative effect adjustment in the period of adoptions rather than in the earliest periodpresented. The Company will adopt the new standard on January 1, 2019 using the optional transition method. TheCompany established a cross-functional implementation team to review its lease portfolio and implement the new guidance.While the Company continues to review its current accounting policies and practices to identify potential differences thatwould result from applying the new guidance, the Company expects that its non-cancellable operating lease commitmentswith a term of more than twelve months will be subject to the new guidance and recognized as right-of-use assets andoperating lease liabilities on the Company’s consolidated balance sheets upon adoption. The Company expects to electtransitional practical expedients such that the Company will not need to reassess whether contracts are leases and will retainlease classification and initial direct costs for leases existing prior to the adoption of the new lease standard.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 financial assets held by areporting entity at each reporting date. The new standard replaces the existing incurred loss impairment methodology with amethodology that requires consideration of a broader range of reasonable and supportable forward-looking information toestimate all expected credit losses. This guidance is effective for fiscal years and interim periods within those yearsbeginning after December 15, 2019 and early adoption is permitted for fiscal years and interim periods within those yearsbeginning after December 15, 2018. The Company is currently evaluating the impact of this new guidance on itsconsolidated financial statements and disclosures.In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718), Improvements toNonemployee Share-Based Payment Accounting, which is intended to simplify the accounting for nonemployee share-basedpayment transactions by expanding the scope of Topic 718 to include share-based payment transactions for acquiring goodsand services from nonemployees. The guidance is effective for fiscal years and interim periods within those years beginningafter December 15, 2018. The Company is currently evaluating the impact of this new guidance on its consolidated financialstatements and disclosures.In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework –Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fairvalue measurements and is intended to improve the effectiveness of disclosures, including the consideration of costs andbenefits. The guidance is effective for the fiscal years and interim periods within those years beginning after January 1, 2020.Early adoption is permitted, and an entity is permitted to early adopt any removed or modified disclosures and delayadoption of additional disclosures until their effective date. The Company does not expect this new guidance to impact itsconsolidated financial statements and is currently evaluating the impact on its disclosures.In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying theInteraction Between Topic 808 and Topic 606, which is intended to clarify the circumstances under which certaintransactions in collaborative arrangements should be accounted for under the revenue recognition standard. Certaintransactions between collaboration arrangement participants should be accounted for as revenue under ASC Topic 606 whenthe collaborative arrangement participant is a customer in the context of a unit of account. This guidance is effective forfiscal years and interim periods within those years beginning after December 15, 2020. Early adoption is permitted. TheCompany is in the process of assessing the impact of this new guidance on its consolidated financial statements anddisclosures. 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 significant112 Table of Contentsstockholder of the Company, and Janssen are both subsidiaries of Johnson & Johnson. PTG-200 is the Company’s oralInterleukin 23 receptor (“IL-23R”) antagonist drug candidate currently in development. The Janssen License andCollaboration Agreement became effective on July 13, 2017. Upon the effectiveness of the agreement, the Company receiveda 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 theInvestigational New Drug application (“IND”). 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 Janssen’s filing of the IND. Following theconclusion of the planned Phase 2a portion of the Phase 2 clinical trial, if Janssen elects to maintain its license rights andcontinue the development of PTG-200 in the Phase 2b portion of such clinical trial (the “First Opt-in Election”), theCompany would be eligible to receive a $125.0 million payment. Following the conclusion of the planned Phase 2b portionof the Phase 2 clinical trial, if Janssen elects again to maintain its license rights (the “Second Opt-in Election”), the Companywould be eligible to receive a $200.0 million payment. In addition to the opt-in fees, the Company would be eligible toreceive potential development, regulatory and sales milestone payments of up to an aggregate of $590.0 million, and tieredroyalties paid as a percentage of Janssen’s worldwide net sales at rates ranging from ten to the mid-teens, with certaincustomary reductions under certain circumstances. If Janssen does not make either the First Opt-in Election or the SecondOpt-in Election, the Janssen License and Collaboration Agreement will terminate. If Janssen does not make the Second Opt-in Election, or if at any time after the Second Opt-in Election, Janssen terminates the Janssen License and CollaborationAgreement, the Company would be obligated to pay Janssen a low single-digit royalty on worldwide net sales of PTG-200.The Company would also have an option to provide up to 30% of the required U.S. details for PTG-200 to prescribers, usingits own sales force personnel, upon commercial launch in the United States. If such right is exercised by the Company, theCompany’s detailing costs would be reimbursed by Janssen at a mutually agreed cost per primary detailing equivalent.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.113 Table of ContentsRevenue 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 License and Collaboration Agreement are expected to involve significant further development of the initial IP, theCompany has concluded that the development and compound supply services are not distinct from the license, and thus thelicense, development services and compound supply services are combined into a single performance obligation. The natureof the combined 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 after completion of Phase 2a and thena perpetual license in the case of opt in after completion of Phase 2b. Therefore, the First Opt-in Election and Second Opt-inElection options are not considered to be material rights. The option fees will be recognized as revenue when, and if, Janssenexercises its options because the Company has no further performance obligations 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 $60.7million as of December 31, 2018, an increase of $6.8 million from the transaction price of $53.9 million as of December 31,2017. 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 IND, which is fully constrained as of December 31, 2018 and December 31, 2017, and $10.7 million of estimatedvariable consideration for cost-sharing payments from Janssen for agreed upon services related to Phase 2 activities as ofDecember 31, 2018 constituted consideration to be included in the transaction price, which is to be allocated to thecombined performance obligation. The increase in the transaction price from December 31, 2017 was due to an increase invariable consideration related to compound supply services and was recognized as a cumulative catch-up adjustment. TheCompany will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changesin circumstances occur.114 Table of ContentsAs part of the evaluation for determining that the $25.0 million payment upon filing of the IND is fully constrained asof December 31, 2018, the Company considered several factors, including the stage of development of PTG-200 and thatachievement of the milestone is outside of the Company’s control, and concluded that the filing of the IND is not probable atDecember 31, 2018. If and when the filing of the IND becomes probable, the $25.0 million payment will be constrained bycontra revenue amounts for payments that the Company expects to make for 20% of the cost of Phase 2 activities to beperformed by Janssen. The additional potential development, regulatory and sales milestone payments of up to an aggregateof $590.0 million after the completion of Phase 2a activities that the Company is eligible to receive are outside the contractterm and as such have been excluded from the transaction price. Any consideration related to sales-based milestones(including royalties) will be recognized when the related sales occur as they were determined to relate predominantly to thelicense granted to Janssen and therefore have also been excluded from the transaction price. At the end of each reportingperiod, the Company will update its assessment of whether an estimate of variable consideration is constrained and updatethe estimated transaction price accordingly.The Company uses the most likely amount method to determine variable consideration. Variable consideration forcost-sharing payments related to agreed upon services for Phase 2 activities that the Company performs within the durationof the contract are included in the transaction price at an amount equal to 80% of the estimated budgeted costs for theseactivities, including primarily internal full-time equivalent effort and third party contract costs. The Company is responsiblefor 20% of the development costs for the Phase 2 clinical trial. Accordingly, a significant portion of this work is expected tobe performed by Janssen. Because the Phase 2 clinical trial activity is related to the license, it is not capable of being distinct.This is because both the Company and Janssen cannot benefit from these activities absent the Phase 1 activities. As the Phase2 activities for which the Company will share 20% of the costs 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 to the Company.Therefore, the consideration payable to Janssen is accounted for as a reduction in the transaction price. The Company andJanssen make quarterly cost-sharing payments to one another in amounts necessary to ensure that each party bears itscontractual share of the overall shared costs incurred. The Company accounts for cost-sharing payments from Janssen asincreases in license and collaboration revenue in its consolidated statements of operations, while cost-sharing payments toJanssen are accounted for as reductions in license and collaboration revenue, or contra-revenue. Costs incurred by theCompany related to agreed upon services for Phase 2 activities under the Janssen License and Collaboration Agreement arerecorded as research and development expenses in its consolidated 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 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 budgeted115 Table of Contentscosts as the Company completes its performance obligations. A cost-based input method of revenue recognition requiresmanagement to make estimates of costs to complete the Company’s performance obligations. In making such estimates,significant judgment is required to evaluate assumptions related to cost estimates. The cumulative effect of revisions toestimated costs to complete the Company’s performance obligations will be recorded in the period in which changes areidentified and amounts can be reasonably estimated. A significant change in these assumptions and estimates could have amaterial impact on the timing and amount of revenue recognized in future periods.For the year ended December 31, 2018, the Company recognized $30.9 million of license and collaboration revenue.This amount included $30.8 million of the transaction price for the Janssen License and Collaboration Agreementrecognized based on proportional performance, and $0.1 million, net, for other services related to Phase 2 activitiesperformed by the Company on behalf of Janssen that are not included in the performance obligations identified under theJanssen License and Collaboration Agreement.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 years ended December 31,2018 and 2017 (in thousands): Balance at Balance at Beginning of End ofYear Ended December 31, 2018 Period Additions Deductions PeriodContract assets: Receivable from collaboration partner - related party $1,816 $6,665 $(6,439) $2,042 Contract asset - related party $ — $2,545 $ — $2,545Contract liabilities: Deferred revenue - related party $31,752 $7,296 $(30,825) $8,223 Payable to collaboration partner - related party $ — $1,574 $(513) $1,061 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) $31,752 Deferred revenue related to the Janssen License and Collaboration Agreement was $8.2 million as of December 31,2018, and was comprised of the $50.0 million upfront payment and $8.0 million of cost sharing payments from Janssen foragreed upon services for Phase 2a activities, less $49.8 million of license and collaboration revenue recognized from theeffective date of the contract. Deferred revenue will be recognized as the combined performance obligation is satisfied. TheCompany recorded a $2.0 million receivable from collaboration partner as of December 31, 2018 for cost sharing amountspayable from and billed to Janssen and a $2.5 million contract asset for unbilled cost sharing amounts payable from Janssen.The Company also recorded a $1.1 million payable to collaboration partner as of December 31, 2018 for cost sharingamounts payable to Janssen.Deferred revenue related to the Janssen License and Collaboration Agreement of $31.8 million as of December 31,2017 was comprised of the $50.0 million upfront payment and $0.7 million of cost sharing payments from Janssen for agreedupon services for Phase 2 activities, less $19.0 million of license and collaboration revenue recognized from the116 Table of Contentseffective date of the contract. The Company also recorded a $1.8 million receivable from collaboration partner as ofDecember 31, 2017 for cost sharing amounts payable from Janssen.During the year ended December 31, 2018, the Company recognized $23.5 million in revenue from the deferredrevenue contract liability balance at the beginning of the year. During the year ended December 31, 2017, the Company didnot recognize any revenue from amounts included in the contract asset and the contract liability balances at the beginning ofthe year or from performance obligations satisfied in previous periods. None of the costs to obtain or fulfill the contract werecapitalized.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, 2018 Level 1 Level 2 Level 3 TotalAssets: Money market funds $25,390 $ — $— $25,390Corporate bonds — 8,989 — 8,989Commercial paper — 59,730 — 59,730Government bonds — 33,394 — 33,394Total financial assets $25,390 $102,113 $ — $127,503 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 — 58,524Government bonds — 40,303 — 40,303Total financial assets $48,704 $105,074 $ — $153,778 117 Table of ContentsThe 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. Note 5. Balance Sheet Components Cash Equivalents and Available-for-sale SecuritiesCash equivalents and available-for-sale securities consisted of the following (in thousands): December 31, 2018 Amortized Gross Unrealized Cost Gains Losses Fair ValueMoney market funds $25,390 $ — $— $25,390Corporate bonds 8,997 — (8) 8,989Commercial paper 59,730 — — 59,730Government bonds 33,423 — (29) 33,394Total cash equivalents and available-for-sale securities $127,540 $ — $(37) $127,503Classified as: Cash equivalents $80,883Available-for-sale securities - current 46,620Total cash equivalents and available-for-sale securities $127,503 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 37,972 Available-for-sale securities - noncurrent 11,458Total cash equivalents and available-for-sale securities $153,778 All available-for-sale securities - current held as of December 31, 2018 and 2017 had contractual maturities of less thanone year. All available securities - noncurrent held as of December 31, 2017 had contractual maturities of at least one yearbut less than two years. There were no material realized gains or realized losses from sales of available-for-sale securities forthe periods presented.118 Table of ContentsPrepaid Expenses and Other Current AssetsPrepaid expenses and other current assets consisted of the following (in thousands): December 31, 2018 2017Prepaid clinical and research related expenses $686 $2,324Prepaid insurance 438 378Other prepaid expenses 1,005 936Other receivable 495 135Prepaid expenses and other current assets $2,624 $3,773 Property and Equipment, NetProperty and equipment, net consisted of the following (in thousands): December 31, 2018 2017Laboratory equipment $2,533 $2,177Furniture and computer equipment 338 270Leasehold improvements 67 26Total property and equipment 2,938 2,473Less: accumulated depreciation and amortization (2,077) (1,594)Property and equipment, net $861 $879 Depreciation expense for the years ended December 31, 2018, 2017, and 2016 was $527,000, $406,000 and $317,000,respectively. As of December 31, 2018, 2017 and 2016, $200, $1,200 and $8,000, respectively, of property and equipment,net, was located 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, 2018 2017Accrued clinical and research related expenses $7,781 $6,437Accrued employee related expenses 2,726 2,718Accrued milestone payment to former collaboration partner 500 —Accrued professional service fees 61 267Other 95 124Total accrued expenses and other payables $11,163 $9,546 Note 6. Research Collaboration and License Agreement In 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 the119 Table of Contentsformer collaboration partner. The initiation of a Phase 2 clinical trial for PTG-300 triggered an additional $500,000 paymentobligation to the former collaboration partner. The Company has the right, but not the obligation, to further develop andcommercialize the product and, if the Company successfully develops and commercializes PTG‑300 without a partner, theCompany will pay to the former collaboration partner up to an additional aggregate of $128.0 million for the achievement ofcertain development, regulatory and sales milestone events. In addition, the Company will pay to the former collaborationpartner a low single digit royalty on worldwide net sales of the product until the later of ten years from the first commercialsale of the product or the expiration of the last patent covering the product. For each of the years ended December 31, 2018,2017 and 2016, the Company recorded research and development expense of $500,000, $250,000 and $250,000 under thisagreement.Note 7. Government Programs Research and Development Tax IncentiveThe Company recognized AUD 2.1 million ($1.6 million), AUD 1.7 million ($1.3 million) and AUD 5.3 million ($4.0million) as a reduction of research and development expenses for the years ended December 31, 2018, 2017 and 2016,respectively, in connection with the research and development tax incentive from Australia. As of December 31, 2018 and2017, the research and development tax incentive receivable was AUD 2.0 million ($1.4 million) and AUD 1.7 million ($1.3million), 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 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.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 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 September 2018, the Company was awarded a Phase 2 SBIR Grant from the NHLBI of the NIH in support of researchaimed at developing the Company’s novel hepcidin mimetic PTG-300 for the potential treatment of chronic anemia and ironoverload in rare blood disorders, including beta-thalassemia. The total grant award was $1.5 million and is for the periodfrom September 2018 to August 2020.120 Table of ContentsThe 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 $663,000, $182,000 and$169,000 as a reduction of research and development expenses for the years ended December 31, 2018, 2017 and 2016,respectively. The Company recorded a receivable for $309,000 and $58,000 as of December 31, 2018 and 2017, 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 Contingencies Lease 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. The Company records tenantimprovement allowances as deferred rent when funds are received and associated capital expenditures as leaseholdimprovements that will be amortized over the shorter of their useful life or the remaining term of the lease. The following table summarizes the Company’s future minimum lease payments related to the Newark facility as ofDecember 31, 2018 (in thousands):Year Ending December 31: Amount2019 $1,9412020 2,0002021 2,0592022 2,1212023 2,185Thereafter 922Total $11,228 The Company’s rent expense was $1.9 million, $1.4 million and $408,000 for the years ended December 31, 2018,2017 and 2016, 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 Warrants In connection with its 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.121 Table of ContentsThese warrants became exercisable only when certain milestones were met on programs begun as a result of collaborationsentered into in 2011 and 2012.In March 2016, the Company made a public announcement related to a preclinical candidate which triggered theachievement of a 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 the exercise of thewarrants, the fair value of the warrants was remeasured at $1.0 million, determined using a hybrid method of the OptionPricing Model with a 67% weighted value per share and the probability-weighted expected return method (“PWERM”) witha 33% weighted value per share.. Upon the exercise of warrants, the redeemable convertible preferred stock warrant liabilityof $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. Therewere no such charges incurred for the years ended December 31, 2018 and 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, 2018 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 for the accretion of the redeemable convertible preferred stock during the year endedDecember 31, 2016. The accretion was recorded as an offset to the additional paid-in capital until such balance122 Table of Contentswas depleted and any remaining accretion was recorded to accumulated deficit. There were no such charges incurred for theyears ended December 31, 2018 and 2017.Note 11. Redeemable Convertible Preferred Stock Tranche LiabilityIn 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 $17.5 million. According to the initial terms of the Series CAgreement, the Company could issue 45,189,794 additional shares under the same terms as the initial closing, in asubsequent 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. At December 31, 2015, thefair value of the Series C redeemable convertible preferred stock tranche liability was determined to be $1.6 million using aone-step binomial lattice model in combination with the Option Pricing Model. 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. Upon the closing of theSeries C Second Tranche, the Series C redeemable convertible preferred stock tranche liability was terminated and thebalance of the liability of $5.8 million was reclassified to redeemable convertible preferred stock.For the year ended December 31, 2016, the Company recorded a charge of $4.2 million for the change in the fair valueof the redeemable convertible preferred stock liability in the consolidated statements of operations. There were no suchcharges incurred for the years ended December 31, 2018 and 2017.Note 12. 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, 2018, approximately 177,473 shares ofcommon stock were available for issuance under the 2016 Plan.123 Table of ContentsThe 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.Inducement PlanIn May 2018, the Company’s board of directors approved the 2018 Inducement Plan, a non-stockholder approvedstock plan, under which it reserved and authorized up to 750,000 shares of the Company’s common stock in order to awardoptions and restricted stock unit awards to persons that were not previously employees or directors of the Company, orfollowing a bona fide period of non-employment, as an inducement material to such persons entering into employment withthe Company, within the meaning of Rule 5635(c)(4) of the NASDAQ Listing Rules. The 2018 Inducement Plan isadministered by the board of directors or the Compensation Committee of the board, which determines the types of awards tobe granted, including the number of shares subject to the awards, the exercise price and the vesting schedule. Awards grantedunder the 2018 Inducement Plan expire no later than ten years from the date of grant. As of December 31, 2018,approximately 645,000 shares were available for issuance under the 2018 Inducement Plan. Stock OptionsActivity under the Company’s equity incentive plans is set forth below: Weighted- Weighted- Average Average Exercise Remaining Aggregate Options Price Per Contractual Intrinsic Outstanding Share Life (years) Value (1) (in millions)Balances at December 31, 2015 833,178 $1.33 8.56 Options granted 1,679,979 14.24 Options exercised (119,328) 1.28 Balances at December 31, 2016 2,393,829 10.39 8.79 Options granted 493,500 13.20 Options exercised (257,858) 1.84 Options forfeited (191,320) 15.00 Balances at December 31, 2017 2,438,151 11.51 8.26 Options granted 1,067,400 13.17 Options exercised (143,358) 2.78 Options forfeited (183,752) 15.46 Balances at December 31, 2018 3,178,441 $12.23 7.52 $3.5Options exercisable – December 31, 2018 1,475,083 $11.07 6.98 $2.6Options vested and expected to vest –December 31, 2018 3,178,441 $12.23 7.52 $3.5____________________124 Table of ContentsThe 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, 2018. The calculation excludes options with an exercise pricehigher than the closing price of the Company’s common stock on December 31, 2018. The aggregate intrinsic value of options exercised was $1.3 million, $3.5 million and $169,000 for the years endedDecember 31, 2018, 2017 and 2016, respectively.During the years ended December 31, 2018, 2017 and 2016, the estimated weighted-average grant-date fair value ofcommon stock underlying options granted was $8.12, $7.74 and $8.20 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, 2018 2017 2016 Expected term (in years) 5.49 - 6.08 5.50 - 6.08 4.16 - 5.95 Expected volatility 62.0% - 66.5% 61.6% - 65.4% 62.5% - 64.8% Risk-free interest rate 2.42% - 3.03% 1.88 - 2.24% 1.27% - 1.79% Dividend yield — — — In 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.125 (1) Table of ContentsStock 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, 2018 2017 2016 Expected term (in years) 7.48 - 7.67 6.97 - 7.40 6.59 - 9.97 Expected volatility 64.4% - 67.8% 61.7% - 65.4% 62.5% - 62.8% Risk-free interest rate 2.61% - 3.02% 2.17% - 2.33% 1.29% - 1.79% Dividend yield — — — During the years ended December 31, 2018 and 2016, the Company granted 42,950 and 59,647 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 31,2018, 2017 and 2016 of $36,000, $263,000 and $505,000, respectively.Restricted Stock UnitsDuring the year ended December 31, 2018, the Company began issuing restricted stock units under the 2016 Plan. Arestricted stock unit is an agreement to issue shares of the Company’s common stock at the time of vesting. Restricted stockunits annual refresher awards vest in four equal installments on approximately the first, second, third and fourth anniversariesof the grant date. Restricted stock unit incentive awards granted during 2018 vest in three equal installments at six monthsintervals over a period of 18 months.Restricted stock unit activity under the Company’s equity incentive plans is set forth below:Un Weighted- Average Number of Grant Date Shares Fair ValueUnvested at December 31, 2017 — —Restricted stock units granted 426,025$10.53Restricted stock units forfeited (7,575) 15.36Unvested at December 31, 2018 418,450$10.45 Stock-based compensation expense associated with restricted stock units is based on the fair value of the Company’scommon stock on the grant date, which equals the closing market price of the Company’s common stock on the grant date.For restricted stock units, the Company recognizes compensation expense over the vesting period of the awards that areultimately expected to vest. 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 stock purchaseplan under Section 423 of the Internal Revenue Code of 1986, as amended, and is administered by the Company’s board ofdirectors and the Compensation Committee of the board of directors. Under the 2016 ESPP, 150,000 shares of the Company’scommon 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 on January 1 ofeach year, starting on January 1, 2017 and continuing through (and including) January 1, 2026 by the lesser of (i) 1% of thetotal 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 eligible employees to purchaseshares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligiblecompensation. At the end of each offering period,126 Table of Contentseligible employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stockat the beginning of the offering period or at the end of each applicable purchase period. As of December 31, 2018, 102,950shares have been issued, and 425,155 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, 2018 2017 2016 Expected term (in years) 0.50 0.50 0.60 Expected volatility 49.0% - 63.4% 52.4% 52.5% Risk-free interest rate 1.89% - 2.32% 0.89% - 1.16% 0.45% Dividend yield — — — Stock-Based CompensationTotal stock-based compensation expense was as follows (in thousands): Year Ended December 31, 2018 2017 2016Research and development $3,424 $2,008 $1,080General and administrative 3,495 2,233 1,050Total stock-based compensation expense $6,919 $4,241 $2,130 As of December 31, 2018, total unrecognized stock-based compensation expense was $15.6 million, which theCompany expects to recognize over a period of approximately 2.1 years.Note 13. 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 Internal Revenue Service. The Company does not make matching contributions tothe 401(k) Plan on behalf of participants.Note 14. Income TaxesThe Company recorded an income tax benefit of $0.8 million for the year ended December 31, 2018 fromthe recognition of deferred tax assets in Protagonist Australia, the Company’s Australian subsidiary. The Company believesthese deferred tax assets will be realized in the future due to expected profitability for this subsidiary.No provision for income taxes was recorded for the years ended December 31, 2017 and 2016. The Company hadincurred net operating losses and did not reflect any benefit of operating loss carryforwards in the consolidated financialstatements for those years. The Company continues to maintain a valuation allowance against its U.S. deferred tax assets dueto the uncertainty surrounding the realization of such assets.127 Table of ContentsThe following table presents domestic and foreign components of net loss before income taxes for the periods presented(in thousands): Year Ended December 31, 2018 2017 2016Domestic $(37,511) $(34,556) $(34,977)Foreign (2,212) (2,401) (2,200)Net loss before income taxes $(39,723) $(36,957) $(37,177) The effective tax rate of the provision for income taxes differs from the federal statutory rate as follows: Year Ended December 31, 2018 2017 2016 Federal statutory income tax rate 21.0% 34.0% 34.0%State taxes, net of federal benefit 7.0 0.5 6.5 Warrant revaluation — — (4.3) Research credit (1.3) 2.6 1.8 Foreign tax rate difference 0.4 (1.2) (1.6) Change in tax law — (31.2) — Change in valuation allowance (22.2) (5.2) (36.0) Other (2.9) 0.5 (0.4) Provision for income taxes 2.0% —% —% 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.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. The impact of the Tax Act was finalizedduring the year ended December 31, 2018 and no change was made from the previously reported provisional transition taxamount of zero.The components of the deferred tax assets are as follows (in thousands): December 31, 2018 2017Deferred tax assets: Net operating loss carryforwards $ 27,704 $21,682Depreciation and amortization 269 339Accruals/other 2,455 1,322Research and development credits 4,270 2,544Total deferred tax assets 34,698 25,887Valuation allowance (34,040) (25,887)Net deferred tax assets $658 $ — 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 U.S. deferred tax assets as of December 31, 2018and 2017 due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferredtax assets. The valuation allowance increased by approximately $8.2 million, $1.9128 Table of Contentsmillion and $13.4 million during the years ended December 31, 2018, 2017 and 2016, respectively. The change in valuationis due to an increase in net operating loss carryforwards incurred during the year, partially offset by a release of the $1.5million valuation allowance related to Protagonist Australia. The increases in the valuation allowance for the years endedDecember 2018 and 2016 primarily related to the increase in net operating loss carryforwards incurred during the respectivetaxable years. The increase in valuation allowance for the year ended December 31, 2017 was primarily related to theincrease in net operating loss carryforwards generated during the year, partially offset by a decrease in the deferred tax assetsrelated to the reduction of the U.S. corporate income tax rate as provided in the Tax Act.At December 31, 2018, the Company had net operating loss carryforwards for federal income tax purposes ofapproximately $109.1 million, $78.7 million of which are available to offset future taxable income, if any, through 2037 and$30.4 million of which do not expire. At December 31, 2018, the Company had net operating loss carryforwards for stateincome tax purposes of approximately $97.1 million which are available to offset future taxable income, if any, through2038.At December 31, 2018, the Company also had accumulated Australian tax losses of AUD 13.9 million ($9.8 million)available for carry forward against future earnings which, under relevant tax laws, do not expire but may be limited undercertain circumstances.As of December 31, 2018, the Company had $4.0 million of federal and $2.2 million of state research and developmenttax credit carryforwards available to reduce future income taxes. The federal research and development tax credits will beginto 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 the Company’sequity transactions since inception, the Company believes a portion of its net operating loss carryforwards and creditcarryforwards may be limited due to certain of its equity financing transactions.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, 2018 2017 2016Balance at beginning of year $5,414 $2,131 $805Increase based on tax positions related to prior years 108 — 707Increase based on tax positions related to current year 3,944 3,283 619Balance at end of year $ 9,466 $5,414 $2,131 At December 31, 2018, the Company had unrecognized tax benefits of $9.5 million, of which $2.7 million would affectthe effective tax rate if recognized and $6.8 million is subject to a valuation allowance and would not affect the effective taxrate if recognized.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 2014 through 2018 remain open for examination due to the carryover of unused net operatinglosses and tax credits.129 Table of ContentsNote 15. Net Loss per Share Attributable to Common StockholdersAs the Company had net losses for the years ended December 31, 2018, 2017 and 2016, 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, 2018 2017 2016Numerator: Net loss $(38,924) $(36,957) $(37,177)Accretion of redeemable convertible preferred stock — — (558)Net loss $(38,924) $(36,957) $(37,735)Denominator: Weighted-average shares used to compute net loss per common share, basicand diluted 22,364,515 17,694,505 6,501,796Net loss per shares, basic and diluted $(1.74) $(2.09) $(5.80) The following outstanding shares of potentially dilutive securities have been excluded from diluted net loss per sharecalculations for the years ended December 31, 2018, 2017 and 2016 because their inclusion would be anti-dilutive: Year Ended December 31, 2018 2017 2016Options to purchase common stock 3,178,441 2,438,151 2,393,829Common stock warrants 2,750,000 — —Restricted stock units 418,450 — —ESPP shares 52,134 24,938 —Total 6,399,025 2,463,089 2,393,829 Note 16. Supplementary Financial Data (unaudited) The following table presents the selected quarterly financial data for the years ended December 31, 2018 and 2017 (inthousands, except per share amounts): Consolidated Statements of Operations Quarter Ended March 31 June 30 September 30 December 312018 License and collaboration revenue - related party $10,781 $11,674 $6,117 $2,353Loss from operations $(8,229) $(9,239) $(9,389) $(15,412)Net loss $(7,661) $(8,663) $(8,735) $(13,865)Net loss per share of common stock, basic and diluted (1) $(0.36) $(0.41) $(0.38) $(0.57)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, basic and diluted (1) $(0.84) $(0.89) $(0.29) $(0.15)_________________Net loss per share amounts for the 2018 and 2017 quarters and full years have been computed separately. Accordingly,quarterly amounts may not add to the annual amounts because of differences in the weighted average shares outstandingduring each period. 130 (1) Table of Contents Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A.Controls and Procedures Evaluation of disclosure controls and proceduresManagement, under the supervision and with the participation of our Chief Executive Officer (Principal ExecutiveOfficer and Principal Financial Officer), has evaluated the effectiveness of our disclosure controls and procedures (as definedin Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act) as of December 31, 2018. Based on the evaluation of ourdisclosure controls and procedures, our Chief Executive Officer has concluded that our disclosure controls and procedures asof December 31, 2018 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, conducted an evaluation of the effectiveness of our internal control over financial reporting based on thecriteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations ofthe Treadway Commission. Based on its evaluation under the criteria set forth in Internal Control-Integrated Framework, ourmanagement concluded that our internal control over financial reporting was effective as of December 31, 2018. 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. Changes 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.131 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 2019 Annual Meeting of Stockholders within 120 days after theend of the fiscal year ended December 31, 2018.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 2019 Annual Meeting of Stockholders within 120 days after the end of the fiscal year endedDecember 31, 2018. 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 2019 Annual Meeting of Stockholders within 120 days after the end of the fiscal year endedDecember 31, 2018. 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 2019 Annual Meeting of Stockholders within 120 days after the end of the fiscal year endedDecember 31, 2018. 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 2019 Annual Meeting of Stockholders within 120 days after the end of the fiscal year endedDecember 31, 2018.132 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 001-37852 3.1 8/16/2016 3.2 Amended and Restated Bylaws S‑1/A 333-212476 3.2 8/1/2016 4.1 Specimen stock certificate evidencingthe shares of common stock S‑1/A 333-212476 4.1 8/1/2016 4.2 Third Amended and Restated InvestorRights Agreement, by and amongProtagonist Therapeutics, Inc. and thestockholders named therein, datedJuly 31, 2016. S‑1/A 333-212476 4.2 8/1/2016 4.3 Form of Indenture S-3 333-220314 4.5 9/1/2017 4.4 Form of Class A Common StockPurchase Warrant 8-K 001-37852 4.1 8/7/2018 4.5 Form of Class B Common StockPurchase Warrant 8-K 001-37852 4.2 8/7/2018 4.6 Form of Warrant 8-K 001-37852 4.1 12/31/2018 10.1+ Protagonist Therapeutics, Inc. 2007Stock Option and Incentive Plan, asamended and restated, and form ofoption agreement, exercise notice,joinder, and adoption agreementthereunder. S‑1 333-212476 10.1 7/11/2016 133 Table of Contents Incorporation By ReferenceExhibit FiledNumber Exhibit Description Form SEC File No. Exhibit Filing Date Herewith10.2+ Protagonist Therapeutics, Inc. 2016Equity Incentive Plan and forms ofstock option grant notice, optionagreement, notice of exercise,restricted stock unit grant notice andrestricted stock unit agreementthereunder. S‑1/A 333-212476 10.2 8/1/2016 10.3+ Protagonist Therapeutics, Inc. 2016Employee Stock Purchase Plan. S‑1/A 333-212476 10.3 8/1/2016 10.4+ Form of Indemnity Agreement forDirectors and Officers. S‑1/A 333-212476 10.4 8/1/2016 10.5+ Protagonist Therapeutics, Inc. 2018Inducement Plan, form of stock optiongrant notice, form of option agreement,form of restricted stock unit grantnotice and form of restricted stock unitagreement S-8 333-225294 99.1 5/30/2018 10.6 Lease, dated September 30, 2013, byand between the Registrant andBerrueta Family Partnership. S‑1 333-212476 10.5 7/11/2016 10.7 First Amendment to Lease, datedMarch 24, 2014, by and between theRegistrant and Berrueta FamilyPartnership. S‑1 333-212476 10.6 7/11/2016 10.8 Second Amendment to Lease, datedMay 4 2015, by and between theRegistrant and Berrueta Family L.P. S‑1 333-212476 10.7 7/11/2016 10.9 Third Amendment to Lease, datedAugust 11, 2015, by and between theRegistrant and Berrueta Family L.P. S‑1 333-212476 10.8 7/11/2016 10.10 Lease, dated March 6, 2017, by andbetween the Registrant and BMR-Pacific Research Center LP. 10-K 001-37852 10.9 3/7/2017 10.11+ Severance Agreement, dated August 1,2016, by and between the Registrantand Dinesh Patel. S‑1/A 333-212476 10.9 8/1/2016 10.12+ Severance Agreement, dated August 1,2016, by and between the Registrantand David Y. Liu, Ph.D. S‑1/A 333-212476 10.10 8/1/2016 10.13+ Severance Agreement, dated August 1,2016, by and between the Registrantand Tom O’Neil. S‑1/A 333-212476 10.12 8/1/2016 10.14+ Severance Agreement, dated August 1,2016, by and between the Registrantand Richard Shames, M.D. S‑1/A 333-212476 10.13 8/1/2016 10.15+ Employment Offer Letter, dated May21, 2018, by and between theRegistrant and Samuel Saks, M.D. 10-Q 001-37852 10.2 8/7/2018 10.16† Research and CollaborationAgreement, dated June 16, 2012, byand among the Registrant, ProtagonistPty. Ltd. and Zealand Pharma A/S. S‑1 333-212476 10.17 7/11/2016 134 Table of Contents Incorporation By ReferenceExhibit FiledNumber Exhibit Description Form SEC File No. Exhibit Filing Date Herewith10.17† Contract Extension Letter ofAgreement, dated June 1, 2013, by andamong the Registrant, ProtagonistPty. Ltd. and Zealand Pharma A/S. S‑1 333-212476 10.18 7/11/2016 10.18† Agreement on Addition of AdditionalCollaboration Program, datedSeptember 16, 2013, by and among theRegistrant, Protagonist Pty. Ltd. andZealand Pharma A/S. S‑1 333-212476 10.19 7/11/2016 10.19† Protagonist Assumption ofResponsibility, dated January 28,2014, by and between the Registrantand Zealand Pharma A/S. S‑1 333-212476 10.20 7/11/2016 10.20† Agreement to Assign PatentApplications, dated February 7, 2014,by and between the Registrant,Protagonist Pty. Ltd. and ZealandPharma A/S. S‑1 333-212476 10.21 7/11/2016 10.21† Abandonment Agreement, datedFebruary 28, 2014, by and among theRegistrant, Protagonist Pty. Ltd. andZealand Pharma A/S. S‑1 333-212476 10.22 7/11/2016 10.22† Exclusive License and CollaborationAgreement, dated May 26, 2017, byand between the Registrant andJanssen Biotech, Inc. 8-K/A 001-37852 10.1 7/31/2017 10.23 Sales Agreement, dated September 1,2017, by and between the Registrantand Cantor Fitzgerald & Co. S-3 333-220314 1.2 9/1/2017 10.24 Registration Rights Agreement, datedAugust 8, 2018, by and between theRegistrant and certain partiesidentified on the signature pagesthereto 8-K 001-37852 4.3 8/7/2018 10.25 Securities Purchase Agreement, datedAugust 6, 2018, by and between theRegistrant and certain purchasersidentified on the signature pagesthereto S-3 333-227216 10.1 9/7/2018 10.26 Exchange Agreement, dated December21, 2018, by and between theRegistrant and Biotechnology ValueFund, L.P., Biotechnology Value FundII, L.P. and Biotechnology ValueTrading Fund OS, L.P. 8-K 001-37852 10.1 12/31/2018 21.1 List of Subsidiaries X23.1 Consent of Independent RegisteredPublic Accounting Firm X24.1 Power of Attorney (included insignature page of this Form 10‑K) X135 Table of Contents Incorporation By ReferenceExhibit FiledNumber Exhibit Description Form SEC File No. Exhibit Filing Date Herewith31.1 Certification of Chief ExecutiveOfficer required by Rule 13a‑14(a) orRule 15d‑14(a) of the SecuritiesExchange Act of 1934, as adoptedpursuant to Section 302 of theSarbanes-Oxley Act of 2002 X32.1* Certification of Chief Executive Officer, asrequired by Rule 13a‑14(b) orRule 15d‑14(b) and Section 1350 ofChapter 63 of Title 18 of the United StatesCode (18 U.S.C. §1350), as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X101.INS XBRL Instance Document X101.SCH XBRL Taxonomy Extension SchemaDocument X101.CAL XBRL Taxonomy Extension CalculationLinkbase Document X101.DEF XBRL Taxonomy Extension DefinitionLinkbase Document X101.LAB XBRL Taxonomy Extension LabelsLinkbase Document 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. 136 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 12, 2019By: /s/ Dinesh V. Patel, Ph.D. Dinesh V. Patel, Ph.D. President, Chief Executive Officer and Director (Principal Executive Officer and Principal FinancialOfficer) POWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes andappoints Dinesh V. Patel and Niall Murphy, 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 12, 2019Dinesh V. Patel, Ph.D. (Principal Executive Officer and Principal Financial Officer) /s/ Niall Murphy Vice President, Corporate Controller March 12, 2019Niall Murphy (Principal Accounting Officer) /s/ Harold E. Selick, Ph.D. Chairman of the Board of Directors March 12, 2019Harold E. Selick, Ph.D. /s/ Bryan Giraudo Director March 12, 2019Bryan Giraudo /s/ Chaitan Khosla, Ph.D. Director March 12, 2019Chaitan Khosla, Ph.D. /s/ Sarah Noonberg, M.D., Ph.D. Director March 12, 2019Sarah Noonberg, M.D., Ph.D. /s/ Armen B. Shanafelt, Ph.D. Director March 12, 2019Armen B. Shanafelt, Ph.D. /s/ William D. Waddill Director March 12, 2019William D. Waddill /s/ Lewis T. Williams, M.D., Ph.D. Director March 12, 2019Lewis 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, No. 333-216532, No. 333-223500 and No. 333-225294) and Form S-3 (No. 333-220314 and No. 333-227216) of ProtagonistTherapeutics, Inc. of our report dated March 12, 2019 relating to the consolidated financial statements, which appears inthis Form 10-K./s/ PricewaterhouseCoopers LLPSan Jose, CAMarch 12, 2019 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 12, 2019 Dinesh V. Patel, Ph.D. President, Chief Executive Officer(Principal Executive Officer andPrincipal Financial Officer) Exhibit 32.1CERTIFICATION OF CHIEF EXECUTIVE 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”), certifies that, to the best of his knowledge:1. The Company’s Annual Report on Form 10-K for the period ended December 31, 2018 (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 12, 2019 Dinesh V. Patel, Ph.D. President, Chief Executive Officer(Principal Executive Officer andPrincipal Financial Officer)This 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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