UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE TRANSITION PERIOD FROM TO
Commission File Number 001-32157
Savara Inc.
(Exact name of Registrant as specified in its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
6836 Bee Cave Road, Building III, Suite 200
Austin, TX
(Address of principal executive offices)
84-1318182
(I.R.S. Employer
Identification No.)
78746
(Zip Code)
Registrant’s telephone number, including area code: (512) 614-1848
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001 per share
Trading
Symbol(s)
SVRA
Name of each exchange on which registered
The Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☒
☒
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The Nasdaq Global
Select Market on June 28, 2019, was $77,999,482.
The number of shares of Registrant’s Common Stock outstanding as of March 12, 2020 was 50,838,879.
Portions of the Registrant’s Definitive Proxy Statement relating to the Annual Meeting of Shareholders, scheduled to be held on May 27, 2020, are incorporated by reference into Part III of this
Report.
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
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Cautionary Statement Concerning Forward-Looking Statements
This Annual Report on Form 10-K, particularly in Item 1 “Business,” and Item 7 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” and the information incorporated herein by reference, include forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on
current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. These
forward-looking statements should not be relied upon as predictions of future events as we cannot assure you that the events or circumstances reflected in
these statements will be achieved or will occur. When used in this report, the words “believe,” “may,” “could,” “will,” “estimate,” “continue,”
“anticipate,” “intend,” “expect,” “indicate,” “seek,” “should,” “would” and similar expressions are intended to identify forward-looking statements,
though not all forward-looking statements contain these identifying words. All statements, other than statements of historical fact, are statements that could
be deemed forward-looking statements. For example, forward-looking statements include, but are not limited to, statements about:
•
•
•
•
•
•
our plans, strategies and objectives for future operations, including the execution and timing of those plans;
our future financial condition or performance, including the accuracy of our estimates regarding expenses, future revenues, capital
requirements and needs for additional funding;
the process and prospects for regulatory approval of our product candidates, including timing and outcomes of clinical studies;
our beliefs regarding the therapeutic benefits of our product candidates;
our beliefs regarding the treatment of conditions related to the indications targeted by our product candidates; and
prospects for market success of our product candidates, including competition, intellectual property protection and infringement, third party
payor coverage and reimbursement.
For a discussion of the factors that may cause our actual results, performance or achievements to differ materially from any future results, or performance
or achievements expressed or implied in such forward-looking statements, see Part I, Item 1A, “Risk Factors,” in this report.
If any of these risks or uncertainties materialize or any of these assumptions proves incorrect, our results could differ materially from the forward-looking
statements in this report. All forward-looking statements in this report are current only as of the date of this report. We do not undertake any obligation to
publicly update any forward-looking statement to reflect events or circumstances after the date on which any statement is made or to reflect the occurrence
of unanticipated events. Unless context requires otherwise, all references in this report to “Savara,” “our company,” “we,” “us,” “our,” or similar words
refer to Savara Inc. together with its consolidated subsidiaries.
1
Item 1. Business.
Business Overview
PART I
Savara is an orphan lung disease company. Our current drug development pipeline is comprised of Molgradex, an inhaled granulocyte-macrophage colony-
stimulating factor (“GM-CSF”) in Phase 3 development for autoimmune pulmonary alveolar proteinosis (“aPAP”), in Phase 2a development for
nontuberculous mycobacterial (“NTM”) lung infection, in Phase 2a development for the treatment of NTM lung infection in people living with cystic
fibrosis (“CF”), and AeroVanc, an inhaled vancomycin in Phase 3 development for persistent methicillin-resistant Staphylococcus aureus (“MRSA”) lung
infection in individuals living with cystic fibrosis (“CF”). Our strategy involves expanding our pipeline of potentially best-in-class products through
indication expansion, strategic development partnerships and product acquisitions, with the goal of becoming a leading company in the orphan lung disease
market. Our management team has significant experience in orphan drug development and pulmonary medicine, navigating the regulatory environment,
identifying unmet needs, developing and acquiring new product candidates and effectively advancing them to approvals, and commercialization.
The table below summarizes the current status and anticipated milestones for our primary drug development candidates.
Corporate Strategy
Our goal is to become a leader in orphan lung disease therapeutics through the development and commercialization of novel, best-in-class medicines that
address unmet medical needs in this field. Key elements of our strategy include:
•
Advancing the current pipeline. Advancing Savara’s development pipeline is our highest priority and includes:
o
o
o
Molgradex for aPAP―Working with the U.S. Food and Drug Administration (“FDA”) to plan an additional Phase 3 clinical study that
will evaluate the efficacy and safety of Molgradex for the treatment of aPAP and ensuring all aspects of our manufacturing are
validated and can produce product at commercial scale.
Molgradex NTM program – Determining the next steps for the program based on the top line microbiology results from the OPTIMA
study and results from the ongoing ENCORE study.
AeroVanc―Continuing to enroll patients until Q2 2020 for AVAIL, the Phase 3 study of inhaled vancomycin for the treatment of
MRSA lung infection in people living with CF. Top line results from the study are expected in early 2021.
•
Expanding the product pipeline through strategic product acquisitions. In addition to evaluating indication expansion opportunities with
our current programs, our strategy also includes growing our development pipeline through strategic partnerships and product acquisitions. A
key priority has been to enhance the delivery of known chemical entities or drug classes (e.g., reformulation of an existing drug so that it can
be delivered directly into the lungs) for the treatment of serious or life-threatening lung diseases. While we have developed an internal core
competency in inhaled drug development, we are technology and route-of-delivery agnostic. Future product acquisition decisions will be
based on the unmet medical need within a specific disease, market opportunity, and the ability to rapidly develop and commercialize the
product candidate.
2
•
Outsource capital intensive operations. We will continue to pursue the development and manufacturing of our product candidates by
outsourcing most clinical development work and all manufacturing operations. We believe our business model enables the effective and
capital-efficient development of our pipeline through the use of high-quality specialist vendors and consultants.
Molgradex – aPAP
Our lead product candidate, Molgradex, an inhaled formulation of recombinant human GM-CSF, is being developed for the treatment of aPAP. Pulmonary
alveolar proteinosis (“PAP”) is a rare lung disease characterized by the build-up of lung surfactant in the alveoli (or air sacs) of the lungs. There are
different types of PAP, of which aPAP is the most common.
In 2019, we announced that IMPALA, the Phase 3 clinical study of Molgradex for the treatment of aPAP, did not meet its primary endpoint of alveolar-
arterial oxygen gradient, (A-a)DO2, improvement compared to placebo and that the FDA indicated the data in our briefing package did not provide
sufficient evidence of efficacy and safety. While we will need to provide additional evidence to meet the FDA’s requirements, we believe the totality of data
from the IMPALA study suggest that Molgradex has the potential to address significant unmet need in this rare disease. These data extend beyond the
primary endpoint and include:
•
•
•
Multiple key secondary and exploratory endpoints that either achieved statistical significance or trended in favor of the active drug arms,
Results from the open-label period of the study that demonstrated a sustained treatment effect, or continued improvement, after longer term
exposure to Molgradex, and
Adverse event frequencies that were similar to placebo.
We consider Molgradex to have a compelling risk-benefit profile and remain confident in the future of the program. Our highest priority is to continue
discussions with the regulatory agencies to plan an additional Phase 3 study of Molgradex in aPAP.
In May 2019, the FDA granted Molgradex for the treatment of aPAP Fast Track Designation which facilitates the expedited development and review of
new drugs or biologics intended to treat serious or life-threatening conditions and demonstrate the potential to address unmet medical needs. In December
2019, the FDA also granted the program Breakthrough Therapy Designation which provides a process for expediting the development and review of drugs
that are intended to treat a serious condition and for which preliminary evidence indicates that the drug may demonstrate substantial improvement over the
available therapy. Additionally, Molgradex has been granted Orphan Drug Designation for the treatment of aPAP in the U.S. and the EU, which allows for
seven and ten years of exclusivity from approval, respectively. Savara has exclusive access to the PARI Investigational eFlow Nebulizer System for this
indication along with a proprietary cell bank for molgramostim, a non-glycosylated form of GM-CSF and the active drug substance of Molgradex.
There are estimated to be at least 2,200 PAP patients in the U.S., with the vast majority having aPAP. The disease process underlying aPAP involves an
autoimmune response against GM-CSF, a naturally occurring protein that functions to clear excess surfactant from the alveoli. More specifically, the anti-
GM-CSF autoantibodies associated with aPAP suppress the stimulating activity of GM-CSF on lung macrophages, resulting in the accumulation of excess
surfactant which obstructs gas exchange and results in shortness of breath and decreased exercise tolerance. Patients may also experience chronic cough,
acute cough or chest pain, as well as episodes of fever, especially if secondary lung infection develops. In the long term, the disease can lead to serious
complications, including lung fibrosis and the need for a lung transplant. Currently, there are no therapies approved for the treatment of aPAP. The current
standard-of-care is a surgical procedure called whole lung lavage (“WLL”), which entails washing out the lungs with saline, segment-by-segment, under
general anesthesia. By nature, WLL is an invasive and inconvenient procedure that requires highly experienced physicians and hospitalization at specialist
sites. Based on published investigator-sponsored treatment experience with inhaled GM-CSF and data from the IMPALA study, we believe Molgradex has
the potential to replace the inactivated GM-CSF in aPAP patients, thereby restoring the surfactant clearing activity of the alveolar macrophages. If
approved, Molgradex could become the first-line treatment for aPAP.
The IMPALA clinical study was a Phase 3 randomized, double-blind, placebo-controlled study that completed in June 2019. It was designed to compare the
efficacy and safety of Molgradex with placebo in patients with aPAP. The study enrolled 138 patients and was conducted in 18 countries, including the
U.S., Japan, and throughout Europe. IMPALA’s primary endpoint was (A-a)DO2, a commonly used measure of oxygenation impairment, and also included
three key secondary endpoints and multiple other secondary and exploratory endpoints designed to assess improvement in the disease pathology,
pathophysiology, clinical symptoms, and function. Patients were randomized to receive treatment for up to 24 weeks in one of three treatment arms: 1)
Molgradex 300 µg administered once daily, 2) Molgradex 300 µg and matching placebo administered daily every other week, or 3) inhaled placebo
administered once daily. For details on the results of the IMPALA study, please see the “Clinical Development of Molgradex―aPAP: Phase 3 IMPALA
Study” section included in this report.
3
In March 2018, the IMPALA-X clinical study was initiated. This open-label extension study allowed patients who have completed the IMPALA study to
continue treatment for up to three additional years and will provide additional data on the long-term safety and use of Molgradex in patients with aPAP. In
February 2020, IMPALA-X enrollment was complete, with 60 patients out of a total of 64 eligible patients enrolled.
Molgradex - NTM
Molgradex is also being investigated for the treatment of NTM lung infection. Top line microbiology results were recently announced for the open-label,
non-controlled Phase 2a study called OPTIMA. NTM lung infection is a rare and serious lung disorder associated with increased rates of morbidity and
mortality. Nontuberculous mycobacteria are naturally occurring organisms, and NTM lung infection can occur when the organism (found in the
environment) is inhaled and an individual develops a slowly progressive and destructive lung disease. NTM lung infection is typically characterized by
cough, fatigue, and weight loss. NTM infections often become chronic and require long courses of multiple antibiotics, and despite aggressive treatment
regimens, treatment failure rates are high and recurrence of infection common. Chronic NTM lung infection can have a significant impact on quality of
life. There are up to 80,000 individuals affected by NTM in the U.S., and the most common types of NTM lung infection involve Mycobacterium avium
complex (“MAC”), and Mycobacterium abscessus (“MABSC”). There have been few advancements in new systemic treatments for NTM lung infection.
NTM lung infections are a considerable therapeutic challenge due to the unique ability of these bacteria to evade the normal killing mechanisms of alveolar
macrophages, a type of immune cell responsible for killing bacteria in the lungs. There is increasing scientific literature suggesting that GM-CSF plays an
important role in enhancing the ability of macrophages to clear mycobacteria.1 For instance, GM-CSF knock out mice inoculated with MABSC develop a
chronic lung disease resembling human chronic infection, whereas wild type mice with intact GM-CSF production typically clear the bacteria quickly and
fail to develop chronic infection. In animal studies, GM-CSF has been shown to kill NTM with similar efficacy compared to commonly used NTM
antibiotics, and the simultaneous use of GM-CSF with antibiotics can further improve the antibacterial effect of either GM-CSF or antibiotics given alone.
In two published clinical case reports in the European Respiratory Journal by Dr. Wylam of the Mayo Clinic,2 inhaled GM-CSF was shown to eradicate or
dramatically reduce the bacterial burden in patients with chronic MABSC lung infection. This suggests that the promising animal data may be translatable
to humans, and the potential therapeutic role of GM-CSF in NTM lung infection warrants more intensive investigation.
The multi-center OPTIMA study in non-CF patients was initiated in Q1 2018 and investigated the efficacy of Molgradex on reduction of NTM bacterial
load in sputum, NTM sputum culture conversion to negative, exercise capacity, patient reported outcomes and safety. Two groups of subjects were recruited
into the study, both of which received Molgradex 300 µg administered once daily. Treatment group one consisted of patients who remained sputum culture
positive while currently on a multidrug NTM guideline-based anti-mycobacterial regimen, which had been ongoing for at least six-months prior to the
baseline visit. Treatment group two consisted of patients who remained sputum culture positive, but either stopped a multidrug NTM guideline-based anti-
mycobacterial regimen at least 28 days prior to screening due to lack of response or intolerance, or never started such treatment. The primary endpoint was
sputum culture conversion during the treatment period, defined as at least three consecutive negative sputum samples. Interim results from the OPTIMA
study were disclosed in December 2018. Based on the microbiological data and safety profile, which provides the basis to continue treating patients for a
longer period of time, the duration of the OPTIMA study was extended from 24 to 48 weeks, with a 12-week follow up period at the end of treatment. In
March 2020, top line microbiology results from OPTIMA were announced that showed five out of 24 patients (21%) with MAC infection achieved a
sputum culture conversion, defined as at least three consecutive sputum samples without growth of nontuberculous mycobacteria by week 48. For details
on the results of the OPTIMA study, please see the “Clinical Development of Molgradex―NTM: Phase 2a OPTIMA Study” section included in this report.
1 deSilva T.I., et al. Journal of Infection (2007) 54 (e207-e210); Hallstrand T.S., et al. European Respiratory Journal (2004) 24 (367-370); Groote et al, J
Antimicrob Chemother. 2014 Apr;69(4):1057-64.; Luiz E. Bermudez, et al. The Journal of Infectious Diseases, Volume 169, Issue 3, 1 March 1994,
Pages 575–580.
2 Scott et al, European Respiratory Journal (2018) (DOI: 10.1183/13993003.02127-2017).
4
In Q3 2018, the IND application for Molgradex in CF-affected patients with chronic NTM lung infection was accepted by the FDA. A Phase 2a study of
Molgradex in CF-affected patients with NTM lung infection, called ENCORE, was initiated in Q1 2019. ENCORE is an open-label, non-controlled, multi-
center, Phase 2a clinical study of Molgradex in patients living with CF who have persistent pulmonary NTM lung infection. ENCORE will enroll
approximately 30 patients (≥18 years of age) with chronic MAC or MABSC infection, with all patients having either antibiotic refractory infection,
intolerance to standard NTM antibiotics, or not currently meeting recommendations for antibiotic treatment. The study comprises a 48-week treatment
period of 300 µg of Molgradex once daily and a 24-week follow up period. The primary endpoint in the study is sputum culture conversion, defined as at
least three consecutive negative NTM sputum samples with a four-week interval between each. Secondary endpoints include: (i) the number of patients
with sputum smear conversion to negative, defined as at least three consecutive negative acid-fast bacilli (“AFB”) stained sputum smears on microscopy
among patients who were smear positive at baseline, (ii) the reduction of bacterial load in sputum, and (iii) other microbiological indicators, pulmonary
measures, and patient reported outcomes.
AeroVanc
Our second Phase 3 product candidate, AeroVanc, is a vancomycin hydrochloride inhalation powder. AeroVanc is the first inhaled antibiotic in
development for the treatment of persistent MRSA lung infection in individuals living with CF. AeroVanc was granted Orphan Drug Designation and
Qualified Infectious Disease Product (“QIDP”) status for the treatment of persistent MRSA lung infection in individuals living with CF in the U.S. Orphan
Drug Designation makes AeroVanc eligible for seven years of exclusivity from approval in the U.S., and the QIDP designation makes AeroVanc eligible
for an additional five years of exclusivity in the U.S. In 2017, a composition of matter patent covering AeroVanc was issued by the U.S. Patent and
Trademark Office (“USPTO”), which affords us important protection for the program in the largest market for the product (the U.S.), augments our market
protection strategy, and will not expire earlier than 2032.
CF is a genetic disease that involves sticky mucus buildup in the lungs, persistent lung infections, and permanent and progressive respiratory disability.
There are approximately 30,000 individuals affected by CF in the U.S. and with a prevalence of approximately 26% of people living with CF infected by
MRSA, this lung infection has become increasingly common. Persistent MRSA infection in people living with CF is associated with increased use of
intravenous (“IV”) antibiotics, increased hospitalizations, a more rapid rate of decline in lung function, and shortened life-expectancy. Due to the lung
pathology associated with CF, persistent MRSA lung infection is difficult to eradicate or manage using oral or IV antibiotics and there is currently no
standard-of-care to manage this condition. Whereas inhaled antibiotics have become a cornerstone of treating Pseudomonas aeruginosa (“Pseudomonas”),
the most prevalent chronic pathogen in individuals living with CF, there are no approved inhaled antibiotics addressing MRSA lung infection. In a
randomized, double-blind, placebo-controlled Phase 2 study in individuals living with CF with persistent MRSA infection, AeroVanc met a primary
endpoint to reduce MRSA density in sputum and showed encouraging trends of improvement in lung function and respiratory symptoms, as well as
prolongation of the time-to-use of other antibiotics, with best responses in patients under 21 years of age.
AeroVanc is currently being investigated in a pivotal Phase 3 clinical study, called AVAIL, in the U.S. and Canada for the treatment of persistent MRSA
lung infection in individuals living with CF. Study enrollment began in late 2017 and is targeted to enroll approximately 200 patients (150 patients ≤ 21
years old, 50 patients > 21 years old). During Period 1 of the study, patients are randomly assigned in a blinded 1:1 fashion to receive either AeroVanc (30
mg) twice daily, or placebo, by inhalation for 24 weeks or 3 dosing cycles. A dosing cycle is defined as 28 days of treatment followed by 28 days of
observation. During Period 2 of the study, patients receive open-label AeroVanc (30 mg) twice daily for an additional 24 weeks or 3 dosing cycles, to
evaluate the long-term safety of AeroVanc. The primary endpoint is the mean absolute change in Forced Expiratory Volume in the first second (“FEV1”)
percent predicted from baseline, which will be analyzed sequentially at week 4 (the end of cycle 1), week 12 (the end of cycle 2), and at week 20 (the end
of cycle 3). Analysis of the primary endpoint will be based on patients 6‒21 years of age. Secondary endpoints include: (i) time-to-use of another antibiotic
medication (oral, IV, and/or inhaled) for pulmonary infection, (ii) the number of successful FEV1-response cycles a patient achieves over Period 1 (weeks
4, 12, and 20), (iii) relative change from baseline in FEV1 percent predicted at weeks 4, 12, and 20, (iv) change from baseline in Cystic Fibrosis
Questionnaire-Revised scores at weeks 4, 12, and 20 and (v) change from Baseline in Cystic Fibrosis Respiratory Symptom Diary-Chronic Respiratory
Symptom Score at weeks 4, 12, and 20. We will continue to enroll patients in the AVAIL study until Q2 2020. We anticipate enrolling approximately 140-
145 out of the expected 150 patients in the primary analysis population. Top line results from the study are expected in early 2021.
5
Detailed Program Descriptions
Molgradex
Background on aPAP
Autoimmune PAP, known as aPAP, is a specific disease belonging to a family of distinct rare lung diseases collectively referred to as PAP syndrome. aPAP
represents about 90% of all patients with PAP syndrome and is estimated to affect up to seven out of a million people in the U.S.3, with similar or higher
prevalence rates reported elsewhere in the world. For example, Japan, a country that undertakes a more centralized approach to diagnosing and treating
aPAP, has seen a consistent increase in patients being diagnosed with the disease. It is now estimated the prevalence rate in Japan could be three times the
original estimate of 7 per million.4 PAP is characterized by the build-up of lung surfactant in the alveoli, or air sacs, of the lungs. The surfactant consists of
proteins and lipids and is an important physiological substance that lines the inside of the alveoli to prevent the lungs from collapsing. The lungs
continuously produce new active surfactant. In a healthy lung, the old and inactivated surfactant is cleared and digested by immune cells called alveolar
macrophages. However, in lungs of patients with aPAP, the macrophages fail to clear the surfactant from the alveoli, leading to gradual accumulation of
excess surfactant in the alveoli. The root cause of aPAP is an autoimmune response against a naturally occurring protein in the body, GM-CSF. Pulmonary
macrophages need to be stimulated by GM-CSF to function properly, but in aPAP, GM-CSF is deactivated by antibodies against GM-CSF, rendering the
macrophages unable to perform their tasks, including the clearance of surfactant from the alveoli.
aPAP most commonly affects men in early middle age, but both sexes and patients of any age can be affected. As a result of the accumulation of excess
surfactant, gas exchange in the lungs is obstructed, and patients start to experience shortness of breath and decreased exercise tolerance. Typically,
shortness of breath is first observed upon exertion, but as the disease progresses, shortness of breath can be experienced even when a person is at rest.
Patients may experience chronic cough, as well as episodes of fever, chest pain, or coughing blood, especially if secondary lung infection develops. In the
long term, the disease can lead to serious complications, including lung fibrosis and the need for lung transplant. Mortality due to aPAP has decreased over
the last decades with better clinical management, but in rare cases serious lung infections or respiratory insufficiency may lead to death.
Current treatment options for aPAP
The current standard-of-care for aPAP is a surgical procedure called Whole Lung Lavage (“WLL”), which entails washing out the lungs with saline under
general anesthesia. WLL is an invasive and inconvenient procedure that is performed at specialist sites and requires highly experienced physicians. The
procedure, conducted in an operating room under general anesthesia, necessitates hospitalization and admission to intensive care afterwards. In many
patients, WLL only provides temporary symptomatic relief, and once the lungs refill with surfactant, the WLL procedure needs to be repeated.
As there are no approved drug treatments available for aPAP, there is a high need for a convenient and efficacious medicinal treatment. We believe that
inhalation of GM-CSF directly into the lungs has the potential to replace the inactivated GM-CSF, thereby restoring the surfactant clearing activity of the
alveolar macrophages and resulting in the potential to considerably improve oxygenation and exercise tolerance. An injectable form of GM-CSF,
sargramostim, is approved and on the market in the U.S. for IV and subcutaneous administration for the treatment of neutropenia caused by cancer
chemotherapy, but there are currently no approved inhalation formulations of GM-CSF.
3 Trapnell BC, Avetisyan R, Carey B, Zhang W, Kaplan P, Wang H. Prevalence of pulmonary alveolar proteinosis (PAP) determined using a large health
care claims database. Am J Respir Crit Care Med. 2014;VOL:abstract A6582.
4 Kitamura N, Ohkouchi S, Tazawa R, Ishi H, Takada T, Sakagami T, Tanaka T, Nakata K. Incidence of autoimmune pulmonary alveolar proteinosis
estimated using Poisson distribution. ERJ Open Res. 2019 Mar. 18;5(1).
6
The potential benefits of inhaled GM-CSF in aPAP, together with the availability of sargramostim for off-label compounding, have stimulated independent
clinicians and academic researchers in the U.S., Europe, and Japan to study the safety and efficacy of GM-CSF, administered by inhalation, in aPAP
patients. In addition to our Phase 3 IMPALA study of Molgradex (molgramostim), the largest placebo-controlled study in this patient population (n=138),
several investigator-sponsored, open-label clinical studies and case studies of inhaled GM-CSF treatment have been published, with promising results on
the efficacy and safety of the treatment.5,6,7 In total, treatment of nearly 150 aPAP patients with inhaled GM-CSF has been reported in open-label studies or
retrospective cohorts, as well as several individual case reports. The recently published data originate from a study called PAGE. It was a randomized,
double-blind, placebo-controlled, 25-week study of inhaled sargramostim in 64 patients with mild-to-moderate disease. A modest but significant effect was
observed in the primary endpoint, change from baseline in (A-a)DO2. Secondary endpoints, including changes from baseline in vital capacity, diffusing
capacity for carbon monoxide (“DLCO”), six-minute walk distance (“6MWD”), and aPAP serum biomarkers, showed directional, but in most cases not
statistically significant, treatment effects over placebo. Overall, for the first time, this study showed in a placebo-controlled setting, proof-of-concept for
GM-CSF inhalation therapy in aPAP. Results from these investigator-sponsored clinical studies and case studies indicate that both molgramostim and
sargramostim have the potential for a positive impact on oxygenation and clinical symptoms in aPAP patients.
According to our review of published literature, few safety issues related with molgramostim or sargramostim inhalation in patients with aPAP have been
reported. However, there is still limited information available on the long-term safety of inhaled GM-CSF. In indications other than aPAP, more than 100
patients, mainly with a cancer diagnosis, have received inhaled sargramostim, in doses up to 4000 µg/day. Pulmonary toxicity was the most frequently
reported toxicity at high doses. An increase in both number and severity of adverse events with increasing dose have been observed. However, due to the
underlying diseases, it was often difficult for the investigators to assess causality of the adverse event cases.
Molgradex Product Description
Molgradex is a novel inhaled formulation of recombinant human GM-CSF being developed for the treatment of aPAP. The active drug substance,
molgramostim, is a non-glycosylated form of GM-CSF. GM-CSF is an endogenous growth factor that stimulates the proliferation and differentiation of
hematopoietic cells (blood and immune cells), mainly granulocytic and monocytic cell lines, which serve as the body’s first line of defense against bacteria
and viruses, and also function to clear cellular debris and waste substances from the body. Molgramostim is produced in a strain of Escherichia coli bearing
a genetically engineered plasmid containing a human GM-CSF gene.
Molgradex is a sterile nebulizer solution in a vial containing 300 µg of molgramostim designed to be administered once daily by inhalation via a high
efficiency Investigational eFlow Nebulizer System (PARI Pharma GmbH, Germany). The PARI eFlow Nebulizer system for use with investigational drug
products is a reusable electronic inhalation system that has been optimized for administration of Molgradex.
Molgradex was granted Orphan Drug Designation by the FDA in October 2012, and by the EMA in July 2013, for the treatment of aPAP. Molgradex was
also granted Fast Track Designation and Breakthrough Therapy Designation by the FDA in May 2019 and December 2019, respectively, for the treatment
of aPAP. Since 2014, Molgradex has been available in several European countries for the treatment of aPAP for named patients following unsolicited
physician requests.
We anticipate that Molgradex will be used as a long-term therapy in patients with aPAP. The optimal duration of treatment is currently not known and is
likely to vary between patients depending on disease severity and the natural course of their disease. Treatment with Molgradex may not entirely eliminate
the need for WLL in all patients. However, based on interviews we conducted, PAP centers that have experimented with long-term inhaled GM-CSF have
seen a considerable reduction of WLL procedures. In the IMPALA study, we observed a reduced number of WLL procedures in the active treatment arms,
but the difference was not statistically significant due to the relatively low number of the procedures. In the open-label extension period (Period 2) of the
study, when all patients received active drug, there was a further reduction of WLL procedures, suggesting that prolonged treatment with Molgradex may
considerably reduce the need for WLL.
5 Tazawa R, Trapnell BC, Inoue Y, Arai T, Takada T, Nasuhara Y, et al. Inhaled Granulocyte/Macrophage–Colony Stimulating Factor as Therapy for
Pulmonary Alveolar Proteinosis. Am J Resp Crit Care Med 181: 1345-1354, 2010.
6 Wylam ME, Ten R, Prakash UB, Nadrous HF, Clawson ML and Anderson PM (2006). Aerosol granulocyte-macrophage colony-stimulating factor for
pulmonary alveolar proteinosis. Eur Respir J 27(3): 585-93.
7 Papiris SA, Tsirigotis P, Kolilekas L, Papadaki G, Papaioannou AI, Triantafillidou C, et al. (2014). Long-term inhaled granulocyte macrophage-colony-
stimulating factor in autoimmune pulmonary alveolar proteinosis: effectiveness, safety, and lowest effective dose. Clin Drug Investig 34(8): 553-64.
7
Molgradex Key Advantages
Based on data from the completed Phase 3 IMPALA study and building upon the published investigator-sponsored treatment experience with inhaled GM-
CSF, we believe Molgradex has the potential to become the treatment of choice for aPAP. Molgradex has the following characteristics that may contribute
to the clinical profile of the product candidate, as well as facilitate potential regulatory approval and successful commercialization.
Specifically, Molgradex offers:
•
•
•
•
A strong product foundation that applies both a previously approved active drug substance class and drug delivery technology.
GM-CSF delivery directly to the lungs, the primary site of macrophage function deficiency, which could result in high clinical efficacy with
limited systemic adverse effects.
A high efficiency nebulizer that provides a fast and convenient method of administration. This is highly desirable for long-term treatment in a
chronic disease, such as aPAP.
Eligibility for strong market protection via orphan drug status, potential eligibility for biologic exclusivity in the U.S., a proprietary cell bank
used in the production of the drug substance, and an exclusive device supply agreement.
Clinical Development of Molgradex ‒ aPAP
Phase 3 IMPALA Study
In June 2019 we announced the results of a pivotal Phase 3 clinical study of Molgradex, called IMPALA, that was conducted in 18 countries including the
U.S., Japan, and various European countries. IMPALA was a randomized, double-blind, placebo-controlled study designed to compare the efficacy and
safety of Molgradex with placebo in patients with aPAP. Patients were randomized to receive treatment for up to 24 weeks in one of three treatment arms:
1) Molgradex 300 µg administered once daily, 2) Molgradex 300 µg and matching placebo administered daily every other week, or 3) inhaled placebo
administered once daily. At the end of the 24-week double-blind period, all patients received Molgradex 300 ug administered daily in 7-day intermittent
cycles in a 24-week open-label follow up period. The primary endpoint of the study was (A-a)DO2, a commonly used measure of oxygenation impairment.
In addition, three key secondary endpoints―St. George’s Respiratory Questionnaire (“SGRQ”), 6MWD, and time to/requirement for WLL― along with
multiple other secondary and exploratory endpoints were assessed to determine improvement in the disease pathology, pathophysiology, clinical symptoms,
and function.
The pathogenesis of aPAP is well known and GM-CSF’s effect on the disease, as evaluated by (A-a)DO2, dyspnea, 6MWD, pulmonary function tests, CT
scores, and biomarkers, is well documented through published clinical studies. When looking at the totality of evidence, we believe that data from the
IMPALA study demonstrate reversal of lung pathology and pathophysiology, improvement in clinical outcomes, and reduction of the need for rescue
treatment, with a clear dose-frequency dependency in favor of the continuous dosing arm. Such results are detailed below:
•
•
Lung Pathology―Reversal of disease pathology and reduction of surfactant accumulation was demonstrated in the Full Analysis Set
Population (FAS) with improvement in CT scans as measured by Ground Glass Opacity (GGO) scores. Results from IMPALA also
demonstrated positive biomarker data, with improvements seen in most of the key biomarkers known to be associated with the severity of
aPAP.
Lung Pathophysiology―In the FAS population, an average (A-a)DO2 improvement of 12.1 mmHg was observed in the continuous dosing
arm, compared to an average (A-a)DO2 improvement of 8.8 mmHg in the placebo arm. With an estimated 4.6 mmHg treatment difference,
the study did not meet its primary endpoint. Notably, one-third of patients in IMPALA were prescribed supplemental oxygen, continuously or
as necessary, during the study. The study protocol recommended that supplemental oxygen not be used immediately before or during arterial
blood sampling to minimize influence on (A-a)DO2 values. For ethical reasons, the protocol did allow patients to remain on supplemental
oxygen during blood sampling if they could not tolerate discontinuation due to the severity of their respiratory condition. This was
conditionally allowed only if they received the same oxygen flow rate as used at baseline at all subsequent visits (n=4 patients, two in the
placebo group and one in each of the active groups).
In these four patients, (A-a)DO2 values distributed quite differently compared to the remaining study population―ranging from highly negative to highly
positive. In a revised analysis that excluded these four patients, a statistically significant average (A-a)DO2 improvement was observed in the continuous
dosing arm compared with the placebo arm.
8
Impaired gas transfer and oxygenation are key pathophysiologic features of aPAP and are associated with symptoms of shortness of breath and limitations
in exercise capacity. In addition to (A-a)DO2, DLCO was assessed in the FAS as a secondary endpoint to evaluate the efficacy of Molgradex on gas
transfer. Patients in the continuous dosing arm showed a mean improvement of 11.6 % predicted in DLCO, whereas the intermittent dosing and placebo
arms showed a 7.7 % predicted and 3.9 % predicted improvement, respectively. The estimated treatment difference of 7.9 % predicted (p=0.007) between
the continuous dosing arm and placebo was statistically significant, and in keeping with the (A-a)DO2 improvement, suggests improved gas exchange in
the lungs.
•
•
•
Clinical Outcomes―In the FAS population, an average improvement of 12.3 points in the SGRQ, a patient-reported outcomes/quality-of-life
measure and a key secondary endpoint, was observed in the continuous dosing arm compared to an average improvement of 4.7 points in the
placebo arm. The estimated treatment difference was 7.6 points which was statistically significant (p < 0.05). The 6MWD, another key
secondary endpoint, was numerically in favor of the continuous dosing arm, but the difference to placebo was not statistically significant.
Patients in the continuous dosing arm showed a mean improvement of 39.6 meters in the 6MWD, while the intermittent and placebo arms
showed improvements of 11.3 meters and 6.0 meters, respectively. The third key secondary endpoint was the requirement for WLL. Four
patients in each of the active arms, and six patients in the placebo arm underwent at least one WLL procedure during the treatment period.
Given that some patients received more than one WLL, the total number of WLLs observed in the continuous dosing arm was 9, with 7
observed in the intermittent dosing arm and 17 in the placebo arm.
Consistency of Endpoints in the FAS―A range of primary and secondary endpoints were selected to determine the potential treatment effect
of Molgradex on aPAP. Patients in the continuous dosing arm demonstrated consistent improvements across all of the key endpoints
compared to placebo, with the majority of the measures achieving statistical significance. A dose-frequency dependency was observed, with
continuous daily administration of Molgradex generally resulting in higher efficacy than intermittent dosing.
Safety and Tolerability―The number of treatment emergent adverse events (TEAEs) in the FAS population, including serious adverse events,
occurred with similar frequency and severity in the active arms compared to placebo and did not indicate any notable safety concerns.
In March 2018, the IMPALA-X clinical study was initiated. This open-label extension study allowed patients who have completed the IMPALA study to
continue treatment for up to three additional years and will provide additional data on the long-term safety and use of Molgradex in patients with aPAP. In
February 2020, IMPALA-X enrollment was complete, with 60 patients out of a total of 64 eligible patients enrolled.
Results from the open-label period of the study announced in March 2020, demonstrated a sustained treatment effect, or continued improvement, after
longer term exposure to Molgradex. A summary of the results can be found below.
During the double-blind period, a dose frequency dependency was observed with continuous administration of Molgradex resulting in higher efficacy than
intermittent dosing. Results from the open-label period noted below therefore focus on the group that had received a continuous dose (OD) of Molgradex
during the double-blind period versus those that had received placebo (PBO)―both of which received intermittent dosing during the open-label period.
•
Patients who had been in the OD treatment group during double-blind period:
(A-a)DO2 improvement from baseline continued in these patients during the open-label period of the study, with progressively larger improvements at
weeks 48 and 72 of the study. Likewise, progressively larger improvements from baseline were observed in DLCO and SGRQ at weeks 48 and 72.
•
Patients who had been in the PBO group during double-blind period:
PBO patients that transitioned to active drug showed similar average improvements in (A-a)DO2, DLCO, and SGRQ in the open-label period as compared
to the OD group during the double-blind period, reaching similar level of improvement with the OD group by week 72.
Similar trends were seen in the 6MWD at weeks 48 and 72, but the data were less conclusive.
During the double-blind period of the study, 33 WLL procedures were required, 9 in the continuous group compared to 17 in the placebo group. During the
48-week open-label period of the study, during which time all patients received active drug, only 5 WLL procedures were conducted.
9
Background on NTM
NTM lung infection is a rare and serious lung disorder associated with increased rates of morbidity and mortality. Nontuberculous mycobacteria are
naturally occurring organisms and NTM lung infection can occur when an individual inhales the organism from their environment and develops a slowly
progressive and destructive lung disease. NTM lung infection is typically characterized by cough, fatigue, and weight loss. NTM infections often become
chronic and require long courses of multiple antibiotics and, despite aggressive treatment regimens, treatment failure rates are high and recurrence of
infection common. Chronic NTM lung infection can have a significant impact on quality of life. There are up to 80,000 individuals affected by NTM in the
U.S, and the most common types of NTM lung infection involve MAC and MABSC. There have been few advancements in new systemic treatments for
NTM lung infection. However, in 2018 the FDA granted accelerated approval of an inhaled form of amikacin directly to the lung. In a 2017 Phase 3 study,
the drug was shown to be effective in approximately one third of treatment refractory patients with pulmonary MAC infection. This suggests that
administration of high local concentrations of drug directly at the site of infection provides an attractive new avenue to improve clinical outcomes in this
and other difficult-to-treat chronic lung infections.
NTM lung infections are a considerable therapeutic challenge due to the unique ability of these bacteria to evade the normal killing mechanisms of alveolar
macrophages, a type of immune cells responsible for killing bacteria in the lungs. There is increasing scientific literature suggesting that GM-CSF plays an
important role in enhancing the ability of macrophages to clear mycobacteria.8 For instance, GM-CSF knock out mice inoculated with MABSC develop a
chronic lung disease resembling human chronic infection, whereas wild type mice with intact GM-CSF production typically clear the bacteria quickly and
fail to develop chronic infection. In animal studies, GM-CSF has been shown to kill NTM with similar efficacy compared to commonly used NTM
antibiotics, and the simultaneous use of GM-CSF with antibiotics can further improve the antibacterial effect of either GM-CSF or antibiotics given alone.
In two published clinical case reports in the European Respiratory Journal by Dr. Wylam of the Mayo Clinic,9 inhaled GM-CSF was shown to eradicate or
dramatically reduce the bacterial burden in patients with refractory MABSC lung infection. This suggests that the promising animal data may be
translatable to humans, and the potential therapeutic role of GM-CSF in NTM lung infection warrants more intensive investigation. Among the various
NTM species, MABSC is a particularly challenging clinical problem, as it is one of the most resistant organisms to antibiotics. Importantly, GM-CSF is not
an antibiotic that targets the bacteria. Rather, it is an anti-infective immunotherapy that targets the human immune response, not the bacteria directly, thus
avoiding the increasing problem of antibiotic resistance.
Clinical Development of Molgradex ‒ NTM
Phase 2a OPTIMA Study
A Phase 2a multi-center clinical study in non-CF patients, called OPTIMA, was initiated in Q1 2018 and investigated the efficacy of Molgradex on
reduction of NTM bacterial load in sputum, NTM sputum culture conversion to negative, exercise capacity, patient reported outcomes, and safety.
OPTIMA is an open-label, non-controlled, multi-center, Phase 2a clinical study of Molgradex in 32 subjects (≥18 years of age) with persistent NTM lung
infection. OPTIMA enrolled subjects with chronic MAC or MABSC infection, with all patients having either antibiotic refractory infection or intolerance
to standard NTM antibiotics. The study initially consisted of a 24-week treatment period and a 12-week follow up period. Two groups of subjects were
recruited into the OPTIMA study, both of which received Molgradex 300 µg administered once daily. Treatment group one consisted of patients who
remained sputum culture positive while currently on a multidrug NTM guideline-based anti-mycobacterial regimen, which had been ongoing for at least
six-months prior to the baseline visit. Treatment group two consisted of patients who remained sputum culture positive, but either stopped a multidrug
NTM guideline-based anti-mycobacterial regimen, at least 28 days prior to screening due to lack of response or intolerance, or never started such treatment.
Interim results from the OPTIMA study were disclosed in December 2018. Based on the microbiological data and safety profile, which provides the basis
to continue treating patients for a longer period of time, the duration of the OPTIMA study was extended from 24 to 48 weeks, with a 12-week follow up
period at the end of treatment.
8 deSilva T.I., et al. Journal of Infection (2007) 54 (e207-e210); Hallstrand T.S., et al. European Respiratory Journal (2004) 24 (367-370); Groote et al, J
Antimicrob Chemother. 2014 Apr;69(4):1057-64.; Luiz E. Bermudez, et al. The Journal of Infectious Diseases, Volume 169, Issue 3, 1 March 1994,
Pages 575–580.
9 Scott et al, European Respiratory Journal (2018) (DOI: 10.1183/13993003.02127-2017).
10
The primary endpoint in the study is sputum culture conversion, defined as at least three consecutive sputum samples without growth of NTM. Secondary
endpoints include: (i) the number of patients with sputum smear conversion to negative, defined as at least three consecutive negative AFB stained sputum
smears on microscopy among patients who were smear positive at baseline, (ii) the number of patients with durable sputum culture conversion, defined as
sputum culture conversion at or before week 48 and culture still negative for growth of NTM at 12-week follow up, (iii) the number of patients with
durable sputum smear conversion, defined as sputum smear conversion at or before week 48 and AFB stained smear still negative for NTM at 12-week
follow up among patients who were smear positive at baseline, and (iv) other microbiological indicators, exercise capacities, and patient reported outcomes.
In March 2020 top line microbiology results from the OPTIMA were announced. In the study, 24 patients had MAC infection and 8 patients had MABSC
infection. Of the patients with MAC infection, 11 were in treatment group one and 13 were in treatment group two. Of the patients with MABSC infection,
3 were in treatment group one and 5 were in treatment group two.
Results from the Intention-to-Treat (ITT) population showed that 5 out of 24 patients (21%) with MAC infection achieved a sputum culture conversion,
defined as at least three consecutive sputum samples without growth of nontuberculous mycobacteria by week 48. Two of these patients, one from each
treatment group, remained culture negative through the 12-week follow-up period. Sputum culture conversions were not observed in patients with MABSC
infection. Among the 32 patients, 14 experienced serious adverse events (SAEs), one of which was considered potentially treatment related. The most
common SAE was infective exacerbation of bronchiectasis. Three patients died during the study, with all deaths being considered unlikely related to the
study treatment.
In Q3 2018, the IND application for Molgradex in CF-affected patients with chronic NTM lung infection was accepted by the FDA. A Phase 2a study of
Molgradex in CF-affected patients with NTM lung infection, called ENCORE, was initiated in Q1 2019. ENCORE is an open-label, non-controlled, multi-
center, Phase 2a clinical study of Molgradex in patients living with CF who have persistent pulmonary NTM lung infection. ENCORE will enroll
approximately 30 patients (≥18 years of age) with chronic MAC or MABSC infection, with all patients having either antibiotic refractory infection,
intolerance to standard NTM antibiotics, or not currently meeting recommendations for antibiotic treatment. The study comprises a 48-week treatment
period of 300 µg of Molgradex once daily and a 24-week follow up period. The primary endpoint in the study is sputum culture conversion, defined as at
least three consecutive negative NTM sputum samples with a four-week interval between each. Secondary endpoints include: (i) the number of patients
with sputum smear conversion to negative, defined as at least three consecutive negative AFB stained sputum smears on microscopy among patients who
were smear positive at baseline, (ii) the reduction of bacterial load in sputum, and (iii) other microbiological indicators, pulmonary measures, and patient
reported outcomes.
Overview of AeroVanc
Background on MRSA Infection in CF
CF is a genetic disease characterized, in part, by the prevalence of thick, sticky mucus produced in the lung, frequent lung infections, and a resultant decline
in pulmonary function. As the disease progresses, patients’ lungs are typically infected with bacteria that are difficult to eradicate. Inhaled antibiotics have
become a cornerstone for the treatment of the most common chronic pathogen, pseudomonas, in order to control the infection and improve lung function
and quality of life. In recent years, MRSA lung infection has become increasingly common in CF, with a prevalence rate of 26% according to the most
recent (2017) data report of the Cystic Fibrosis Foundation. Importantly, persistent MRSA lung infection has been associated with worse clinical outcomes
in CF, including a more rapid rate of decline in lung function10 and a shorter life expectancy.11 The increasing prevalence and high clinical impact of
MRSA infection in CF have resulted in an unmet need for improved therapies to help address the condition. Considering the established practice of treating
chronic Pseudomonas infection in CF using inhaled antibiotics, all of which have limited activity against MRSA, it would be logical to attempt treatment of
chronic MRSA infection with an inhaled antibiotic that is active against MRSA. We believe that AeroVanc is the first inhaled antibiotic being developed to
specifically treat MRSA infection of the lungs.
10 Dasenbrook EC, Merlo CA, Diener-West M, et al. “Persistent Methicillin-resistant Staphylococcus aureus and Rate of FEV1 Decline in Cystic
Fibrosis.” Am J Respir Crit Care Med 2008;178, 814-821.
11 Dasenbrook EC, Checkley W, Merlo CA, et al. “Association Between Respiratory Tract Methicillin-Resistant Staphylococcus aureus and Survival in
Cystic Fibrosis.” JAMA 2010;303, 2386-2392.
11
Current MRSA Treatment Options in CF
Persistent MRSA lung infection in people living with CF is difficult to eradicate or manage using oral or IV antibiotics. Currently, there is no standard of
care to manage the infection despite the high need.12 In contrast to the established treatment of pseudomonas infection with inhaled antibiotics, there is no
FDA-approved inhaled antibiotic treatment available for MRSA infection.
For people living with CF who have MRSA infection, IV vancomycin or linezolid are the most commonly used drugs for the treatment of acute pulmonary
exacerbation, and these drugs may be used in combination with other IV antibiotics in patients with simultaneous gram-negative infections, such as
Pseudomonas. For MRSA lung infection, vancomycin is available exclusively in IV form, and while highly effective against MRSA and other gram-
positive bacteria, chronic home-based use of IV vancomycin is not practical, and chronic use has been associated with systemic toxicity, especially renal
toxicity and ototoxicity.
According to our research, there is increasing clinical need to treat chronic MRSA infection in CF. In the absence of an inhaled antibiotic, there is emerging
use of oral anti-MRSA antibiotics in an attempt to suppress the MRSA infection and reduce the occurrence of acute pulmonary exacerbations. According to
our survey of CF specialists in the U.S., 27% of those surveyed regularly use antibiotics targeting MRSA as a suppressive treatment (any dosage form) in
patients with frequent exacerbations or other symptoms for which MRSA is considered a cause or contributing factor. This practice is emerging despite the
absence of established consensus or guidelines relating to the use of oral anti-MRSA antibiotics in CF, or evidence of efficacy established in controlled
studies.
As with current inhaled anti-pseudomonal drugs, we believe that there is significant clinical advantage in delivering an anti-MRSA antibiotic, such as
vancomycin, directly to the site of infection to maximize the clinical efficacy, reduce systemic exposure and the risk of adverse effects, and to enable
convenient use of the product outside of the hospital setting. The aerosolized IV form of vancomycin, administered by nebulization, has been used in
multiple published small clinical studies, mainly to treat ventilator-associated pneumonia in an intensive care setting. In these studies, and case reports,
nebulized vancomycin had good antibacterial efficacy and was generally well tolerated. According to our research, in recent years many of the leading CF
centers in the U.S. have explored the use of inhaled vancomycin to treat MRSA on a chronic basis, by nebulizing the IV form of vancomycin. The
experience gained from this type of treatment has been encouraging and provides anecdotal reports of the safety and clinical utility of inhaled vancomycin
for a period of several years in some patients. Similarly, in the 1990’s, nebulized IV tobramycin was explored as a treatment of pseudomonas infections in
people living with CF. This exploration resulted in the development of the most widely used inhaled antibiotic worldwide, TOBI, which is a cornerstone of
chronic treatment of pseudomonas lung infection in CF.
We believe that inhaled antibiotics, as well as other palliative treatments, will continue to have a central role in the management of CF. Various disease
modifying drugs, such as CF Transmembrane Conductance Regulator (“CFTR”) modulators, that attempt to address the underlying cause of CF, (i.e.,
restore or improve the function of the CFTR protein that is defective or dysfunctional in individuals living with CF) have recently been launched. Such
disease-modifying drugs, on average, result in improvement in lung function and, potentially, slow the rate of lung function decline. Nevertheless, patients
on these drugs are expected to continue to have chronic infections that require antibiotic treatment, and their lung function is expected to continue to
decline. Feedback from the CF Foundation and key opinion leaders suggests that managing chronic infection and inflammation continue to be key
challenges in the management of CF and addressing these issues should remain a high priority for new drug development.
AeroVanc Product Description
AeroVanc is a novel inhaled formulation of vancomycin being developed for the treatment of persistent MRSA lung infection in individuals with CF.
Vancomycin is a glycopeptide antibiotic that was discovered in the mid-1950’s and is commonly used in the prophylaxis and treatment of infections caused
by gram-positive bacteria. Vancomycin acts by inhibiting proper cell wall synthesis of aerobic and anaerobic gram-positive bacteria and is generally not
active against gram-negative bacteria.
AeroVanc is delivered via a capsule containing a proprietary dry powder formulation of vancomycin hydrochloride intended for oral inhalation with the
AeroVanc inhaler. The AeroVanc inhaler is a commercialized, hand-held, manually operated, breath-activated device manufactured by Plastiape S.p.A.
(Lecco, Italy).
12 Zobell JT, Epps KL, Young DC, Montague M, Olson J, Ampofo K, Chin MJ, Marshall BC, Dasenbrook E. “Utilization of antibiotics for methicillin-
resistant Staphylococcus aureus infection in cystic fibrosis.” Pediatric Pulmonology (June 2015) Volume 50, Issue 6, pages 552–559.
12
We anticipate that AeroVanc, if approved, will be used predominantly to suppress chronic MRSA lung infection which has the potential to improve
patients’ lung function and respiratory symptoms, and to prolong the time to pulmonary exacerbation and need of systemic antibiotics. AeroVanc would not
be intended to replace IV vancomycin or other IV antibiotics in the treatment of acute pulmonary exacerbations associated with MRSA. However, long-
term AeroVanc use has the potential to reduce the occurrence of these exacerbations and, thereby, reduce the need for IV treatments and hospitalizations.
If approved, we believe AeroVanc in CF will be broadly adopted based on a high level of interest for the product from direct clinician surveys, as well as
market research of key opinion leaders in the field of CF. Notably, a clear majority of the surveyed CF physicians in the U.S. (94%) indicated they expect to
prescribe AeroVanc for MRSA lung infection, if approved by the FDA. Likewise, according to U.S. payer interviews, an AeroVanc launch would receive
reimbursement support given the high unmet need in an orphan indication and a current lack of comparable products.
AeroVanc Key Advantages
There are a number of important characteristics that, we believe, contribute to AeroVanc’s overall clinical profile and may facilitate regulatory approval
and, potentially, successful commercialization. Specifically, AeroVanc offers:
•
•
•
•
A strong product foundation that applies both a previously approved active drug substance and drug delivery technology.
High concentration of antibiotic delivered directly to the lungs (the primary site of infection) which, we believe, can result in higher clinical
efficacy and reduced systemic toxicity, as compared with oral or IV delivery of antibiotics.
Capsule-based powder inhaler that provides a fast and convenient method of administration, which is attractive to the CF population, who
have a high treatment burden.
Eligibility for strong market protection via orphan drug status, QIDP status, a formulation patent, and an exclusive device supply agreement.
Clinical Development of AeroVanc
Phase 3 Study
AeroVanc is currently being investigated in a pivotal Phase 3 clinical study, called AVAIL, in the U.S. and Canada for the treatment of persistent MRSA
lung infection in people living with CF. The study began enrolling patients at U.S. and Canadian clinical sites in late 2017.
AVAIL is currently enrolling approximately 200 patients (150 patients ≤ 21 years old, 50 patients > 21 years old), subject to potential enrollment reductions
discussed below, to evaluate the long-term safety of AeroVanc. During Period 1 of the study, patients are randomly assigned in a blinded 1:1 fashion to
receive either AeroVanc (30 mg) twice daily, or placebo, by inhalation for 24 weeks or 3 dosing cycles. A dosing cycle is defined as 28 days of treatment
followed by 28 days of observation. During Period 2 of the study, patients receive open-label AeroVanc (30 mg) twice daily for an additional 24 weeks or 3
dosing cycles. The primary endpoint is the mean absolute change in FEV1 percent predicted from baseline, which will be analyzed sequentially at week 4
(the end of Cycle 1), week 12 (the end of Cycle 2), and at week 20 (the end of Cycle 3). Analysis of the primary endpoint will be based on patients 6‒21
years of age. Secondary endpoints include: (i) time-to-use of another antibiotic medication (oral, IV, and/or inhaled) for pulmonary infection, (ii) the
number of successful FEV1-response cycles a patient achieves over Period 1 (weeks 4, 12, and 20), (iii) relative change from baseline in FEV1 percent
predicted at weeks 4, 12, and 20, (iv) change from baseline Cystic Fibrosis Questionnaire-Revised scores at weeks 4, 12, and 20 and (v) change from
baseline in Cystic Fibrosis Respiratory Symptom Diary-Chronic Respiratory Symptom Score scores at weeks 4, 12, and 20.
We will continue to enroll patients in the AVAIL study until Q2 2020. We anticipate enrolling approximately 140-145 out of the expected 150 patients in
the primary analysis population. Top line results from the study are expected in early 2021.
Completed Clinical Studies
Phase 2 Study
In a Phase 2 clinical study in CF patients with persistent MRSA lung infection, AeroVanc met a primary endpoint to reduce MRSA density in sputum and
showed encouraging trends of improvement in lung function, prolongation of the time to use of other antibiotics, and improvement in respiratory
symptoms, with best responses in patients below 21 years of age. The consistency of the responses across the different endpoints, as well as the magnitude
of change in the younger patients, supported the advancement of AeroVanc into a Phase 3 clinical study. The results of the Phase 2 study were summarized
and presented to the FDA in an End of Phase 2 Meeting, and the agency subsequently provided detailed guidance on the design and analysis of our current
Phase 3 study, which is described above under the heading “Phase 3 study.”
13
The Phase 2 study evaluated the safety and efficacy of AeroVanc in CF patients with persistently positive MRSA lung infection. The 28-day, randomized,
double-blind, placebo-controlled study enrolled 87 patients. Patients received AeroVanc 32 mg twice daily (“BID”) or 64 mg BID, with an eight-week
follow-up. The study was conducted at 40 sites in the U.S. Quantitative MRSA cultures from spontaneously expectorated sputum samples were used as the
primary endpoint of the study. The average baseline values in both active drug cohorts, as well as the placebo cohorts, were high ranging from 6.78 ‒ 7.65
log 10 colony-forming units (“CFU”) /mL. In the primary endpoint analyses (modified intent-to-treat population), a reduction from baseline in MRSA CFU
was observed in the 32 mg and 64 mg dose cohorts pooled, compared to placebo by -0.52 log 10 CFU/mL and -0.06 log 10 CFU/mL for the AeroVanc and
placebo doses, respectively (p = 0.0312); in the 64 mg dose cohort by -0.63 log 10 CFU/mL and 0.16 log 10 CFU/mL for the AeroVanc and placebo doses,
respectively (p = 0.0145); in the 32 mg dose cohort by -0.25 log 10 CFU/mL and -0.30 log 10 CFU/mL for the AeroVanc and placebo doses, respectively
(p = 0.8352).
MICs of vancomycin for MRSA cultured from the sputum samples were determined using a broth microdilution technique at baseline, at each visit during
the administration of AeroVanc, as well as at the post-administration follow-up time points. The distribution of MIC values was very narrow, with MIC 50
and MIC 90 both at 0.5 µg/mL at baseline. At baseline, all strains were susceptible to vancomycin, with MIC values of 1 µg/mL, and there were no notable
changes in the MIC distribution at any of the time points following the baseline sample. This suggests the susceptibility of MRSA to vancomycin was not
affected by the 28 days of pulmonary administration of AeroVanc.
Vancomycin peak and trough concentrations in sputum at Day 8 and Day 29 were in high excess over the generally accepted level of MIC (mean C trough
/MIC ratio > 35) after multiple dosings in all patients at both dose levels, with apparent dose-dependency but no notable difference in C trough between the
two time points.
The most frequent adverse events reported were respiratory related. The AeroVanc 32 mg BID dose was well tolerated, with no significant difference in
adverse events as compared with placebo. However, a higher incidence of adverse events, most frequently consistent with signs and symptoms of
bronchoconstriction, and a significantly higher rate of premature study drug discontinuations were seen in adult patients at the 64 mg BID dose, as
compared with patients receiving 32 mg of AeroVanc or placebo. Discontinuations were most commonly due to drug intolerability (mainly
bronchoconstriction and/or chest tightness) or pulmonary exacerbation and typically occurred within the first two weeks from the start of drug
administration.
Based on the observed clinical results in the 32 mg cohort of patients below 21 years of age, the high vancomycin concentrations in sputum observed at
both dose levels, and the high frequency of discontinuation in adult patients at the 64 mg dose, the Phase 3 study is further evaluating the 32 mg dose and
enrollment is focused on patients below 21 years of age.
Human Factor Study
We have performed a human factor study with fourteen people living with CF (ages 12 ‒ 56 years old) to better understand patient reactions to the
AeroVanc inhaler device, drug capsule and written instructions. Study participants represented a variety of sex and ethnicity demographics, as well as
dominant hand preference. Patients were given the device, capsules and instructions to simulate use (without drug) and provide feedback. In summary, all
patients were able to use the device properly and no device design issues were identified that could impact proper use.
Manufacturing and Supply
We do not own or operate manufacturing facilities to produce clinical or commercial quantities of any of our product candidates. We have fee-for-service
contracts with well-established drug substance manufacturers, as well as drug product manufacturers covering all steps of the manufacturing process of our
product candidates. We expect to continue with this outsourcing model for the foreseeable future. All of our manufacturing and supply vendors conduct
their operations under current Good Manufacturing Practices (“cGMP”), a regulatory standard for the manufacture of pharmaceuticals.
Molgradex Manufacturing
The drug substance in Molgradex, molgramostim, is currently manufactured by GEMA Biotech S.A. (Buenos Aires, Argentina). All clinical and
nonclinical studies to date have used material sourced from GEMA Biotech S.A. and validation activities are ongoing to prepare for commercial
manufacturing.
Patheon UK Limited (Ferentino, Italy), a division of Thermo Fisher Scientific Inc., has been selected as the commercial drug product manufacturer.
Technology transfer is ongoing, and the planning of process validation activities has been initiated.
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Molgradex is administered to the lungs using the investigational eFlow® Nebulizer System, manufactured by PARI Pharma GmbH (Stamberg, Germany).
The eFlow nebulizer has been CE certified (CE 0123) according to the Medical Devices Directive 93/42/EEC (as amended by Directive 2007/47/EC) as a
class IIa device. The device has a 510(k) approval in the U.S. as a general device. We have an exclusive license and a long-term supply agreement with
PARI Pharma GmbH, as further discussed below, covering the eFlow nebulizer for the administration of recombinant human GM-CSF.
AeroVanc Manufacturing
AeroVanc is a high-performance inhalation powder formulation of vancomycin hydrochloride, applying a commercially-available capsule inhaler. The drug
substance used in AeroVanc, vancomycin hydrochloride USP, is produced using microbial fermentation followed by purification, and is sourced from
Xellia Pharmaceuticals ApS (Copenhagen, Denmark), a commercial manufacturer with two manufacturing facilities (one in China and one in Denmark).
Both sites use the same cell line and manufacturing processes and produce material of comparable quality. A long-term commercial supply agreement has
been established with Xellia Pharmaceuticals ApS.
AeroVanc inhalation powder is a spray-dried powder containing a ratio of 9:1 by weight of vancomycin hydrochloride and l-leucine. L-leucine is an
essential amino acid and has generally regarded as safe, GRAS, status as a food additive. Formulation studies showed that the addition of l-leucine
improves inhalation performance in vitro, as measured by improved emitted dose and fine particle dose. The powder manufacturing is carried out by
Hovione LLC (East Windsor, NJ), a vendor with two operational sites (one in the U.S. and one in Europe). Both of the facilities have the same base
equipment, which could be upgraded to produce material of comparable quality. The proprietary AeroVanc spray drying process creates very fine particles
(smaller than five microns) required for efficient delivery to the lungs. Proprietary nozzle and cyclone technologies were developed to meet product
performance and manufacturing throughput requirements. The powder production process has been successfully scaled-up from laboratory to commercial
equipment.
The drug product is manufactured from bulk AeroVanc powder by GlaxoSmithKline Trading Services Limited (“GSK”). At this final stage of
manufacturing, AeroVanc powder is conditioned and automatically filled into 16 mg capsules of vancomycin. The capsules are then packaged into
aluminum foil blisters to protect them from light and moisture. A long-term commercial supply agreement has been established with GSK for the finished
product.
The inhaler device used for AeroVanc is manufactured by Plastiape S.p.A. (Lecco, Italy). The device was approved in the U.S. as part of the Aridol ® new
drug application (NDA 022368) on October 5, 2010. A cosmetically modified version of the device was approved in the U.S. as part of the Arcapta ®
Neohaler ® new drug application (NDA 022383) on July 1, 2011. An exclusive long-term commercial supply agreement has been established with
Plastiape S.p.A.
We have worked with our manufacturing partners to scale up processes, improve yields and production rates, and transfer processes to commercial facilities
with commercial equipment. We have produced the supplies for the AVAIL pivotal Phase 3 clinical study using the same manufacturing sites, equipment
and processes that will be used for commercial supply.
Commercialization
We own exclusive rights to Molgradex and AeroVanc in the U.S. and all other major markets, except for Japan, where we have licensed the Molgradex
rights to Nobelpharma Co., Ltd. (“Nobelpharma”), located in Tokyo, Japan, and which is described further below. We recently received notification from
Nobelpharma of its intent to terminate the license agreement which will be effective on August 21, 2020. However, we continue plan to pursue clinical and
regulatory approvals for our products in the U.S. and EU, and to independently commercialize AeroVanc and Molgradex in the U.S. In doing so, we may
engage with strategic partners to help implement optimal sales and promotion activities. Our commercialization strategy will target key prescribing
physicians, as well as provide patients with support programs to ensure product access. Pending EMA approval, we expect to commercialize Molgradex
and AeroVanc in certain key markets in the EU and may engage with strategic partners to optimize sales and promotion activities in the remaining EU
territories.
License and Supply Agreements
Plastiape S.p.A.
In September 2012, we entered into a supply agreement related to AeroVanc with Plastiape S.p.A, which was subsequently amended in June 2016 (the
“Plastiape Agreement”). Pursuant to the terms of the Plastiape Agreement, Plastiape S.p.A. will supply dry powder inhalers to us on an exclusive basis for
use with vancomycin for the diagnosis, management, prevention or treatment of lung diseases. Pricing under the Plastiape Agreement is on a per unit basis,
with the per unit price decreasing as the volume increases.
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Xellia Pharmaceuticals ApS
In September 2016, we entered into a supply agreement related to the supply of the Active Pharmaceutical Ingredients (“API”) for AeroVanc with Xellia
Pharmaceuticals ApS (the “Xellia Agreement”). Pursuant to the Xellia Agreement, we are obligated to purchase all of our requirements of the API from
Xellia Pharmaceuticals ApS. The pricing under the Xellia Agreement is a set price per kg, with the price decreasing upon the commercial launch of
AeroVanc.
PARI Pharma GmbH
In November 2014, Serendex, predecessor-in-interest to our Savara ApS subsidiary, entered into a license and collaboration agreement related to
Molgradex with PARI Pharma GmbH (“PARI”), (collectively the “PARI License Agreement”), which we assumed as part of the Serendex Acquisition (as
defined in Item 1, subheading “Acquisition of Serendex Pharmaceuticals,” of this report). Under the PARI License Agreement, we have a worldwide,
exclusive license to commercialize PARI’s investigational eFlow Nebulizer device for the pulmonary delivery of any liquid formulation containing Human
Granulocyte Macrophage Colony Stimulating Factors (“hGM-CSF”) as the sole active pharmaceutical ingredient for nebulization for aPAP. Additionally,
we have the option to change the device, subject to certain conditions, to PARI’s eFlow Technology Nebulizer CS and, until marketing approval, the option
to negotiate an extension to the license to cover commercialization of the drug for pulmonary delivery via the PARI eFlow Inline device for the treatment of
certain other indications.
On July 23, 2018, we entered into Amendment No. 1 (the “PARI Amendment”), effective May 23, 2018, to the PARI License Agreement which adds NTM
lung infection to the indications included in the license and allows us to add other pulmonary infections to the included indications in the future.
Under the terms of the PARI License Agreement, we are not permitted to work with third parties to develop any inhalation device or nebulizer for the
pulmonary delivery of a pharmaceutical product containing hGM-CSF as the sole active ingredient. This restriction extends until (i) in the European
Economic Area, marketing approval of the product in Europe or the U.S., whichever is later, or (ii) in the rest of the world, the term of the PARI License
Agreement.
In consideration of rights granted by PARI, Serendex paid a one-time upfront fee and agreed to pay an hourly rate for work performed by PARI under work
orders issued pursuant to the PARI License Agreement. Additionally, we are obligated to make future milestone payments to PARI based upon (i) the
successful completion of certain clinical trials, (ii) submissions for regulatory approval in the U.S, the European Union or Japan, and (iii) the first
marketing approval for the product in the U.S., the European Union or Japan. The PARI Amendment expanded the development milestones in the
agreement to include NTM and any additional pulmonary indications.
If we successfully commercialize any product candidate subject to the PARI License Agreement in a country, we are responsible for royalty payments equal
to a percentage of net sales. We are obligated to make such royalty payments until the later of (i) the expiration of the last valid claim in an issued patent
covering a portion of the PARI device in the applicable country or (ii) 15 years after the first commercial sale of Molgradex with the PARI device in that
country (the “PARI Royalty Period”). If there is no such valid patent claim covering the applicable PARI device, the royalty owed to PARI will be
decreased by a specified percentage.
The license term extends on a country by country basis until the end of the PARI Royalty Period or until mutually agreed by the parties.
In April 2015, Serendex entered into a commercial supply agreement with PARI (the “PARI Supply Agreement”) related to the supply of the
investigational PARI eFlow Technology Nebulizer and related accessories for commercial use with our products after marketing approval is obtained. We
assumed the PARI Supply Agreement as part of the Serendex Acquisition (as defined in Item 1, subheading “Acquisition of Serendex Pharmaceuticals,” of
this report). Pursuant to the terms of the PARI Supply Agreement, we are obligated to purchase from PARI (i) within the European Economic Area,
(a) during the first five years from marketing approval, all of our requirements for the device and related accessories and (b) thereafter 80% and (ii) in the
rest of the world, all of our requirements during the PARI Royalty Period. Pricing is on a per unit basis, with a reduction in price once purchasing volumes
reach over 5,000 for devices and starter kits and over 40,000 for nebulizer handsets in a twelve-month period.
GEMA Biotech S.A.
On April 26, 2019, we entered into a Manufacture and Supply Agreement (the “GEMA Agreement”) with GEMABIOTECH SAU, a corporation organized
under the laws of Argentina (“GEMA”), pursuant to which GEMA will supply the active pharmaceutical ingredient for our Molgradex product (the “API”).
The Agreement supersedes the Supply and License Agreement between Savara ApS (as defined in Item 1, subheading “Acquisition of Serendex
Pharmaceuticals,” of this report) and GEMA dated December 10, 2012, as amended on February 22, 2016 and September 20, 2017.
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Under the GEMA Agreement, GEMA shall manufacture and supply the API exclusively for us for commercial sale and continue to supply the API to us
for clinical studies and research and development activities. Pursuant to the terms of the GEMA Agreement, GEMA agreed to undertake the actions
required to comply with the requirements of the FDA and other similar regulatory authorities and obtain the approvals necessary to manufacture and supply
the API to us for commercial sale. Additionally, GEMA transferred and assigned to us all right, title and interest in and to the master cell bank and working
cell bank necessary to produce the API.
As consideration for the rights granted by GEMA, we are required to pay GEMA an agreed upon price per vial of 1 gram of the API. Additionally, we are
obligated to make milestone payments to GEMA upon (i) the effective date of the GEMA Agreement, (ii) completion of certain developmental activities,
(iii) successful completion of an audit by the FDA, and (iv) marketing approval of a product containing the API. If we successfully commercialize a
product containing the API in a country, we must pay GEMA a single digit percentage royalty on annual net sales. We are obligated to make such royalty
payments until the earlier of (i) 10 years after the first receipt of marketing approval for the product in that country or (ii) the date a biosimilar of such
product is first sold in that country.
The term of the GEMA Agreement continues until the twentieth anniversary of the date of receipt of marketing approval for a product containing the API
in any country and may be extended for additional twelve-month terms by the agreement of both parties. We may terminate the GEMA Agreement
immediately if (i) products containing the API will not be sold or will be withdrawn from the market, (ii) the FDA or other regulatory authority withdraws
marketing approval for or fails to approve products incorporating the API, (iii) three or more batches of API supplied in any six month period fail to
conform to specifications, (iv) GEMA receives notice of deficiencies in its manufacturing and fails to adequately respond, or (v) GEMA fails to achieve
compliance with the requirements of the FDA and other regulatory authorities necessary to manufacture and supply the API to the Company for
commercial sale.
Patheon UK Limited
On June 26, 2019, we entered into a Master Manufacturing Services Agreement (the “Master Manufacturing Agreement”) with Patheon UK Limited
(“Patheon”). The Master Manufacturing Agreement governs the general terms under which Patheon, or one of its affiliates, will provide manufacturing
services to us for the drug products specified by us from time to time.
We expect to enter into one or more related Product Agreements (each a “Product Agreement”) pursuant to the Master Manufacturing Agreement to govern
the terms and conditions of Patheon’s manufacture of commercial supplies of Molgradex, our lead product candidate. Pursuant to the Master
Manufacturing Agreement, we have agreed to order from Patheon at least a certain percentage of our commercial requirements for a product under a
Product Agreement. Each Product Agreement that the we may enter into from time to time will be governed by the terms of the Master Manufacturing
Agreement, unless expressly modified in such Product Agreement.
The Master Manufacturing Agreement has an initial term ending December 31, 2024, and will automatically renew after the initial term for successive
terms of two years each if there is a Product Agreement in effect, unless we give notice of our intention to terminate the Master Manufacturing Agreement
at least 12 months prior to the end of the then current term or Patheon gives notice of its intention to terminate the Master Agreement at least 24 months
prior to the end of the then current term. Unless otherwise agreed in a Product Agreement, Product Agreements will automatically renew after the initial
term for successive terms of two years each unless either party gives notice of its intention to terminate a Product Agreement at least 18 months prior to the
end of its then current term.
Either party may terminate the Master Manufacturing Agreement or a Product Agreement upon written notice if the other party (i) has failed to remedy a
material breach within a specified time or (ii) is declared insolvent or bankrupt, voluntarily files a petition of bankruptcy or assigns such agreement for the
benefit of creditors. We may terminate a Product Agreement upon 30 days’ prior written notice if any governmental agency takes any action that prevents
the Company from selling the relevant product in the relevant territory or upon six months’ prior written notice if it does not intend to order manufacturing
services due to a product’s discontinuance in the market. Patheon may terminate the Master Manufacturing Agreement or a Product Agreement if we assign
such agreement to an assignee that is unacceptable to Patheon for certain reasons, for failure of our timely payment of invoices, or if we forecast zero
volume for six months.
Nobelpharma Co., Ltd.
Serendex entered into a license agreement on May 12, 2016, as assumed by us in the Serendex Acquisition (as defined in Item 1, subheading “Acquisition
of Serendex Pharmaceuticals,” of this report), which was amended on June 4, 2018 (the “Nobelpharma Agreement”), with Nobelpharma Co. Ltd.
(“Nobelpharma”) under which Nobelpharma received an exclusive right to import, market, sell, distribute and promote Molgradex in Japan for the
treatment of aPAP. In return, Nobelpharma will pay us marketing and regulatory-based milestone payments totaling $10.5 million and sales-based royalties
equal to thirty-five percent (35%) of the National Health Insurance price determined by the Ministry of Health Labor and Welfare in Japan.
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Pursuant to the Nobelpharma Agreement, we are obligated to fund Nobelpharma fifty percent (50%), up to a maximum of approximately $0.8 million, of
the external costs associated with specific regulatory and filing activities to be conducted by Nobelpharma regarding the commercialization of Molgradex
for the treatment of aPAP in Japan. We received notification from Nobelpharma of its termination of the license agreement effective on August 21, 2020.
Mayo Foundation for Medical Education Services and Research
Under an agreement with the Mayo Foundation for Medical Education Services and Research, entered into on October 8, 2018, we are subject to certain
milestone payments for the use of proprietary information and material in specific intellectual property filings related to the application of Molgradex in the
treatment of NTM. We will owe royalties to the foundation based on net sales of Molgradex for the treatment of NTM equal to one half of one percent
(0.5%) when the intellectual property filings are published and one quarter of one percent (0.25%) prior to the publication or in the event publication does
not occur, with respect to the specified intellectual property filings.
Government Regulation
The FDA and other regulatory authorities at federal, state, and local levels, as well as in foreign countries, extensively regulate, among other things, the
research, development, testing, manufacture, quality control, import, export, safety, effectiveness, labeling, packaging, storage, distribution, record keeping,
approval, advertising, promotion, marketing, post-approval monitoring, and post-approval reporting of drugs, such as those we are developing. We, along
with third-party contractors, will be required to navigate the various preclinical, clinical and commercial approval requirements of the governing regulatory
agencies of the countries in which we wish to conduct studies or seek approval or licensure of our product candidates. The process of obtaining regulatory
approvals and the subsequent compliance with appropriate federal, state, local, and foreign statutes and regulations require the expenditure of substantial
time and financial resources.
Government Regulation of Drugs
The process required by the FDA before drug product candidates may be marketed in the U.S. generally involves the following:
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Completion of preclinical laboratory tests and animal studies performed in accordance with the FDA’s current Good Laboratory Practices
(“GLP”) regulation.
Submission to the FDA of an IND, which must become effective before clinical trials may begin and must be updated annually or when
significant changes are made.
Approval by an independent Institutional Review Board (“IRB”) or ethics committee for each clinical site before a clinical trial can begin.
Performance of adequate and well-controlled human clinical trials to establish the safety, purity and potency of the proposed product
candidate for its intended purpose.
Preparation of and submission to the FDA of an NDA, after completion of all required clinical trials.
A determination by the FDA within 60 days of its receipt of an NDA to file the application for review.
Satisfactory completion of an FDA Advisory Committee review, if applicable.
Satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities at which the proposed product is
produced to assess compliance with cGMPs and to assure that the facilities, methods and controls are adequate to preserve the product’s
continued safety, purity and potency, and of selected clinical investigational sites to assess compliance with current Good Clinical Practices
(“cGCP”); and
FDA review and approval of the NDA to permit commercial marketing of the product for particular indications for use in the U.S., which
must be updated annually and when significant changes are made.
The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our product
candidates will be granted on a timely basis, if at all. Prior to beginning the first clinical trial with a product candidate, we must submit an IND to the FDA.
An IND is a request for authorization from the FDA to administer an investigational new drug product to humans. The central focus of an IND submission
is on the general investigational plan and the protocol(s) for clinical studies. The IND also includes results of animal and in vitro studies assessing the
toxicology, pharmacokinetics, pharmacology, and pharmacodynamic characteristics of the product; chemistry, manufacturing, and controls information; and
any available human data or literature to support the use of the investigational product. An IND must become effective before human clinical trials may
begin. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises safety concerns or
questions about the proposed clinical trial. In such a case, the IND may be placed on clinical hold and the IND sponsor and the FDA must resolve any
outstanding concerns or questions before the clinical trial can begin. Submission of an IND therefore may or may not result in FDA authorization to begin a
clinical trial.
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Clinical trials involve the administration of the investigational product to human subjects under the supervision of qualified investigators in accordance
with cGCPs, which include the requirement that all research subjects provide their informed consent for their participation in any clinical study. Clinical
trials are conducted under protocols detailing, among other things, the objectives of the study, the parameters to be used in monitoring safety and the
effectiveness criteria to be evaluated. A separate submission to the existing IND must be made for each successive clinical trial conducted during product
development and for any subsequent protocol amendments. Furthermore, an independent IRB, for each site proposing to conduct the clinical trial, must
review and approve the plan for any clinical trial and its informed consent form before the clinical trial begins at that site, and must monitor the study until
completed. Regulatory authorities, the IRB or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects
are being exposed to an unacceptable health risk or that the trial is unlikely to meet its stated objectives. Some studies also include oversight by an
independent group of qualified experts organized by the clinical study sponsor, known as a data safety monitoring board, which provides authorization for
whether or not a study may move forward at designated check points based on access to certain data from the study and may halt the clinical trial if it
determines that there is an unacceptable safety risk for subjects or other grounds, such as no demonstration of efficacy. There are also requirements
governing the reporting of ongoing clinical studies and clinical study results to public registries.
For purposes of NDA approval, human clinical trials are typically conducted in three sequential phases that may overlap. Additionally, in certain instances,
a fourth phase, post approval, may be necessary or required.
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Phase 1. The drug product is initially introduced into healthy human subjects and tested for safety. In the case of some products for severe or
life-threatening diseases, the initial human testing is often conducted in patients.
Phase 2. The drug product is evaluated in a limited patient population to identify possible adverse effects and safety risks, to preliminarily
evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance, optimal dosage and dosing schedule.
Phase 3. Clinical trials are undertaken to further evaluate dosage, clinical efficacy, potency, and safety in an expanded patient population at
geographically dispersed clinical trial sites. These clinical trials are intended to establish the overall risk to benefit ratio of the product and
provide an adequate basis for product labeling.
Phase 4. In some cases, the FDA may require, or companies may voluntarily pursue, additional clinical trials after a product is approved to
gain more information about the product. Phase 4 studies may be required as a condition to approval of the NDA.
Phase 1, Phase 2 and Phase 3 testing may not be completed successfully within a specified period, if at all, and there can be no assurance that the data
collected will support FDA approval or licensure of the product. Concurrent with clinical trials, companies may complete additional animal studies and
develop additional information about the drug characteristics of the product candidate, and must finalize a process for manufacturing the product in
commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the
product candidate. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the product
candidate does not undergo unacceptable deterioration over its shelf life.
NDA Submission and Review by the FDA
Assuming successful completion of all required testing in accordance with all applicable regulatory requirements, the results of product development,
nonclinical studies and clinical trials are submitted to the FDA as part of an NDA requesting approval to market the product for one or more indications.
The NDA must include all relevant data available from pertinent preclinical and clinical studies, including negative or ambiguous results as well as positive
findings, together with detailed information relating to the product’s chemistry, manufacturing, controls, and proposed labeling, among other things. Data
can come from company-sponsored clinical studies intended to test the safety and effectiveness of a use of the product, or from a number of alternative
sources, including studies initiated by investigators. The submission of an NDA requires payment of a substantial user fee to the FDA, and the sponsor of
an approved NDA is also subject to annual product and establishment user fees. These fees are typically increased annually. A waiver of user fees may be
obtained under certain limited circumstances.
Within 60 days following submission of the application, the FDA reviews an NDA to determine if it is substantially complete before the agency accepts it
for filing. The FDA may refuse to file any NDA that it deems incomplete or not properly reviewable at the time of submission and may request additional
information. In this event, the NDA must be resubmitted with the additional information. Once an NDA has been filed, the FDA’s goal is to review the
application within ten months after it accepts the application for filing, or, if the application relates to an unmet medical need in a serious or life-threatening
indication, six months after the FDA accepts the application for filing. The review process is often significantly extended by FDA requests for additional
information or clarification. The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for the indication being
pursued, and the facility in which it is manufactured, processed, packed, or held meets standards designed to assure the product’s continued
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safety and effectiveness. The FDA may convene an advisory committee to provide clinical insight on application review questions. Before approving an
NDA, the FDA will typically 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 in compliance with cGMP requirements and adequate to assure consistent production of the
product within required specifications. Additionally, before approving an NDA, the FDA will typically inspect one or more clinical sites to assure
compliance with cGCP. If the FDA determines that the application, manufacturing process or manufacturing facilities are not acceptable, it will outline the
deficiencies in the submission and often will request additional testing or information. Notwithstanding the submission of any requested additional
information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.
The testing and approval process requires substantial time, effort and financial resources, and each may take several years to complete. The FDA may not grant
approval on a timely basis, or at all, and we may encounter difficulties or unanticipated costs in our efforts to secure necessary governmental approvals, which
could delay or preclude us from marketing our products. After the FDA evaluates an NDA and conducts inspections of manufacturing facilities where the
investigational product and/or our drug substance will be produced, the FDA may issue an approval letter or a Complete Response Letter. An approval letter
authorizes commercial marketing of the product with specific prescribing information for specific indications. A Complete Response Letter indicates that the
review cycle of the application is complete and the application is not ready for approval. A Complete Response Letter may request additional information or
clarification. The FDA may delay or refuse approval of an NDA if applicable regulatory criteria are not satisfied, require additional testing or information
and/or require post-marketing testing and surveillance to monitor safety or efficacy of a product.
If regulatory approval of a product is granted, such approval may entail limitations on the indicated uses for which such product may be marketed. For
example, the FDA may approve the NDA with a Risk Evaluation and Mitigation Strategy (“REMS”) to mitigate risks, which could include medication guides,
physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. The
FDA also may condition approval on, among other things, changes to proposed labeling or the development of adequate controls and specifications. Once
approved, the FDA may withdraw the product approval if compliance with pre- and post-marketing regulatory standards is not maintained or if problems occur
after the product reaches the marketplace. The FDA may require one or more Phase 4 post-market studies and surveillance to further assess and monitor the
product’s safety and effectiveness after commercialization, and may limit further marketing of the product based on the results of these post-marketing studies.
In addition, new government requirements, including those resulting from new legislation, may be established, or the FDA’s policies may change, which could
delay or prevent regulatory approval of its products under development.
A sponsor may seek approval of its product candidate under programs designed to accelerate the FDA’s review and approval of new drugs that meet certain
criteria. Specifically, new drug products are eligible for fast track designation if they are intended to treat a serious or life-threatening condition and
demonstrate the potential to address unmet medical needs for the condition. For a fast track product, the FDA may consider sections of the NDA for review
on a rolling basis before the complete application is submitted if relevant criteria are met. A fast track designated product candidate may also qualify for
priority review, under which the FDA sets the target date for FDA action on the NDA at six months after the FDA accepts the application for filing. Priority
review is granted when there is evidence that the proposed product would be a significant improvement in the safety or effectiveness of the treatment,
diagnosis, or prevention of a serious condition. If criteria are not met for priority review, the application is subject to the standard FDA review period of 10
months after FDA accepts the application for filing. Priority review designation does not change the scientific/medical standard for approval or the quality
of evidence necessary to support approval.
Under the accelerated approval program, the FDA may approve an NDA on the basis of either a surrogate endpoint that is reasonably likely to predict
clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect
on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or
lack of alternative treatments. Post-marketing studies or completion of ongoing studies after marketing approval are generally required to verify the
biologic’s clinical benefit in relationship to the surrogate endpoint or ultimate outcome in relationship to the clinical benefit. In addition, the U.S. Food and
Drug Administration Safety and Innovation Act, which was enacted and signed into law in 2012, established breakthrough therapy designation. A sponsor
may seek FDA designation of its product candidate as a breakthrough therapy if the product candidate is intended, alone or in combination with one or
more other drugs or biologics, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the therapy may
demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed
early in clinical development. Sponsors may request the FDA to designate a breakthrough therapy at the time of or any time after the submission of an
IND, but ideally before an end-of-phase 2 meeting with the FDA. If the FDA designates a breakthrough therapy, it may take actions appropriate to expedite
the development and review of the application, which may include holding meetings with the sponsor and the review team throughout the development of
the therapy; providing timely advice to, and interactive communication with, the sponsor regarding the development of the drug to ensure that the
development program to gather the nonclinical and clinical data necessary for approval is as efficient as practicable; involving senior managers and
experienced review staff, as appropriate, in a collaborative, cross-disciplinary review; assigning a cross-disciplinary project lead for the FDA review team
to facilitate an efficient review of the development program and to serve as a scientific liaison between the review team and the sponsor; and considering
alternative clinical trial designs when scientifically appropriate, which may result in smaller or more efficient clinical trials that require less time to
complete and may minimize the number of patients exposed to a potentially less efficacious treatment. Breakthrough designation also allows the sponsor to
file sections of the NDA for review on a rolling basis. We may seek designation as a breakthrough therapy for some or all of our product candidates. On
December 23, 2019, the FDA awarded us breakthrough therapy designation for Molgradex for the treatment of aPAP.
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Fast track designation, priority review and breakthrough therapy designation do not change the standards for approval but may expedite the development or
approval process.
The review and approval process with respect to our drug candidates may also be significantly delayed in the event of government shutdowns, if any.
Orphan Drug Status
Under the Orphan Drug Act, the FDA may grant orphan drug designation to drug candidates intended to treat a rare disease or condition, which is generally
a disease or condition that affects fewer than 200,000 individuals in the U.S., or more than 200,000 individuals in the U.S. and for which there is no
reasonable expectation that costs of research and development of the drug for the indication can be recovered by sales of the drug in the U.S. Orphan drug
designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the generic identity of the therapeutic agent and
its potential orphan use are disclosed publicly by the FDA. Although there may be some increased communication opportunities, orphan drug designation
does not convey any advantage in or shorten the duration of the regulatory review and approval process.
If a drug candidate that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the
product is entitled to orphan drug exclusivity, which means that the FDA may not approve any other applications, including a full NDA, to market the same
drug for the same indication for seven years, except in very limited circumstances, such as if the second applicant demonstrates the clinical superiority of
its product or if the FDA finds that the holder of the orphan drug exclusivity has not shown that it can assure the availability of sufficient quantities of the
orphan drug to meet the needs of patients with the disease or condition for which the drug was designated. Orphan drug exclusivity does not prevent the
FDA from approving a different drug for the same disease or condition, or the same drug for a different disease or condition. Among the other benefits of
orphan drug designation are tax credits for certain research and a waiver of the NDA application user fee.
Orphan drug exclusivity could block the approval of our drug candidates for seven years if a competitor obtains approval of the same product as defined by
the FDA or if our drug candidate is determined to be contained within the competitor’s product for the same indication or disease.
As in the U.S., designation as an orphan drug for the treatment of a specific indication in the EU, must be made before the application for marketing
authorization is made. Orphan drugs in Europe enjoy economic and marketing benefits, including up to 10 years of market exclusivity for the approved
indication unless another applicant can show that its product is safer, more effective or otherwise clinically superior to the orphan designated product.
The FDA and foreign regulators expect holders of exclusivity for orphan drugs to assure the availability of sufficient quantities of their orphan drugs to
meet the needs of patients. Failure to do so could result in the withdrawal of marketing exclusivity for the orphan drug.
Breakthrough Designation
In December 2019, the FDA granted the use of Molgradex for the treatment of aPAP program Breakthrough Therapy Designation which provides a process
for expediting the development and review of drugs that are intended to treat a serious condition and for which preliminary evidence indicates that the drug
may demonstrate substantial improvement over the available therapy.
GAIN Act Exclusivity for Antibiotics
In 2012, Congress passed legislation known as the Generating Antibiotic Incentives Now Act (the “GAIN Act”). This legislation is designed to encourage
the development of antibacterial and antifungal drug products that treat pathogens that cause serious and life-threatening infections. To that end, the new
law grants an additional five years of exclusivity upon the approval of an NDA for a drug product designated by FDA as a QIDP. Thus, for a QIDP with
Orphan Drug Designation, the periods of five-year exclusivity and seven-year orphan drug exclusivity, would become 12 years.
A QIDP is defined in the GAIN Act to mean “an antibacterial or antifungal drug for human use intended to treat serious or life-threatening infections,
including those caused by (1) an antibacterial or antifungal resistant pathogen, including novel or emerging infectious pathogens or (2) certain qualifying
pathogens.” A “qualifying pathogen” is a pathogen that has the potential to pose a serious threat to public health (such as resistant Gram-positive
pathogens, multi-drug resistant Gram-negative bacteria, multi-drug resistant tuberculosis, and C. difficile) and that is included in a list established and
maintained by the FDA. A drug sponsor may request the FDA to designate its product as a QIDP any time before the submission of an NDA. The FDA
must make a QIDP determination within 60 days of the designation request. A product designated as a QIDP will be granted priority review by the FDA
and can qualify for “fast track” status.
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The five year exclusivity extension under the GAIN Act for drug products designated by the FDA as QIDPs does not apply to: a supplement to an
application under FDCA Section 505(b) for any QIDP for which an extension is in effect or has expired; a subsequent application filed with respect to a
product approved by the FDA for a change that results in a new indication, route of administration, dosing schedule, dosage form, delivery system, delivery
device or strength; or a product that does not meet the definition of a QIDP under Section 505(g) based upon its approved uses.
Post-Approval Requirements
Any products manufactured or distributed by us pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including,
among other things, requirements relating to record keeping, reporting of adverse experiences, periodic reporting, distribution, and advertising and
promotion of the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims, are subject to
prior FDA review and approval. There also are continuing, annual user fee requirements for any marketed products and the establishments at which such
products are manufactured, as well as new application fees for supplemental applications with clinical data. Drug manufacturers and their subcontractors
are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and
certain state agencies for compliance with cGMP, which impose certain procedural and documentation requirements upon us and our third-party
manufacturers. Changes to the manufacturing process are strictly regulated and, depending on the significance of the change, may require prior FDA
approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting
requirements upon us and any third-party manufacturers that we may decide to use. Accordingly, manufacturers must continue to expend time, money and
effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance. We cannot be certain
that we or our present or future suppliers will be able to comply with the cGMP regulations and other FDA regulatory requirements. If our present or future
suppliers are not able to comply with these requirements, the FDA may, among other things, halt our clinical trials, require us to recall a product from
distribution, or withdraw approval of the NDA.
Future FDA and state inspections may identify compliance issues at our facilities or at the facilities of our contract manufacturers that may disrupt
production or distribution, or require substantial resources to correct. In addition, discovery of previously unknown problems with a product or the failure
to comply with applicable requirements may result in restrictions on a product, manufacturer or holder of an approved NDA, including withdrawal or recall
of the product from the market or other voluntary, FDA-initiated or judicial action that could delay or prohibit further marketing.
The FDA may withdraw approval of an NDA if compliance with regulatory requirements and standards is not maintained or if problems occur after the
product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or
frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new
safety information; imposition of post-market studies or clinical studies to assess new safety risks; or imposition of distribution restrictions or other
restrictions under a REMS program. Other potential consequences include, among other things:
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restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;
fines, warning letters or holds on post-approval clinical studies;
refusal of the FDA to approve pending applications or supplements to approved applications, or suspension or revocation of product license
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 closely regulates the marketing, labeling, advertising and promotion of drugs and biologics. A company can make only those claims relating to
safety and efficacy that are approved by the FDA and in accordance with the provisions of the approved label. The FDA and other agencies actively
enforce the laws and regulations prohibiting the promotion of off-label uses. Failure to comply with these requirements can result in, among other things,
adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties. Physicians may prescribe legally available products for
uses that are not described in the product’s labeling and that differ from those tested by us and approved by the FDA. Such off-label uses are common
across medical specialties. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does
not regulate the behavior of physicians in their choice of treatments. The FDA does, however, restrict manufacturer’s communications on the subject of off-
label use of their products.
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Government Regulation of Combination Products
Our products under development will be regulated as combination products, which means that they are comprised of two or more different components
that, if marketed individually, would be subject to different regulatory paths and would require approval of independent marketing applications by the FDA.
A combination product, however, is assigned to a center within the FDA that will have primary jurisdiction over its regulation on a determination of the
combination product’s primary mode of action, which is the single mode of action that provides the most important therapeutic action. We believe our
product candidates include both a drug and medical device component, and will be regulated as a drug, subject to the review of the FDA’s Center for Drug
Evaluation and Research which will have primary jurisdiction over premarket development and approval. The FDA’s Center for Devices and Radiological
Health will provide support and review of the inhaler component of our product candidates.
Other Healthcare Laws and Compliance Requirements
Our sales, promotion, medical education, clinical research and other activities following product approval will be subject to regulation by numerous
regulatory and law enforcement authorities in the U.S. in addition to the FDA, including potentially the Federal Trade Commission, the Department of
Justice, the Centers for Medicare and Medicaid Services, other divisions of the U.S. Department of Health and Human Services and state and local
governments. Our promotional and scientific/educational programs and interactions with healthcare professionals must comply with the federal Anti-
Kickback Statute, the civil False Claims Act (“FCA”), physician payment transparency laws, privacy laws, security laws, and additional federal and state
laws similar to the foregoing.
The federal Anti-Kickback Statute prohibits, among other things, the knowing and willing, direct or indirect offer, receipt, solicitation or payment of
remuneration in exchange for or to induce the referral of patients, including the purchase, order or lease of any good, facility, item or service that would be paid
for in whole or part by Medicare, Medicaid or other federal health care programs. Remuneration has been broadly defined to include anything of value,
including cash, improper discounts, and free or reduced-price items and services. The federal Anti-Kickback Statute has been interpreted to apply to
arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, formulary managers, and beneficiaries on the other. Although
there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are
drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to
increased scrutiny and review if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory
exception or regulatory safe harbor does not make the conduct per se illegal under the federal Anti-Kickback Statute. Instead, the legality of the arrangement
will be evaluated on a case-by-case basis based on a cumulative review of all its facts and circumstances. Several courts have interpreted the statute’s intent
requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the federal
Anti-Kickback Statute has been violated. The government has enforced the federal Anti-Kickback Statute to reach large settlements with healthcare companies
based on sham research or consulting and other financial arrangements with physicians. Further, a person or entity does not need to have actual knowledge of
the statute or specific intent to violate it to have committed a violation. In addition, the government may assert that a claim including items or services resulting
from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA. Many states have similar laws that apply
to their state health care programs as well as private payers.
Federal false claims and false statement laws, including the FCA, impose liability on persons and/or entities that, among other things, knowingly present or
cause to be presented claims that are false or fraudulent or not provided as claimed for payment or approval by a federal health care program. The FCA has
been used to prosecute persons or entities that “cause” the submission of claims for payment that are inaccurate or fraudulent, by, for example, providing
inaccurate billing or coding information to customers, promoting a product off-label, submitting claims for services not provided as claimed, or submitting
claims for services that were provided but not medically necessary. Actions under the FCA may be brought by the Attorney General or as a qui tam action by a
private individual, or whistleblower, in the name of the government. Violations of the FCA can result in significant monetary penalties and treble damages. The
federal government is using the FCA, and the accompanying threat of significant liability, in its investigation and prosecution of pharmaceutical and
biotechnology companies throughout the country, for example, in connection with the promotion of products for unapproved uses and other illegal sales and
marketing practices. The government has obtained multi-million and multi-billion dollar settlements under the FCA in addition to individual criminal
convictions under applicable criminal statutes. In addition, certain companies that were found to be in violation of the FCA have been forced to implement
extensive corrective action plans, and have often become subject to consent decrees or corporate integrity agreements, restricting the manner in which they
conduct their business.
The federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) created additional federal criminal statutes that prohibit, among other
things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party
payers; knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in
connection with the delivery of or payment for healthcare benefits, items or services; and willfully obstructing a criminal investigation of a healthcare
offense. Like the federal Anti-Kickback Statute, the Affordable Care Act amended the intent standard for certain healthcare fraud statutes under HIPAA
such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
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Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources to
investigating healthcare providers’ and manufacturers’ compliance with applicable fraud and abuse laws. Also, many states have similar fraud and abuse
statutes or regulations that may be broader in scope and may apply regardless of payer, in addition to items and services reimbursed under Medicaid and
other state programs. Additionally, to the extent that our products, once commercialized, are sold in a foreign country, we may be subject to similar foreign
laws.
In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians and other healthcare providers. The
Physician Payments Sunshine Act, known as “Open Payments” and implemented as part of the Patient Protection and Affordable Care Act, as amended by
the Health Care and Education Reconciliation Act, or collectively, the Affordable Care Act, among other things, imposed new reporting requirements on
certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health
Insurance Program, with specific exceptions, for payments or other transfers of value made by them to physicians and teaching hospitals, as well as
ownership and investment interests held by physicians and their immediate family members. Covered manufacturers are required to collect and report
detailed payment data and submit legal attestation to the accuracy of such data to the government each year. Failure to submit required information may
result in civil monetary penalties of up to an aggregate of $179,495 per year (or up to an aggregate of $1,176,638 per year for “knowing failures”), for all
payments, transfers of value or ownership or investment interests that are not timely, accurately and completely reported in an annual submission. On
October 24, 2018, President Trump signed into law the “Substance Use-Disorder Prevention that Promoted Opioid Recovery and Treatment for Patients
and Communities Act” which in part (under a provision entitled “Fighting the Opioid Epidemic with Sunshine”) extends the reporting and transparency
requirements under Open Payments to physician assistants, nurse practitioners, and other mid-level practitioners (with reporting requirements going into
effect in 2022 for payments made in 2021). Additionally, entities that do not comply with mandatory reporting requirements may be subject to a corporate
integrity agreement. Certain states also mandate implementation of commercial compliance programs, impose restrictions on covered manufacturers’
marketing practices and/or require the tracking and reporting of gifts, compensation and other remuneration to physicians and other healthcare
professionals.
We are also subject to data privacy and security regulation by the federal government and the states in which we conduct our business and the EU with the
General Data Protection Regulation rules which became effective in May 2018. HIPAA, as amended by the Health Information Technology and Clinical
Health Act (“HITECH”), and their respective implementing regulations, imposes specified requirements on certain health care providers, plans and
clearinghouses (collectively, “covered entities”) and their “business associates,” relating to the privacy, security and transmission of individually
identifiable health information. Among other things, HITECH makes HIPAA’s security standards directly applicable to “business associates,” defined as
independent contractors or agents of covered entities that create, receive, maintain or transmit protected health information in connection with providing a
service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business
associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to
enforce HIPAA and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, certain states have their own laws that govern
the privacy and security of health information in certain circumstances, many of which differ from each other and/or HIPAA in significant ways and may
not have the same effect, thus complicating compliance efforts.
If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to them, we may be subject to penalties,
including, without limitation, civil and criminal penalties, damages, fines, disgorgement, the curtailment or restructuring of our operations, exclusion from
participation in federal and state healthcare programs, imprisonment, contractual damages, reputational harm, and diminished profits and future earnings,
any of which could adversely affect our ability to operate our business and our financial results.
In addition to the foregoing health care laws, we are also subject to the U.S. Foreign Corrupt Practices Act (“FCPA”) and similar worldwide anti-bribery
laws, which generally prohibit companies and their intermediaries from making improper payments to government officials or private-sector recipients for
the purpose of obtaining or retaining business. We have adopted an anti-corruption policy which mandates compliance with the FCPA and similar anti-
bribery laws applicable to our business throughout the world. However, we cannot assure that such a policy or procedures implemented to enforce such a
policy will protect against intentional, reckless or negligent acts committed by our employees, distributors, partners, collaborators or agents. Violations of
these laws, or allegations of such violations, could result in fines, penalties or prosecution and have a negative impact on our business, results of operations,
and reputation.
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Coverage and Reimbursement
Sales of pharmaceutical products depend significantly on the extent to which coverage and adequate reimbursement are provided by third-party payers.
Third-party payers include state and federal government health care programs, managed care providers, private health insurers and other organizations.
Although we currently believe that third-party payers will provide coverage and reimbursement for our product candidates, if approved, we cannot be
certain of this. Third-party payers are increasingly challenging the price, examining the cost-effectiveness, and reducing reimbursement for medical
products and services. In addition, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. The U.S.
government, state legislatures and foreign governments have continued implementing cost containment programs, including price controls, restrictions on
coverage and reimbursement and requirements for substitution of generic products. Adoption of price controls and cost containment measures, and
adoption of more restrictive policies in jurisdictions with existing controls and measures, could limit our net revenue and results. We may need to conduct
expensive clinical studies to demonstrate the comparative cost-effectiveness of our products. The product candidates that we develop may not be
considered cost-effective and thus may not be covered or sufficiently reimbursed. It is time consuming and expensive for third-party payers to seek
coverage and reimbursement. Thus, one payer’s decision to provide coverage and adequate reimbursement for a product does not assure that another payer
will provide coverage or that the reimbursement levels will be adequate. Moreover, a payer’s decision to provide coverage for a drug product does not
imply that an adequate reimbursement rate will be approved. Reimbursement may not be available or sufficient to allow third-party payers to sell our
products on a competitive and profitable basis.
Healthcare Reform
The U.S. and some foreign jurisdictions are considering or have enacted a number of legislative and regulatory proposals to change the healthcare system
in ways that could materially affect our ability to sell our products profitably. Among policy makers and payers in the U.S. and elsewhere, there is
significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding
access. In the U.S., the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative
initiatives.
By way of example, in March 2010, the Affordable Care Act was signed into law, intended to broaden access to health insurance, reduce or constrain the
growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for the healthcare and health insurance
industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Among the provisions of the Affordable Care Act
of importance to our potential drug candidates are:
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an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents, apportioned
among these entities according to their market share in certain government healthcare programs;
an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13.0% of the
average manufacturer price for branded and generic drugs, respectively;
a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are
inhaled, infused, instilled, implanted or injected;
a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off
negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for a manufacturer’s
outpatient drugs to be covered under Medicare Part D;
extension of a manufacturer’s Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care
organizations;
expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional
individuals and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the federal poverty
level, thereby potentially increasing a manufacturer’s Medicaid rebate liability;
expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program; and
a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness
research, along with funding for such research.
In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. These changes include, among others,
the Budget Control Act of 2011, which mandates aggregate reductions to Medicare payments to providers of up to 2% per fiscal year effective April 1,
2013, and due to subsequent legislative amendments, will remain in effect through 2029 unless additional Congressional action is taken. In January 2013,
President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several
providers, including hospitals and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to
providers from three to five years. These laws may result in additional reductions in Medicare and other healthcare funding, which could have a material
adverse effect on customers for our product candidates, if approved, and, accordingly, our financial operations.
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There have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, and we expect additional challenges and amendments
in the future. The Trump Administration and the U.S. Congress may take further action regarding the Affordable Care Act, including, but not limited to,
repeal or replacement. On December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the District Court ruling that the individual mandate
was unconstitutional and remanded the case to the District Court to determine whether the remaining provisions of the ACA are invalid. It is unclear how
this decision, subsequent appeals, and other efforts to repeal and replace the ACA will impact the healthcare industry or our business operations. Any
reduction in reimbursement from Medicare or other government-funded programs may result in a similar reduction in payments from private payers. The
implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or
commercialize our drugs.
Foreign Regulation
In addition to regulations in the U.S., we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of
our products to the extent we choose to develop or sell any products outside of the U.S. The approval process varies from country to country and the time
may be longer or shorter than that required to obtain FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing
and reimbursement vary greatly from country to country.
Intellectual Property
We strive to protect the proprietary technology that we believe is important to our business, including our product candidates and our processes. We seek
patent protection in the U.S. and internationally for our products, their methods of use and processes of manufacture and any other technology to which we
have rights, as appropriate, such as device exclusivity. We also rely on trade secrets that may be important to the development of our business.
We own issued patents and additional pending patent applications worldwide for a proprietary formulation of AeroVanc. The patents and pending
applications are derived from a PCT application (Pub. No. WO2012159103) entitled “Dry Powder Vancomycin Compositions and Associated Methods.” In
February 2017, the United States Patent and Trademark Office issued United States Patent No. 9,572,774 for “Dry Powder Vancomycin Compositions and
Associated Methods” which will provide key intellectual property protection in the U.S. for the AeroVanc program and will expire no earlier than 2032.
This affords us important composition of matter protection for our AeroVanc program in the U.S., the largest market for the product, and is a key
component of our market protection strategy which also includes Orphan Drug and QIDP protection. We also have corresponding patent applications for
AeroVanc in different stages of prosecution in other key markets throughout the world. As of December 31, 2019, patents have issued in the U.S., Canada,
Australia, China, Israel, Japan, Mexico, New Zealand, South Korea and Singapore. As of December 31, 2019, we have patent applications pending in the
U.S., Argentina, Brazil, Europe, Hong Kong and India.
We have pending patent applications and issued patents in the U.S. and other countries covering the formulation of AeroVanc. However, these patents may
not provide us with significant competitive advantages, because the validity or enforceability of the patents may be challenged and, if instituted, one or
more of the challenges may be successful. Patents may be challenged in the U.S. under post-grant review proceedings, inter partes re-examination, ex parte
re-examination, or challenges in district court. Patents issued in foreign jurisdictions may be subjected to comparable proceedings lodged in various foreign
patent offices, or courts. These proceedings could result in either loss of the patent or loss or reduction in the scope of one or more of the claims of the
patent. Even if a patent issues and is held valid and enforceable, competitors may be able to design around our patents, such as by using pre-existing or
newly developed technology, in which case competitors may not infringe our issued claims and may be able to market and sell products that compete
directly with us before and after our patents expire.
Our success will, in part, depend on the ability to obtain and maintain patent and other proprietary rights in commercially important technology, inventions
and know-how related to our business, the validity and enforceability of our patents, the continued confidentiality of our trade secrets as well as our ability
to operate without infringing the valid and enforceable patents and proprietary rights of third parties. We also rely on continuing technological innovation
and in-licensing opportunities to develop and maintain our proprietary position.
We cannot be sure patents will be granted with respect to any of our pending patent applications or with respect to any patent applications we may own or
license in the future, nor can we be sure that any of our existing patents or any patents we may own or license in the future will be useful in protecting our
technology and products. For this and more comprehensive risks related to our intellectual property, please see “Risk Factors — Risks Related to Our
Intellectual Property.”
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Trade Secrets
In addition to patents, we rely on trade secrets and know-how to develop and maintain our competitive position. For example, significant aspects of our
processes and proprietary technology portfolio are based on unpatented trade secrets and know-how. Trade secrets and know-how can be difficult to
protect. We seek to protect our proprietary technology and processes, in part, by confidentiality agreements and invention assignment agreements with our
employees, consultants, scientific advisors, contractors and commercial partners. These agreements are designed to protect the proprietary information and,
in the case of the invention assignment agreements, to grant us ownership of technologies that are developed through a relationship with a third party.
While we have confidence in our key individuals, consultants, partner organizations and systems, agreements or security measures may be breached, and
there may not be adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by
competitors. To the extent that our contractors 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.
Competition
The pharmaceutical industry is highly competitive and subject to continuous technological change. Our potential competitors include large pharmaceutical
and biotechnology companies, specialty pharmaceutical and generic drug companies, academic institutions, government agencies and research institutions.
We believe that key competitive factors affecting the commercial success of our product candidates will be efficacy, safety and tolerability profile,
reliability, convenience of dosing, price and reimbursement. Many of our potential competitors, either alone or with their collaboration partners have
substantially greater financial, technical and human resources than us, and significantly greater experience in the discovery and development of product
candidates, manufacturing, obtaining FDA and other regulatory approvals of products and the commercialization of those products. Accordingly, our
competitors may be faster and more successful in obtaining FDA approval for therapies and achieving widespread market acceptance. Mergers and
acquisitions in the pharmaceutical and biotechnology industry may result in even more resources being concentrated among a smaller number of very
capable competitors. We anticipate facing intense and increasing competition as new drugs enter the market and advanced technologies become available.
Our competitors’ products may be more effective, or more effectively marketed and sold, than any product candidate we may commercialize and may
render our therapies obsolete or non-competitive before we can recover development and commercialization expenses.
We are not aware of any other companies developing an inhaled form of GM-CSF. A glycosylated GM-CSF product, sargramostim (Leukine), is available
on the market in the U.S., intended for IV or subcutaneous delivery in patients with neutropenia following cancer chemotherapy. Leukine has not been
approved for the treatment of aPAP or any other acute or chronic lung disease but may be administered off-label. The drug substance in Leukine,
sargramostim, has been used in a nonclinical research project conducted by NIH/TRND in collaboration with the University of Cincinnati College of
Medicine on the potential application of inhaled GM-CSF as a treatment for aPAP. No clinical studies have been conducted to date under this collaboration
project. We are aware of a multicenter clinical study of inhaled Leukine, using a standard commercially available nebulizer, which is currently ongoing in
Japan, conducted by a consortium of independent clinical investigators. It is not known to us if this study, together with other possibly available related
clinical or nonclinical information, may be, or will be, used to support a potential new product approval in Japan. If such a new product would be approved
and launched in Japan, we believe it has the potential to present a material competitive threat to the commercial success of Molgradex in Japan. In addition,
in November 2018, Partner Therapeutics, Inc., a commercial biotechnology company, was granted Orphan Drug Designation to Leukine® for the treatment
of PAP by the FDA.
We are not aware of any other companies developing inhaled forms of vancomycin. There are several inhaled antibiotics on the market or in development,
but we are not aware of any other inhaled antibiotic product that would be specifically developed for the treatment of MRSA infection. Certain inhaled
antibiotics in development, including levofloxacin, and ciprofloxacin inhalation formulations, may possess some level of in vitro or in vivo activity against
MRSA, even though the compounds are not generally considered MRSA-antibiotics. It is therefore possible that such products, if approved, may present a
competitive threat to AeroVanc. A combination product containing fosfomycin and tobramycin for inhalation (“FTI”) was developed by Gilead Sciences
(Foster City, CA), and shown in a Phase 2 study to possess activity against Gram-negative and Gram-positive bacteria, including MRSA. Gilead Sciences
terminated the development of the product, and licensed it to CURx Pharmaceuticals (San Diego, CA) in February 2014. No clinical studies on FTI have
been initiated by CURx Pharmaceuticals. If FTI is developed, and approved, for the treatment of MRSA lung infection in CF, we believe it has the potential
to present a material competitive threat to the commercial success of AeroVanc.
Many small and large pharmaceutical companies have intravenously or orally administered MRSA-antibiotics on the market, and/or in development.
Whereas such antibiotics are important in the treatment of many acute and chronic MRSA-infections, such as skin and soft tissue infections, pneumonia, or
endocarditis, we do not believe these products are practical or sufficiently efficacious and/or safe for long-term management of chronic MRSA lung
infection in individuals living with CF. Therefore, we do not believe these products and product candidates are a material competitive threat to the
commercial success of AeroVanc.
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Employees
As of March 12, 2020, we had 39 full-time employees and one part-time employee, as well as several full-time or part-time consultants. None of our
employees are represented by a labor union or covered by a collective bargaining agreement. We consider our relationship with our employees to be good.
Acquisition of Serendex Pharmaceuticals
On July 15, 2016, we completed an acquisition (the “Serendex Acquisition”) through a Business Transfer Agreement, dated May 13, 2016 (the “BTA”)
under which we acquired certain assets, including Molgradex (an inhalation formulation of recombinant human GM-CSF for the treatment of aPAP),
liabilities, employees, and subsidiaries of Serendex Pharmaceuticals A/S (“Serendex”), a public limited company organized under the laws of Denmark.
The purchase price consists of 1,965,400 shares of our common stock and $21.5 million of contingent cash consideration based upon the achievement of
certain milestones (the “Milestone Payments”). On May 27, 2019, we entered into an Amendment (the “BTA Amendment”) to the BTA between Aravas,
our wholly owned subsidiary, and Serenova A/S, formerly Serendex Pharmaceuticals A/S (“Serenova”). The BTA Amendment modifies the BTA
Agreement to provide for the issuance of 1,105,216 shares of our common stock (the “Settlement Shares”), which represented the equivalent of $12.5
million in shares of our common stock based on the volume weighted-average trading price of our common stock for the ten trading days ending May 23,
2019, within five business days of the effective date of the BTA Amendment in lieu of the Milestone Payments. The BTA Amendment further provides that
Serenova will not sell, contract to sell, or otherwise transfer or dispose of the Settlement Shares until the earlier of (i) marketing approval of our Molgradex
product by the FDA or (ii) twelve months following the date of the BTA Amendment.
2017 Merger and Corporate Information
On April 27, 2017, Savara completed its business combination through a reverse merger with Mast Therapeutics, Inc. (“Mast”), a publicly held company, in
accordance with the terms of the Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), dated January 6, 2017 (the “Merger”). In
connection with the Merger, Mast changed its name to Savara Inc. Pre-Merger Savara was formed as a corporation in Delaware in 2007. Mast was
originally incorporated in Delaware in December 1995.
Our website is located at http://www.savarapharma.com. Information found on our website is not incorporated by reference into this annual report on Form
10-K. We make our filings with the U.S. Securities and Exchange Commission (“SEC”) including our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and any amendments and exhibits to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (“Exchange Act”), available free of charge on or through our website, as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the SEC. The SEC maintains a website that contains reports, proxy and information statements,
and other information regarding our filings at http://www.sec.gov.
Trademarks
“Savara Inc.,” the Savara logo, “AeroVanc,” and “Molgradex” are unregistered trademarks of Savara Inc. or its subsidiaries in the U.S. and other
jurisdictions. Other third-party logos and product/trade names are registered trademarks or trade names of their respective companies. Use or display by us
of other parties’ trademarks, service marks, trade names, trade dress or products is not intended to and does not imply a relationship with, or endorsements
or sponsorship of, us by the trademark, service mark, trade name, trade dress or product owners.
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Item 1A. Risk Factors.
Investment in our common stock involves a high degree of risk and uncertainty. Our business, operating results, growth prospects and financial condition
are subject to various risks, many of which are not exclusively within our control, that may cause actual performance to differ materially from historical or
projected future performance. We urge investors to consider carefully the risks described below, together with all of the information in this report and our
other public filings, before making investment decisions regarding our securities. Each of these risk factors, as well as additional risks not presently known
to us or that we currently deem immaterial, could adversely affect our business, operating results, growth prospects or financial condition, as well as the
trading price of our common stock, in which case you may lose all or part of your investment.
Risks Related to Our Capital Requirements and Financial Condition
We have incurred significant losses since inception and expect that we will continue to incur losses for the foreseeable future, which makes it difficult
to assess our future viability.
We are a clinical development-stage biopharmaceutical company and we have not been profitable since we commenced operations and may not ever
achieve profitability. In addition, we have limited history as an organization and have not yet demonstrated an ability to successfully overcome many of the
risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical industry. Drug
development is a highly speculative undertaking and involves a substantial degree of risk. To date, we have not obtained any regulatory approvals for any
of our product candidates, commercialized any of our product candidates, or generated any product revenue. We have devoted significant resources to
research and development and other expenses related to our ongoing clinical trials and operations, in addition to acquiring product candidates.
For the year ended December 31, 2019, we incurred a net loss of $78.2 million, and net cash used in operating activities was $45.1 million. At December
31, 2019, our cash, cash equivalents and short-term investment securities were $121.8 million, and working capital was $113.2 million. At December 31,
2019, we had an accumulated deficit of $207.9 million. We expect to continue to incur substantial operating losses for the next several years as we seek to
advance our product candidates through clinical development, global regulatory approvals, and commercialization. No revenue from operations will likely
be available until, and unless, one of our product candidates is approved by the FDA or another regulatory agency and successfully marketed, or we enter
into an arrangement that provides for licensing revenue or other partnering-related funding, outcomes which we may not achieve.
We will require additional financing to obtain regulatory approval for Molgradex and AeroVanc, and a failure to obtain this necessary capital when
needed on acceptable terms, or at all, could force us to delay, limit, reduce, or terminate our product development efforts or other operations.
Since our Aravas subsidiary was formed in 2007, most of our resources have been dedicated to the development and acquisition of our product candidates,
Molgradex and AeroVanc. Under our current operating plan, we believe that our existing capital resources will be sufficient to fund our planned operations
into 2022. However, we may raise additional capital, including through our “at the market offering” program to fund new studies, including an additional
Phase 3 for Molgradex in aPAP, programs, or acquisitions, or to address changes in our existing development programs. We cannot estimate with
reasonable certainty the actual amounts necessary to successfully complete the development and commercialization of our product candidates and there is
no certainty that we will be able to raise the necessary capital on reasonable terms or at all.
Our capital requirements for the foreseeable future will depend in large part on, and could increase significantly as a result of, our expenditures on our
development programs. Future expenditures on our development programs are subject to many uncertainties, and will depend on, and could increase
significantly as a result of, many factors, including:
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the number, size, complexity, results, and timing of our drug development programs;
the timing and terms of any collaborative or other strategic arrangement that we may establish;
the number of clinical and nonclinical studies necessary to demonstrate acceptable evidence of the safety and efficacy of our product
candidates;
changes in standards of care which could increase the size and complexity of our clinical studies;
the number of patients who participate, the rate of enrollment, and the ratio of randomized to evaluable patients in each clinical study;
the ability to locate patients to participate in a study given the limited number of patients available for orphan or ultra-orphan indications;
the number and location of sites and the rate of site initiation in each study;
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the duration of patient treatment and follow-up;
the potential for additional safety monitoring or other post-marketing studies that may be requested by regulatory agencies;
the time and cost to manufacture clinical trial material and commercial product, including process development and scale-up activities, and to
conduct stability studies, which can last several years;
the degree of difficulty and cost involved in securing alternate manufacturers or suppliers of drug product, components, or delivery devices,
as necessary to meet FDA requirements and/or commercial demand;
the costs, requirements, timing of, and the ability to, secure regulatory approvals;
the extent to which we increase our workforce and the costs involved in recruiting, training, and incentivizing new employees;
the costs related to developing, acquiring, and/or contracting for sales, marketing, and distribution capabilities, supply chain management
capabilities, and regulatory compliance capabilities, if we obtain regulatory approval for a product candidate and commercialize it without a
partner;
the costs involved in evaluating competing technologies and market developments or the loss in sales in case of such competition; and
the costs involved in establishing, enforcing, or defending patent claims and other proprietary rights.
Additional capital may not be available when we need it, on terms that are acceptable to us or at all. If adequate funds are not available to us on a timely
basis, we will be required to delay, limit, reduce, or terminate our establishment of sales and marketing, manufacturing or distribution capabilities,
development activities, other activities that may be necessary to commercialize our product candidates, or conduct preclinical or clinical studies.
If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances, or licensing arrangements with
third parties, we may have to relinquish certain valuable rights to our product candidates, technologies, future revenue streams, or research programs or
grant licenses on terms that may not be favorable to us. If we raise additional capital through public or private equity offerings, the ownership interest of
our stockholders will be diluted and the terms of any new equity securities may have preferential rights over our common stock. In particular, due to the
price per share of our common stock, any sale of our equity securities to raise significant capital would result in substantial ownership dilution to our
stockholders. If we raise additional capital through debt financing, it may be subject to covenants limiting or restricting our ability to take specific actions,
such as incurring additional debt or making capital expenditures, or subject to specified financial ratios, any of which could restrict our ability to develop
and commercialize our product candidates or operate as a business.
Any future acquisitions that we make could disrupt our business and harm our financial condition.
We expect to evaluate, from time to time, potential strategic acquisitions of complementary businesses, products, or technologies. In addition, we expect to
evaluate joint ventures, licensing opportunities, and other collaborative projects. We may not be able to identify appropriate acquisition candidates or
strategic partners, or successfully negotiate, finance, or integrate acquisitions of any businesses, products, or technologies. Furthermore, the integration of
any acquisition and management of any collaborative project may divert our management’s time and resources from our core business and disrupt our
operations. Any cash acquisition we pursue would diminish the funds otherwise available to us for other uses. Any acquisition using our stock would dilute
our stockholders’ ownership interests.
If we engage in acquisitions of companies, products or technologies in order to execute our business strategy, we may need to raise additional capital. We
may raise additional capital in the future through one or more financing vehicles that may be available to us including (i) new collaborative agreements; (ii)
expansions or revisions to existing collaborative relationships; (iii) private financings; (iv) other equity or debt financings; (v) monetizing assets; and/or
(vi) the public offering of securities.
If we are required to raise additional capital in the future, it may not be available on favorable financing terms within the time required, or at all. If
additional capital is not available on favorable terms when needed, we will be required to raise capital on adverse terms or significantly reduce operating
expenses through the restructuring of our operations or deferral of strategic business initiatives. If we raise additional capital through a public offering of
securities or equity, a substantial number of additional shares may be issued, which may negatively affect our stock price and these additional shares will
dilute the ownership interest of our current investors.
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Our loan agreement contains covenants which may adversely impact our business; the failure to comply with such covenants could cause our
outstanding debt to become immediately payable.
On April 28, 2017, we entered into a Loan and Security Agreement, as subsequently amended on October 31, 2017, December 4, 2018, and January 31,
2020 between us and Aravas, as co-borrowers, and Silicon Valley Bank (the “Amended Loan Agreement”). The Amended Loan Agreement includes a
number of restrictive covenants, including restrictions on incurring additional debt, making investments, granting liens, disposing of assets, paying
dividends, and redeeming or repurchasing capital stock, subject to certain exceptions. Collectively, these covenants could constrain our ability to grow our
business through acquisitions or engage in other transactions. In addition, the Amended Loan Agreement includes covenants requiring, among other things,
that we provide financial statements, comply with all laws, pay all taxes, and maintain insurance and the satisfaction of an equity-based milestone. If we are
not able to comply with these covenants, the outstanding loans under the Amended Loan Agreement could become immediately due and payable and
would have a material adverse effect on our liquidity, financial condition, operating results, business, and prospects and cause the price of our common
stock to decline.
We have significant IPR&D and future impairment of IPR&D may have a significant adverse impact on our future financial condition and results of
operations. Our goodwill was fully impaired during the year ended December 31, 2019.
As of December 31, 2019, we had IPR&D of approximately $11.1 million. These intangible assets have been previously impaired and remain subject to
additional impairment analyses whenever an event or change in circumstances indicates the carrying amount of such an asset may not be recoverable. We
test our goodwill, if any, and IPR&D for impairment annually, or more frequently if an event or change in circumstances indicates that the asset may be
impaired. If an impairment is identified, we would be required to record an impairment charge with respect to the impaired asset to our consolidated
statements of operations and comprehensive loss. A significant impairment charge could have a material negative impact on our financial condition and
results of operations. We will continue to evaluate our intangible assets for potential impairment in accordance with our accounting policies. For instance,
we determined that a triggering event occurred during the second and fourth quarter of 2019. In each instance, our stock price experienced significant
declines requiring the impairment testing of our goodwill which resulted in an impairment charge of $7.4 million in the second quarter of 2019 and $19.4
million in the fourth quarters of 2019, reducing the carrying value of our goodwill to its fair value, which was determined to be zero. (See Note 2 of the
consolidated financial statements).
Events giving rise to impairment are difficult to predict and are an inherent risk in the pharmaceutical industry. Some of the potential risks that could result
in impairment of our goodwill and IPR&D include negative clinical study results, adverse regulatory developments, delay or failure to obtain regulatory
approval, additional development costs, changes in the manner of our use or development of our product candidates, competition, earlier than expected loss
of exclusivity, pricing pressures, higher operating costs, changes in tax laws, prices that third parties are willing to pay for our IPR&D or similar assets in
an arm’s-length transaction being less than the carrying value of our IPR&D, and other market and economic environment changes or trends. Events or
changes in circumstances may lead to significant impairment charges on our goodwill, if any, and/or IPR&D in the future, which could materially adversely
affect our financial condition and results of operations.
Risks Related to Our Business Strategy and Operations
We are substantially dependent upon the clinical, regulatory, and commercial success of our product candidates, Molgradex and AeroVanc. Clinical
drug development involves a lengthy and expensive process with an uncertain outcome, results of earlier studies and trials may not be predictive of
future trial results, and our clinical trials may fail to adequately demonstrate to the satisfaction of regulatory authorities the safety and efficacy of our
product candidates.
The success of our business is dependent on our ability to advance the clinical development of Molgradex for the treatment of patients with aPAP, treatment
of patients with NTM lung infection, and its expansion into NTM lung infection with people living with CF, and AeroVanc for the treatment of MRSA
infection in the lungs of CF patients.
The topline results of the Molgradex Phase 3 clinical study for the treatment of aPAP, designated as IMPALA, were announced on June 12, 2019. The study
did not meet its primary endpoint of alveolar-arterial oxygen gradient (“A-aDO2”) compared to placebo. The continuous treatment arm (Molgradex 300 µg
administered once daily continuously over 24 weeks) did show a 12.1 mmHG improvement which is similar to what has been observed in previously
published studies, but a larger-than-expected placebo effect was also seen (8.8 mmHg improvement). However, results from IMPALA did show statistically
significant improvement in two secondary endpoints: The St. George’s Respiratory Questionnaire (“SGRQ”) and diffusing capacity of the lungs for carbon
monoxide (“DLCO”). Two other secondary endpoints were numerically in favor of the continuous dosing arm of Molgradex but were not statistically
significant (six-minute walk distance and time to whole lung lavage), while adverse event frequencies were similar between the treatment arms and
placebo.
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On October 1, 2019, we received a written response from the FDA in connection with a Type C meeting regarding the Molgradex development program for
aPAP and results from the IMPALA study in which the FDA indicated that the data provided in the briefing package for the Type C meeting did not
provide sufficient evidence of efficacy and safety.
On December 23, 2019, the FDA granted us Breakthrough Therapy designation for Molgradex for the treatment of aPAP, a process designed to expedite the
development and review of drugs that are intended to treat a serious condition and for which preliminary clinical evidence indicates that the drug may
demonstrate substantial improvement over available therapy on a clinically significant endpoint(s). As such, we are working to determine the next steps for
our Molgradex development program focusing on the scope and design of an additional Phase 3 study. The timing and cost of commencement and the
likelihood of success of such additional Phase 3 study is currently not known.
The Molgradex studies for (i) the treatment of NTM lung infection, designated as OPTIMA, and the treatment of NTM lung infection in people living with
CF, designated ENCORE, are in Phase 2a development. The AeroVanc Phase 3 study, designated as AVAIL, started in the U.S. and Canada in the third
quarter of 2017. We anticipate enrolling approximately 140-145 out of the expected 150 patients in the primary analysis population. Top line results from
the study are expected in the first half of 2021
Clinical testing is expensive, can take many years to complete, and its outcome is inherently uncertain. A failure of one or more of our clinical trials can
occur at any time during the clinical trial process as demonstrated by our recent IMPALA study results. The results of preclinical studies and early clinical
trials of our product candidates may not be predictive of the results of later-stage clinical trials. There is a high failure rate for drugs proceeding through
clinical trials, and product candidates in later stages of clinical trials may fail to show the required safety and efficacy despite having progressed through
preclinical studies and initial clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical
trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier clinical trials, and we cannot be certain that we will not
face similar setbacks. Even if our clinical trials are completed, the results may not be sufficient to obtain regulatory approval for our product candidates.
Given the developmental nature of our product candidates, we are subject to risks associated with initiating, completing, and achieving positive outcomes
from our current and future clinical trials, including:
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slow implementation, enrollment, and completion of the clinical trials;
inability to enroll enough patients in the clinical trials;
low patient compliance and adherence to dosing and reporting requirements, for example, incomplete reporting of patient reported outcomes
in the clinical trials or missed doses;
lack of safety and efficacy in the clinical trials;
delays in manufacture of supplies for both drug and device components due to delays in formulation, process development, or manufacturing
activities;
requirements for additional nonclinical or clinical studies based on changes to formulation and/or changes to regulatory requirements; and
requirements for additional clinical studies based on inconclusive or negative clinical results or changes in market, standard of care, and/or
regulatory requirements.
If we successfully complete the necessary clinical trials for our product candidates, our success will be subject to the risks associated with obtaining
regulatory approvals, product launch, and commercialization, including:
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FDA rejection of our NDA and Biologics License Application (“BLA”) submissions for our product candidates;
regulatory rejection in the EU, Japan, and other markets;
delays during regulatory review and/or requirements of additional Chemistry, Manufacturing, and Controls, nonclinical, or clinical studies,
resulting in increased costs and/or delays in marketing approval and subsequent commercialization of the product candidates in the U.S. and
other markets;
inability to consistently manufacture commercial supplies of drug and delivery devices resulting in slowed market development and lower
revenue;
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poor commercial sales due to:
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the inability of our future sales organization or our potential commercialization partners to effectively sell the product candidates;
our lack of success in educating physicians and patients about the benefits, administration, and use of our product candidates;
the availability, perceived advantages, relative cost, relative safety, and relative efficacy of other products or treatments for the targeted
indications of the product candidates;
low patient demand for the product candidates; and
poor prescription coverage and inadequate reimbursement for our product candidates;
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our inability to enforce our intellectual property rights in our product candidates; and
reduction in the safety profile of our product candidates following approval.
Many of these clinical, regulatory, and commercial matters are beyond our control and are subject to other risks described elsewhere in this “Risk Factors”
section. Accordingly, we cannot assure that we will be able to advance our product candidates further through final clinical development, or obtain
regulatory approval of, commercialize, or generate significant revenue from them. If we cannot do so, or are significantly delayed in doing so, our business
will be materially harmed.
If we fail to attract and retain senior management and key scientific personnel, we may be unable to successfully develop and commercialize our
product candidates.
We have historically operated with a limited number of employees that manage third parties for most development activities. Institutional knowledge is
concentrated within a small number of employees. Our success depends on our continued ability to attract, retain, and motivate highly qualified
management, clinical, and scientific personnel. Our future success is highly dependent upon the contributions of our senior management, as well as our
senior scientists and other members of our senior management team. The loss of services of any of these individuals, who all have at-will employment
arrangements with us, could delay or prevent the successful development of our product pipeline, completion of our planned clinical trials, or the
commercialization of our product candidates.
Replacing key employees may be a difficult, costly, and protracted process, and we may not have other personnel with the capacity to assume all the
responsibilities of a key employee upon his/her departure. Transition periods can be difficult to manage and may cause disruption to our business. In
addition, there may be intense competition from other companies and organizations for qualified personnel. Other companies and organizations with which
we compete for personnel may have greater financial and other resources and different risk profiles than us, and a history of successful development and
commercialization. If we cannot attract and retain skilled personnel, as needed, we may not achieve our development and other goals.
In addition, the success of our business will depend on our ability to develop and maintain relationships with respected service providers and industry-
leading consultants and advisers. If we cannot develop and maintain such relationships as needed, the rate and success at which we can develop and
commercialize product candidates may be limited. In addition, our outsourcing strategy, which has included engaging consultants that spend considerable
time to manage key functional areas, may subject us to scrutiny under labor laws and regulations, which may divert management time and attention and
have an adverse effect on our business and financial condition.
We do not have, and do not have plans to establish commercial manufacturing facilities. We completely rely on third parties for the manufacture and
supply of our clinical trial drug and delivery device supplies and, if approved, commercial product materials. The loss of any of these vendors or a
vendor’s failure to provide us with an adequate supply of clinical trial or commercial product material in a timely manner and on commercially
acceptable terms, or at all, could harm our business.
We outsource the manufacture of our product candidates and do not plan to establish our own manufacturing facilities. To manufacture our product
candidates, we have made numerous custom modifications at contract manufacturing organizations (“CMOs”), making us highly dependent on these
CMOs. For clinical and commercial supplies, if approved, we have supply agreements with third party CMOs for drug substance, finished drug product,
drug delivery devices and other necessary components of our product candidates. While we have secured long-term commercial supply agreements with
many of the third party CMOs, we would need to negotiate agreements for commercial supply with several important CMOs, and we may not be able to
reach agreement on acceptable terms. In addition, we rely on these third parties to conduct or assist us in key manufacturing development activities,
including qualification of equipment, developing and validating methods, defining critical process parameters, releasing component materials, and
conducting stability testing, among other things. If these third parties are unable to perform their tasks successfully in a
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timely manner, whether for technical, financial, or other reasons, we may be unable to secure clinical trial material, or commercial supply material if
approved, which likely would delay the initiation, conduct, or completion of our clinical studies or prevent us from having enough commercial supply
material for sale, which would have a material and adverse effect on our business. For example, in December 2019, a novel strain of COVID-19
coronavirus was reported to have surfaced in Wuhan, China, the impacts of which are unknown and rapidly evolving. The extent to which the coronavirus
impacts our ability to procure sufficient supplies for the development and commercialization of our products and product candidates will depend on the
severity and duration of the spread of the coronavirus, and the actions undertaken to contain the coronavirus or treat its effects.
All manufacturers of our clinical trial material and, if approved, commercial product, including drug substance manufacturers, must comply with cGMP
requirements enforced by the FDA through its facilities inspection program and applicable requirements of foreign regulatory authorities. These
requirements include quality control, quality assurance, and the maintenance of records and documentation. Manufacturers of our clinical trial material may
be unable to comply with these cGMP requirements and with other FDA, state, and foreign regulatory requirements. While we and our representatives
generally monitor and audit our manufacturers’ systems, we do not have full control over their ongoing compliance with these regulations. Although the
responsibility to maintain cGMP compliance is shared between us and the third-party manufacturer, we bear ultimate responsibility for our supply chain
and compliance with regulatory standards. Failure to comply with these requirements may result in fines and civil penalties, suspension of production,
suspension or delay or failure to obtain product approval, product seizure or recall, or withdrawal of product approval.
Currently, we do not have alternative vendors to back up our primary vendors of clinical trial material or, if approved, commercial supply material.
Identification of and discussions with other vendors may be protracted and/or unsuccessful, or these new vendors may be unsuccessful in producing the
same results as the current primary vendors producing the material. Therefore, if our primary vendors become unable or unwilling to perform their required
activities, we could experience protracted delays or interruptions in the supply of clinical trial material and, ultimately, product for commercial sale, which
would materially and adversely affect our development programs, commercial activities, operating results, and financial condition. In addition, the FDA or
regulatory authorities outside of the U.S. may require that we have an alternate manufacturer of a drug product before approving it for marketing and sale
in the U.S. or abroad and securing such alternate manufacturer before approval of an NDA or BLA could result in considerable additional time and cost
prior to NDA or BLA approval.
Any new manufacturer or supplier of finished drug product or its component materials, including drug substance and delivery devices, would be required to
qualify under applicable regulatory requirements and would need to have sufficient rights under applicable intellectual property laws to the method of
manufacturing of such product or ingredients required by us. The FDA or foreign regulatory agency may require us to conduct additional clinical studies,
collect stability data, and provide additional information concerning any new supplier, or change in a validated manufacturing process, including scaling-up
production, before we could distribute products from that manufacturer or supplier or revised process. For example, if we were to engage a third party other
than our current CMOs to supply the drug substance or drug product for future clinical trial or commercial product, the FDA or regulatory authorities
outside of the U.S. may require us to conduct additional clinical and nonclinical studies to ensure comparability of the drug substance or drug product
manufactured by our current CMOs to that manufactured by the new supplier. Changing of suppliers or equipment is particularly challenging for
companies like us, with inhalation products, because any change could alter the performance of the drug product.
The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing
techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling-up initial
production. These problems include difficulties with production costs and yields, quality control, including stability of the product candidate and quality
assurance testing, and shortages of qualified personnel. Some of our product candidates have not been manufactured at the scale we believe will be
necessary to maximize its commercial value and, accordingly, we may encounter difficulties in attempting to scale-up production and may not succeed in
that effort on a timely basis or at all. In addition, the FDA or other regulatory authorities may impose additional requirements as we scale up initial
production capabilities, which may delay our scale-up activities and/or add expense.
If our manufacturers encounter any of the aforementioned difficulties or otherwise fail to comply with their contractual obligations or there are delays
entering commercial supply agreements due to capital constraints, we may have insufficient quantities of material to support ongoing and/or planned
clinical studies or to meet commercial demand, if approved. In addition, any delay or interruption in the supply of materials necessary or useful to
manufacture our product candidates could delay the completion of our clinical studies, increase the costs associated with our development programs, and
depending upon the period of delay, require us to commence new clinical studies at significant additional expense or terminate the studies completely.
Delays or interruptions in the supply of commercial product could result in increased cost of goods sold and lost sales. We cannot provide assurance that
manufacturing or quality control problems will not arise in connection with the manufacture of our clinical trial material or commercial product, if
approved, or that third-party manufacturers will be able to maintain the necessary governmental licenses and approvals to continue manufacturing such
clinical trial material or commercial product, as applicable. In addition, Molgradex and AeroVanc are currently
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manufactured entirely or partially outside the U.S. and, as a result, we may experience interruptions in supply due to shipping or customs difficulties or
regional instability. Furthermore, changes in currency fluctuations, shipping costs, or import tariffs could adversely affect cost of goods sold. Any of the
above factors could cause us to delay or suspend anticipated or ongoing trials, regulatory submissions or commercialization of our product candidates,
entail higher costs, or result in being unable to effectively commercialize our products. Our dependence upon third parties for the manufacture of our
clinical trial material may adversely affect our future costs and our ability to develop and commercialize our product candidates on a timely and
competitive basis.
We rely significantly on third parties to conduct our nonclinical testing and clinical studies and other aspects of our development programs and if those
third parties do not satisfactorily perform their contractual obligations or meet anticipated deadlines, the development of our product candidates could
be adversely affected.
We do not employ personnel or possess the facilities necessary to conduct many of the activities associated with our programs. We engage consultants,
advisors, contract research organizations (“CROs”), CMOs, and others to assist in the design and conduct of nonclinical and clinical studies of our product
candidates, with interpretation of the results of those studies and with regulatory activities, and we expect to continue to outsource all or a significant
amount of such activities. As a result, many important aspects of our development programs are and will continue to be outside our direct control, and our
third-party service providers may not perform their activities as required or expected, including the maintenance of good clinical practice (“GCP”), good
laboratories practice (“GLP”), and cGMP compliance, which are ultimately our responsibility to ensure. Further, such third parties may not be as
committed to the success of our programs as our own employees and, therefore, may not devote the same time, thoughtfulness, or creativity to completing
projects or problem-solving as our own employees would. To the extent we are unable to successfully manage the performance of third-party service
providers, our business may be adversely affected.
The CROs that we engage to execute our clinical studies play a significant role in the conduct of the studies, including the collection and analysis of study
data, and we likely will depend on CROs and clinical investigators to conduct future clinical studies and to assist in analyzing data from completed studies
and developing regulatory strategies for our product candidates. Individuals working at the CROs with which we contract, as well as investigators at the
sites at which our studies are conducted, are not our employees, and we have limited control over the amount or timing of resources that they devote to
their programs. In addition, our CROs may be affected by business or workforce interruptions for many reasons, including as a result of an outbreak of the
coronavirus or another infectious disease, over which they and we have limited control. If our CROs, study investigators, and/or third-party sponsors fail to
devote sufficient time and resources to studies of our product candidates, if we and/or our CROs do not comply with all GLP and GCP regulatory and
contractual requirements, or if their performance is substandard, we may delay commencement and/or completion of these studies, submission of
applications for regulatory approval, regulatory approval, and commercialization of our product candidates. Failure of CROs to meet their obligations to us
could adversely affect development of our product candidates.
In addition, CROs we engage may have relationships with other commercial entities, some of which may compete with us. Through intentional or
unintentional means, our competitors may benefit from lessons learned on our projects that could ultimately harm our competitive position. Moreover, if a
CRO fails to properly, or at all, perform our activities during a clinical study, we may not be able to enter into arrangements with alternative CROs on
acceptable terms or in a timely manner, or at all. Switching CROs may increase costs and divert management time and attention. In addition, there likely
would be a transition period before a new CRO commences work. These challenges could result in delays in the commencement or completion of our
clinical studies, which could materially impact our ability to meet our desired and/or announced development timelines and have a material adverse impact
on our business and financial condition.
We currently have limited marketing capabilities and no sales organization. If we are unable to establish sales and marketing capabilities on our own
or through third parties, we will be unable to successfully commercialize our products, if approved, or generate product revenue.
To commercialize our products, if approved, in the U.S. and other jurisdictions we seek to enter, we must build our marketing, sales, managerial, and other
non-technical capabilities, or make arrangements with third parties to perform these services, and we may not be successful in doing so. If our products
receive regulatory approval, we expect to market such products in the U.S. through a focused, specialized sales force, which will be costly and time
consuming. Institutionally, we have no prior experience in the marketing and sale of pharmaceutical products and there are significant risks involved in
building and managing a sales organization, including our ability to hire, retain, and incentivize qualified individuals, generate sufficient sales leads,
provide adequate training to sales and marketing personnel, and effectively manage a geographically dispersed sales and marketing team. Outside of the
U.S., we may consider collaboration arrangements. If we are unable to enter into such arrangements on acceptable terms or at all, we may not be able to
successfully commercialize our products in certain markets. Any failure or delay in the development of our internal sales, marketing, and distribution
capabilities would adversely impact the commercialization of our products. If we are not successful in commercializing our products, either on our own or
through collaborations with one or more third parties, our future product revenue will suffer and we would incur significant additional losses.
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To establish a sales and marketing infrastructure and expand our manufacturing capabilities, we will need to increase the size of our organization, and
we may experience difficulties in managing this growth.
As of March 12, 2020, we had 39 full-time employees, including 28 employees engaged in research and development. As we advance our product
candidates through the development process and to commercialization, we will need to continue to expand our development, regulatory, quality,
managerial, sales and marketing, operational, finance, and other resources to manage our operations and clinical trials, continue our development activities,
and commercialize our product candidates, if approved. As our operations expand, we expect that we will need to manage additional relationships with
various manufacturers and collaborative partners, suppliers, and other organizations.
Due to our limited financial resources and our limited experience in managing a company with such anticipated growth, we may not be able to effectively
maintain or manage the expansion of our operations or recruit and train additional qualified personnel. In addition, the physical expansion of our operations
may lead to significant costs and may divert our management attention and resources. Any inability to manage growth could delay the execution of our
development and strategic objectives, or disrupt our operations, which could materially impact our business, revenue, and operating results.
Our product candidates may cause undesirable side effects or adverse events or have other properties that could delay or prevent our clinical
development, regulatory approval, or commercialization.
Undesirable side effects or adverse events caused by our product candidates could interrupt, delay, or halt clinical studies and could result in the denial of
regulatory approval by the FDA or other regulatory authorities for any or all indications, and in turn prevent us from commercializing our product
candidates. A significant challenge in clinical development is that the patient population in early studies, where small numbers of patients are required, is
different from the patient population observed in later stage studies, where larger groups of patients are required. For example, patients in earlier stage
studies may be more sick, compliant, or otherwise motivated than patients in larger studies. As such, efficacy or safety results may differ significantly
between studies. Side-effects seen at high doses in earlier studies of AeroVanc, such as bronchoconstriction or other airway irritation, may be seen in
significant numbers at the lower doses selected for later studies. Also, for AeroVanc, while not observed in the Phase 2 clinical study, the emergence of
vancomycin-resistant MRSA could occur during the longer dosing period of AeroVanc that is currently implemented in the Phase 3 clinical study. If this or
other undesirable side effects occur, they could possibly prevent approval, which would have a material and adverse effect on our business.
If any of our product candidates receive marketing approval and we or others later identify undesirable side effects caused by the product:
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regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a contraindication;
regulatory authorities may withdraw their approval of the product;
we may be required to change the way the product is administered, conduct additional clinical studies, or change the labeling of the product;
and
our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and
expenses of commercializing the product, which in turn could delay or prevent us from generating significant revenue from its sale.
We may not achieve our projected development goals in the time frames we have announced.
We have set goals for accomplishing certain objectives material to the successful development of our product candidates. The actual timing of these events
may vary due to many factors, including delays or failures in our nonclinical testing, clinical studies, and manufacturing and regulatory activities and the
uncertainties inherent in the regulatory approval process. From time to time we create estimates for the completion of enrollment of or announcement of
data from clinical studies of our product candidates. However, predicting the rate of enrollment or the time from completion of enrollment to announcement
of data for any clinical study requires us to make significant assumptions that may prove to be incorrect. As an example, we have experienced enrollment
delays in our AeroVanc program. Our estimated enrollment rates and the actual rates may differ materially and the time required to complete enrollment of
any clinical study may be considerably longer than we estimate. Such delays may adversely affect our financial condition and results of operations.
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Even if we complete a clinical study with successful results, we may not achieve our projected development goals in the time frames we initially anticipate
or announce. If a development plan for a product candidate becomes more extensive and costly than anticipated, we may determine that the associated time
and cost are not financially justifiable and, as a result, may discontinue development in a particular indication or of the product candidate as a whole. In
addition, even if a study did complete with successful results, changes may occur in regulatory requirements or policy during the period of product
development and/or regulatory review of an NDA or BLA that relate to the data required to be included in NDAs or BLAs which may require additional
studies that may be costly and time consuming. Any of these actions may be viewed negatively, which could adversely impact our financial condition.
Further, throughout development, we must provide adequate assurance to the FDA and other regulatory authorities that we can consistently develop and
produce our product candidates in conformance with GLP, GCP, cGMP, and other regulatory standards. As discussed above, we rely on CMOs for the
manufacture of clinical, and future commercial, quantities of our product candidates. If future FDA or other regulatory authority inspections identify cGMP
compliance deficiencies at these third-party facilities, production of our clinical trial material or, in the future, commercial product, could be disrupted,
causing potentially substantial delay in or failure of development or commercialization of our product candidates.
Our employees, independent contractors and consultants, principal investigators, CROs, CMOs and other vendors, and any future commercial partners
may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could cause
significant liability for us and harm our reputation.
We are exposed to the risk that our employees, independent contractors and consultants, principal investigators, CROs, CMOs and other vendors, and any
future commercial partners may engage in fraudulent conduct or other misconduct, including intentional failures to comply with FDA regulations or similar
regulations of comparable foreign regulatory authorities, to provide accurate information to the FDA or comparable foreign regulatory authorities, to
comply with manufacturing standards required by cGMP or our standards, to comply with federal and state healthcare fraud and abuse laws and regulations
and similar laws and regulations established and enforced by comparable foreign regulatory authorities, and to report financial information or data
accurately or disclose unauthorized activities to them. The misconduct of our employees and other service providers could involve the improper use of
information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. Although we have
adopted a code of business conduct and ethics, it is not always possible to identify and deter such misconduct, and the precautions we take to detect and
prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or
other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against them, and we
are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and results of operations,
including the imposition of significant fines or other sanctions. For example, if one of our manufacturing partners were placed under a consent decree, we
may be hampered in our ability to manufacture clinical or commercial supplies.
Our business and operations would suffer in the event of third-party computer system failures, cyber-attacks on third-party systems, or deficiency in
our cyber-security.
We rely on information technology (“IT”) systems, including third-party “cloud based” service providers, to keep financial records, maintain laboratory
data, clinical data and corporate records, communicate with staff and external parties, and operate other critical functions. This includes critical systems
such as email, other communication tools, electronic document repositories, and archives. If any of these third-party IT providers are compromised due to
computer viruses, unauthorized access, malware, natural disasters, fire, terrorism, war and telecommunication failures, electrical failures, cyber-attacks, or
cyber-intrusions over the internet, then sensitive emails or documents could be exposed or deleted. Similarly, we could incur business disruption if our
access to the internet is compromised and we are unable to connect with third-party IT providers. The risk of a security breach or disruption, particularly
through cyber-attacks or cyber-intrusion by computer hackers, foreign governments, or cyber-terrorists, has generally increased as the number, intensity,
and sophistication of attempted attacks and intrusions from around the world have increased. In addition, we rely on those third parties to safeguard
important confidential personal data regarding our employees and patients enrolled in our clinical trials. If a disruption event were to occur and cause
interruptions in a third-party IT provider’s operations, it could result in a disruption of our drug development programs. For example, the loss of clinical
trial data from completed, ongoing, or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to
recover or reproduce the data. To the extent that any disruption or security breach results in loss or damage to our data or applications or inappropriate
disclosure of confidential or proprietary information, we could incur liability and development of our product candidates could be delayed or could fail. We
have experienced and may continue to experience attempts to breach our security and attempts to introduce malicious software into our IT systems;
however, to date and to our knowledge, such attacks have not resulted in any material damage to us.
We are continually working to maintain reliable systems to control costs and improve our operations. Our efforts include, but are not limited to, the
following: firewalls, antivirus protection, patches, log monitors, routine backups with offsite retention of storage media, system audits, data partitioning,
and routine password modifications. Our internal IT systems environment continues to evolve and our business policies and internal security controls may
not keep pace as new threats emerge. No assurance can be given that our efforts to continue to enhance our systems will be successful.
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If we fail to comply with data protection laws and regulations, we could be subject to government enforcement actions (which could include civil or
criminal penalties), private litigation and/or adverse publicity, which could negatively affect our operating results and business.
A number of state, national, and foreign laws and regulations apply to the collection, use, retention, protection, disclosure, transfer, and other processing of
personal data. Due to our Danish subsidiary, Savara ApS, our clinical trial activities, and operations in Europe, we are subject to data protection laws in the
EU, including the General Data Protection Regulation (“GDPR”). The GDPR, which became effective on May 25, 2018, has caused the EU requirements
for the protection of personal data to become more stringent and increased the penalties for noncompliance. Penalties can consist of fines up to 20 million
euros or 4% of global annual revenues, whichever is higher. As a result, we have been required to implement additional mechanisms to ensure compliance
with the new EU data protection rules, which may cause us to incur additional costs. Similarly, in June 2018, California enacted the California Consumer
Privacy Act of 2018 (the “CCPA”), which became effective in January 2020. The CCPA, among other things, requires covered companies to provide new
disclosures to California consumers and afford such consumers new rights to opt-out of certain sales of personal information. The CCPA creates a private
right of action for statutory damages for certain breaches of information. The California Attorney General has proposed regulations under the CCPA, but
these regulations have yet to be finalized. Aspects of the CCPA and its interpretation and enforcement remain unclear at this time. In addition, other states
have enacted or proposed legislation that regulates the collection, use, and sale of personal information, and such regimes might not be compatible with
either the GDPR or the CCPA. We may be required to implement additional mechanisms to comply with the CCPA or such other state laws, which may be
difficult to implement and may require us to incur additional costs.
If we or our vendors fail to comply with applicable data privacy laws, including the GDPR or the CCPA, we could be subject to government
enforcement actions and significant penalties against us, and our business could be adversely impacted.
If we or our vendors fail to comply with applicable data privacy laws, including the GDPR, we could be subject to government enforcement actions and
significant penalties against us, and our business could be adversely impacted.
Our operations and financial results could be adversely impacted by might be interrupted by the occurrence of a natural disaster, war, system
malfunction, terrorism, war, telecommunication and electrical failures or other catastrophic event, or public health crises, such as the 2019 Novel
Coronavirus (COVID-19) outbreak in China and the rest of the world including the United States.
Our corporate headquarters is located in a single commercial facility in Austin, Texas, USA. We maintain a second office in a single commercial facility in
Denmark where many of our product development staff are located. Important documents and records, including copies of our regulatory documents and
other records for our product candidates, are located both at a secure offsite document storage facility as well at our own facilities and we depend on our
facilities for the continued operation of our business. Natural disasters and other catastrophic events, such as wildfires and other fires, earthquakes and
extended power interruptions, terrorist attacks, public health crises, or severe weather conditions could significantly disrupt our operations and result in
additional, unplanned expense. As a small company with limited resources, we have not prepared or implemented a formal business continuity or disaster
recovery plan and any natural disaster or catastrophic event could disrupt our business operations and result in setbacks to our development programs. Even
though we believe we carry commercially reasonable insurance, we might suffer losses that are not covered by or exceed the coverage available under these
insurance policies.
In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China, resulting in significant disruptions to
Chinese manufacturing and supply chain as well as travel restrictions in many countries. While the extent of the impact of the current COVID-19
coronavirus outbreak on our business and financial results is uncertain, a continued and prolonged public health crisis such as the COVID-19 coronavirus
outbreak could have a negative impact on our business, financial condition and operating results. As a result of the COVID-19 coronavirus outbreak, there
could be delays in the manufacturing supply chain for our product candidates, including delays in procurement of materials for certain of our clinical
studies due to the outbreak, delays in clinical trials or recruitment, or in a more severe scenario, our business, financial condition and operating results
could be more severely affected. Given the dynamic nature of these circumstances, the duration of any business disruption or potential impact to our
business of the COVID-19 coronavirus is difficult to predict.
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Risks Related to Drug Development and Commercialization
We depend on the successful completion of clinical studies of our product candidates, and any positive results in prior clinical studies do not ensure
that ongoing or future clinical studies will be successful.
Pharmaceutical products are subject to stringent regulatory requirements covering quality, safety, and efficacy. The burden of proof is on the manufacturer,
such as us, to show with substantial clinical data that the risk/benefit profile for any new drug is favorable. Only after successfully completing extensive
pharmaceutical development, nonclinical testing, and clinical studies may a product be considered for regulatory approval.
Clinical studies are expensive, difficult to design and implement, they can take many years to complete, and outcomes are inherently uncertain. A drug
product may fail to demonstrate positive results at any stage of testing despite having progressed satisfactorily through nonclinical testing and initial
clinical studies. There is significant risk in clinical development where later stage clinical studies are designed and powered based on the analysis of data
from earlier studies, with these earlier studies involving a smaller number of patients, and the results of the earlier studies being driven primarily by a
subset of responsive patients. In addition, interim results of a clinical study do not necessarily predict final results. Further, clinical study data frequently are
susceptible to varying interpretations. Medical professionals and/or regulatory authorities may analyze or weigh study data differently than the sponsor
company, resulting in delay or failure to obtain marketing approval for a product candidate. Additionally, the possible lack of standardization across
multiple investigative sites may induce variability in the results which can interfere with the evaluation of treatment effects.
If we license rights to develop our product candidates to independent third parties or otherwise permit such third parties to evaluate our product candidates
in clinical studies, we may have limited control over those clinical studies. Any safety or efficacy concern identified in a third-party sponsored study could
adversely affect our or another licensee’s development of our product candidate and prospects for its regulatory approval, even if the data from that study
are subject to varying interpretations and analyses.
There is significant risk that ongoing and future clinical studies of our product candidates are unsuccessful such as the recently announced results of the
IMPALA study. Negative or inconclusive results could cause the FDA and other regulatory authorities to require us to repeat or conduct additional clinical
studies, which could significantly increase the time and expense associated with development of that product candidate or cause us to elect to discontinue
one or more clinical programs. For example, as a result of our IMPALA study results and related correspondence from the FDA, we are planning an
additional Phase 3 study of Molgradex for the treatment of aPAP. Failure to complete a clinical study of a product candidate or an unsuccessful result of a
clinical study could have a material adverse effect on our business.
Molgradex and AeroVanc have received Orphan Drug Designation by the FDA and Molgradex has also received Orphan Drug Designation in Europe.
While orphan designation provides certain benefits, there are also associated risks.
Molgradex has received Orphan Drug Designation in the U.S. by the FDA and in Europe by the EMA for the treatment of aPAP, and AeroVanc has been
granted Orphan Drug Designation in the U.S. by the FDA for the treatment of MRSA lung infection in patients with CF. Orphan Drug Designation will not
shorten the regulatory review or reduce the clinical data requirements needed to obtain approval. If approval is received to market either Molgradex or
AeroVanc for the respective indications, the FDA will not approve a similar product, with the same active ingredient, to Molgradex or AeroVanc for seven
years and the EMA will not approve a similar product to Molgradex for ten years, unless we are unable to produce enough supply to meet demand in the
marketplace or another similar product, with the same active ingredient, is deemed clinically superior. Similar product candidates, with the same active
ingredient and route of delivery, may be granted Orphan Drug Designation during the development of the respective products, but the Orphan Drug
exclusivity is granted only to the first of such products approved, which means there is risk that a competitor product candidate may receive approval and
Orphan Drug exclusivity before us, thus preventing us from marketing one or more of our product candidates until the exclusivity of the competing product
expires. Also, the Orphan Drug status will not prevent a competitor with a different active ingredient from competing with our product candidates. If we are
prevented from marketing one or more product candidates due to a competitor’s Orphan Drug exclusivity, this would have a material adverse effect on our
business.
Delays in commencement and completion of clinical studies are common and have many causes. Delays in clinical studies of our product candidates
would likely increase overall development costs and jeopardize our ability to obtain regulatory approval and successfully commercialize any approved
products.
Clinical testing typically is expensive, can take many years to complete, and its outcome is inherently uncertain. Clinical studies may not commence on
time or be completed on schedule, if at all. The commencement and completion of clinical studies can be delayed for a variety of reasons, including:
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inability to raise sufficient funding to initiate or continue a clinical study;
delays in obtaining regulatory approval to commence a clinical study;
delays in identifying and reaching agreement on acceptable terms with prospective CROs, clinical study sites, and investigators, which
agreements can be subject to extensive negotiation and may vary significantly among study sites;
delays in obtaining regulatory approval in a prospective country;
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delays in obtaining ethics committee approval to conduct a clinical study at a prospective site;
delays in reaching agreements on acceptable terms with prospective CMOs or other vendors for the production and supply of clinical trial
material and, if necessary, drug administration devices, which agreements can be subject to extensive negotiation;
delays in the production or delivery of sufficient quantities of clinical trial material or drug delivery devices from our CMOs and other
vendors to initiate or continue a clinical study;
delays due to product candidate recalls as the result of stability failure, excessive product complaints, or other failures of the product
candidate during its use or testing;
invalidation of clinical data caused by premature unblinding or integrity issues;
invalidation of clinical data caused by mixing up of the active drug and placebo through randomization or manufacturing errors;
delays on the part of our CROs, CMOs, and other third-party contractors in developing procedures and protocols or otherwise conducting
activities in accordance with applicable policies and procedures and in accordance with agreed upon timelines;
delays in identifying and hiring or engaging, as applicable, additional employees or consultants to assist in managing clinical study-related
activities;
delays in recruiting and enrolling individuals to participate in a clinical study, which historically can be challenging in orphan diseases;
delays caused by patients dropping out of a clinical study due to side effects, concurrent disorders, difficulties in adhering to the study
protocol, unknown issues related to different patient profiles than in previous studies, such as the reduced age limit required for inclusion into
the AeroVanc Phase 3 study, or otherwise;
delays in having patients complete participation in a clinical study, including returning for post-treatment follow-up;
delays resulting from study sites dropping out of a trial, providing inadequate staff support for the study, problems with shipment of study
supplies to clinical sites, or focusing its staff’s efforts on enrolling studies that compete for the same patient population;
suspension of enrollment at a study site or the imposition of a clinical hold by the FDA or other regulatory authority following an inspection
of clinical study operations at study sites or finding of a drug-related serious adverse event;
delays in quality control/quality assurance procedures necessary for study database lock and analysis of unblinded data; and
delays, inconsistencies, or negative results in statistical analyses of clinical study data.
Patient enrollment, a critical component to successful completion of a clinical study, is affected by many factors, including the size and nature of the study
population, the proximity of patients to clinical sites, the eligibility criteria for the study, the design of the clinical study, ongoing studies competing for the
same patient population and clinicians and patients’ perceptions as to the potential advantages of the drug being studied in relation to available alternatives,
including therapies being investigated by other companies which may be viewed as more beneficial or important to study, fear of being randomized to the
placebo arm, and changes in standard of care. Challenges to complete enrollment can be exacerbated in orphan indications, like those being pursued by us,
with a limited number of qualifying patients and the lack of clinical sites with the necessary expertise and experience to conduct our studies. Further,
completion of a clinical study and/or its results may be adversely affected by failure to retain patients who enroll in a study but withdraw due to adverse
side effects, perceived lack of efficacy, belief that they are on placebo, improvement in condition before treatment has been completed, for personal
reasons, without reason, or by patients who fail to return for or complete post-treatment follow-up. We are currently experiencing slower than expected
enrollment in our Phase 3 AeroVanc study due to several factors including patient availability and patients experiencing exacerbations prior to
randomization, and therefore, precluding them from enrolling in the study. The COVID-19 coronavirus outbreak may cause further delays in our clinical
trials and have a negative impact on our business, financial condition and operating results.
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Clinical studies may not begin on time or be completed in the time frames we anticipate and may be costlier than we anticipate for a variety of reasons,
including one or more of those described above. The length of time necessary to successfully complete clinical studies varies significantly and is difficult to
predict accurately. We may make statements regarding anticipated timing for completion of enrollment in and/or availability of results from our clinical
studies, but such predictions are subject to a number of significant assumptions and actual timing may differ materially for a variety of reasons, including
patient enrollment rates, length of time needed to prepare raw study data for analysis and then to review and analyze it, and other factors described above.
If we experience delays in the completion of a clinical study, if a clinical study is terminated, or if failure to conduct a study in accordance with regulatory
requirements or the study’s protocol leads to deficient safety and/or efficacy data, the regulatory approval and/or commercial prospects for our product
candidates may be harmed, and our ability to generate product revenue will be delayed. In addition, any delays in completing our clinical studies likely will
increase our development costs. Further, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical studies have in
the past and may in the future ultimately lead to the denial of regulatory approval of a product candidate. Even if we ultimately commercialize our product
candidates, the standard of care may have changed or other therapies for the same indications may have been introduced to the market in the interim and
may establish a competitive threat to us or diminish the need for our products.
Clinical studies are very expensive, difficult to design and implement, often take many years to complete, and the outcome is inherently uncertain.
Clinical development of pharmaceutical products for humans is generally very expensive, takes many years to complete, and failures can occur at any stage
of clinical testing. We estimate that clinical development of our product candidates will take several additional years to complete, but because of the variety
of factors that can affect the design, timing and outcome of clinical studies, we are unable to estimate the exact funds required to complete research and
development, obtain regulatory approval, and commercialize all of our product candidates. We will need significant additional capital to continue to
advance our products as per current business plans.
Failure at any stage of clinical testing is not uncommon and we may encounter problems that would require additional, unplanned studies or cause us to
abandon a clinical development program.
In addition, a clinical study may be suspended or terminated by us, an IRB, a data safety monitoring board, the FDA, or other regulatory authorities due to
a number of factors, including:
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lack of adequate funding to continue the study;
failure to conduct the study in accordance with regulatory requirements or the study’s protocol;
inspection of clinical study operations or sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;
unforeseen safety issues, including adverse side effects; or
changes in governmental regulations or administrative actions.
Changes in governmental regulations and guidance relating to clinical studies may occur and we may need to amend study protocols to reflect these
changes, or we may amend study protocols for other reasons. Amendments may require us to resubmit protocols to IRBs for re-examination and approval
or renegotiate terms with CROs, study sites and investigators, all of which may adversely impact the costs or timing of or our ability to successfully
complete a trial.
There is significant uncertainty regarding the regulatory approval process for any investigational new drug, substantial further testing and validation
of our product candidates and related manufacturing processes may be required, and regulatory approval may be conditioned, delayed, or denied, any
of which could delay or prevent us from successfully marketing our product candidates and substantially harm our business.
Pharmaceutical products generally are subject to rigorous nonclinical testing and clinical studies and other approval procedures mandated by the FDA and
foreign regulatory authorities. Various federal and foreign statutes and regulations also govern or materially influence the manufacturing, safety, labeling,
storage, record keeping, and marketing of pharmaceutical products. The process of obtaining these approvals and the subsequent compliance with
appropriate U.S. and foreign statutes and regulations is time-consuming and requires the expenditure of substantial resources. Molgradex is currently in
Phase 3 clinical testing in the U.S., Europe, and Japan. The clinical study results were released by us on June 12, 2019 and did not meet all of the statistical
goals and protocol end points. On October 1, 2019, we received a written response from the FDA in connection with a Type C meeting regarding the
Molgradex development program for aPAP and results from the IMPALA Phase 3 study in which the FDA indicated that the data provided in the briefing
package for the Type C meeting did not provide sufficient evidence of efficacy and safety for the treatment of aPAP. On December 23, 2019, the FDA
provided communication to us regarding the granting of Breakthrough Therapy designation, a process
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designed to expedite the development and review of drugs that are intended to treat a serious condition and preliminary clinical evidence indicates that the
drug may demonstrate substantial improvement over available therapy on clinically significant endpoint(s), for Molgradex for the treatment of aPAP. As
such, we are working with the FDA and EMA to determine the scope and design of an additional Phase 3 study for the Molgradex development program
for the treatment of aPAP. The scope, powering, cost, and timing of the additional study is not currently definitive, but the additional Phase 3 study will
require us to expend substantial additional resources, significantly extend the timeline for clinical development prior to market approval, and may result in
failure to achieve the clinical development of Molgradex for the treatment of aPAP.
We have commenced the Phase 3 trial of AeroVanc, the success of which will be needed for FDA approval to market AeroVanc in the U.S. to treat
persistent MRSA lung infection in individuals living with CF. While significant communication with the FDA on the Phase 3 study design has occurred,
even if the Phase 3 clinical study meets all of its statistical goals and protocol end points, the FDA may not view the results as robust and convincing. They
may require additional clinical studies and/or other costly studies, which could require us to expend substantial additional resources and could significantly
extend the timeline for clinical development prior to market approval. Additionally, we are conducting a two-year nonclinical carcinogenicity study on the
AeroVanc powder, required by the FDA. The results of this study will not be known until a short time prior to potential submission of an NDA or BLA for
AeroVanc. If the carcinogenicity study cannot be completed for technical or other reasons, or provides results that the FDA determines to be concerning,
this may cause a delay or failure in obtaining approval for AeroVanc.
Significant uncertainty exists with respect to the regulatory approval process for any investigational new drug, including Molgradex and AeroVanc.
Regardless of any guidance the FDA or foreign regulatory agencies may provide a drug’s sponsor during its development, the FDA or foreign regulatory
agencies retain complete discretion in deciding whether to accept an NDA or BLA or the equivalent foreign regulatory approval submission for filing or, if
accepted, whether to approve an NDA or BLA. There are many components to an NDA or BLA or marketing authorization application submission in
addition to clinical study data. For example, the FDA or foreign regulatory agencies will review the sponsor’s internal systems and processes, as well as
those of its CROs, CMOs, and other vendors, related to development of its product candidates, including those pertaining to its clinical studies and
manufacturing processes. Before accepting an NDA or BLA for review or before approving the NDA or BLA, the FDA or foreign regulatory agencies may
request that we provide additional information that may require significant resources and time to generate and there is no guarantee that our product
candidates will be approved for any indication for which we may apply. The FDA or foreign regulatory agencies may choose not to approve an NDA or
BLA for a variety of reasons, including a decision related to the safety or efficacy data, manufacturing controls or systems, or for any other issues that the
agency may identify related to the development its product candidates. Even if one or more Phase 3 clinical studies are successful in providing statistically
significant evidence of the efficacy and safety of the investigational drug, the FDA or foreign regulatory agencies may not consider efficacy and safety data
from the submitted studies adequate scientific support for a conclusion of effectiveness and/or safety and may require one or more additional Phase 3 or
other studies prior to granting marketing approval. If this were to occur, the overall development cost for the product candidate would be substantially
greater and competitors may bring products to market before us, which could impair our ability to generate revenues from the product candidates, or even
seek approval, if blocked by a competitor’s Orphan Drug exclusivity, which would have a material adverse effect on our business, financial condition, and
results of operations.
Further, development of our product candidates and/or regulatory approval may be delayed for reasons beyond our control. For example, U.S. federal
government shut-downs or budget sequestrations, such as ones that occurred during January 2018 and December 2018 through January 2019, may result in
significant reductions to the FDA’s budget, employees, and operations, which may lead to slower response times and longer review periods, potentially
affecting our ability to progress development of our product candidates or obtain regulatory approval for our product candidates. Further, regulatory
oversight and actions may be disrupted or delayed in regions particularly impacted by the coronavirus if regulators and industry professionals are
expending significant and unexpected resources addressing the outbreak.
Even if the FDA or foreign regulatory agencies grant approvals for our product candidates, the conditions or scope of the approval(s) may limit successful
commercialization of the product candidates and impair our ability to generate substantial sales revenue. For example, the FDA may approve label claims
for AeroVanc with age restrictions and/or treatment duration limitations, or Molgradex with restrictions for use only by patients unresponsive to the current
standard of care. They may limit the label of Molgradex or AeroVanc to a subset of patients based on a review of which patient groups had the greatest
efficacious response in clinical studies. Such label restriction may be undesirable and may limit successful commercialization. The FDA or foreign
regulatory agencies may also only grant marketing approval contingent on the performance of costly post-approval nonclinical or clinical studies, or subject
to warnings or contraindications that limit commercialization. Additionally, even after granting approval, the manufacturing processes, labeling, packaging,
distribution, adverse event reporting, storage, advertising, promotion, and recordkeeping for our products will be subject to extensive and ongoing
regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, and continued
compliance with cGMP, GCP, international conference on harmonization regulations, and GLP, which are regulations and guidelines that are enforced by
the FDA or foreign regulatory agencies for all clinical development and for any clinical studies that we conduct post-approval. The FDA or foreign
regulatory agencies may decide to
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withdraw approval, add warnings, or narrow the approved indications in the product label, or establish risk management programs that could restrict
distribution of our products. These actions could result from, among other things, safety concerns, including unexpected side effects or drug interaction
problems, or concerns over misuse of a product. If any of these actions were to occur following approval, we may have to discontinue commercialization of
the product, limit our sales and marketing efforts, implement risk minimization procedures, and/or conduct post-approval studies, which in turn could result
in significant expense and delay or limit our ability to generate sales revenues.
Regulations may be changed prior to submission of a marketing application that require higher hurdles than currently anticipated. These may occur as a
result of drug scandals, recalls, or a political environment unrelated to our products.
Even if we receive regulatory approval for a product candidate, we may face regulatory difficulties that could materially and adversely affect our
business, financial condition, and results of operations.
Even if initial regulatory approval is obtained, as a condition to the initial approval, the FDA or a foreign regulatory agency may impose significant
restrictions on a product’s indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies or marketing
surveillance programs, any of which would limit the commercial potential of the product. Our product candidates also will be subject to ongoing FDA
requirements related to the manufacturing processes, labeling, packaging, storage, distribution, advertising, promotion, record-keeping, and submission of
safety and other post-market information regarding the product. For instance, the FDA may require changes to approved drug labels, require post-approval
clinical studies, and impose distribution and use restrictions on certain drug products. In addition, approved products, manufacturers and manufacturers’
facilities are subject to continuing regulatory review and periodic inspections. If previously unknown problems with a product are discovered, such as
adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, the FDA may impose restrictions on
that product or us, including requiring withdrawal of the product from the market. If we or a CMO of ours fail to comply with applicable regulatory
requirements, a regulatory agency may:
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issue warning letters or untitled letters;
impose civil or criminal penalties;
suspend or withdraw regulatory approval;
suspend or terminate any ongoing clinical studies;
refuse to approve pending applications or supplements to approved applications;
exclude our product from reimbursement under government healthcare programs, including Medicaid or Medicare;
impose restrictions or affirmative obligations on our or our CMO’s operations, including costly new manufacturing requirements;
close the facilities of a CMO; or
seize or detain products or require a product recall.
If any of our product candidates for which we receive regulatory approval fails to achieve significant market acceptance among the medical
community, patients, or third-party payers, the revenue we generate from its sales will be limited and our business may never achieve profitability.
Our success will depend in substantial part on the extent to which our product candidates, if approved, are accepted by the medical community and patients
and reimbursed by third-party payers, including government payers. The degree of market acceptance with respect to each of our approved products, if any,
will depend upon a number of factors, including:
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the safety and efficacy of our products as demonstrated in clinical studies;
acceptance in the medical and patient communities of our products as a safe and effective treatment;
the product’s taste, ease of use, or features associated with the delivery device;
the perceived advantages of our product over alternative treatments, including with respect to the incidence and severity of any adverse side
effects and the cost of treatment;
the indications for which our product is approved;
claims or other information (including limitations or warnings) in a product’s approved labeling;
reimbursement and coverage policies of government and other third-party payers;
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pricing and cost-effectiveness of our product relative to alternative treatments;
availability of alternative treatments;
smaller-than-expected market size due to lack of disease awareness of a rare disease, or the patient population with a specific rare disease
being smaller than anticipated;
inappropriate diagnostic efforts due to limited knowledge and/or resources among clinicians;
difficulties identifying patients;
the prevalence of off-label substitution of chemically equivalent products or alternative treatments; and
the resources we devote to marketing our product and restrictions on promotional claims we can make with respect to the product.
We cannot predict with reasonable accuracy whether physicians, patients, healthcare insurers, health maintenance organizations, or the medical community
in general, will accept or utilize any of our products, if approved. If our product candidates are approved but do not achieve an adequate level of acceptance
by these parties, we may not generate sufficient revenue to become or remain profitable. In addition, our efforts to educate the medical community and
third-party payers regarding benefits of our products may require significant resources and may never be successful.
If we determine that a product candidate may not achieve adequate market acceptance or that the potential market size does not justify additional
expenditures on the program, we may reduce our expenditures on the development and/or the process of seeking regulatory approval of the product
candidate while we evaluate whether and on what timeline to move the program forward.
Even if we receive regulatory approval to market one or more of our product candidates in the U.S., we may never receive approval or commercialize
our products outside of the U.S., which would limit our ability to realize the full commercial potential of our product candidates.
In order to market products outside of the U.S., we must establish and comply with the numerous and varying regulatory requirements of other countries
regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and validation and additional
administrative review periods. The time required to obtain approval in other countries generally differs from that required to obtain FDA approval. The
regulatory approval process in other countries may include all of the risks detailed above regarding FDA approval in the U.S., as well as other risks.
Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country
may have a negative effect on the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay or setback in obtaining
such approval could have the same adverse effects detailed above regarding FDA approval in the U.S. As described above, such effects include the risks
that our product candidates may not be approved for all indications requested, which could limit the uses of our product candidates and have an adverse
effect on product sales, and that such approval may be subject to limitations on the indicated uses for which the product may be marketed or require costly,
post-marketing follow-up studies. Conversely, if the product candidates do receive approval outside the U.S. in the future, we may not meet the FDA
requirements in the U.S. for approval.
We must comply with the U.S. Foreign Corrupt Practices Act and similar foreign anti-corruption laws.
The U.S. Foreign Corrupt Practices Act, to which we are subject, prohibits corporations and individuals from engaging in certain activities to obtain or
retain business or to influence a person working in an official capacity. It is illegal to pay, offer to pay, or authorize the payment of anything of value to any
foreign government official, government staff member, political party, or political candidate in an attempt to obtain or retain business or to otherwise
influence a person working in an official capacity. Other countries, such as the U.K., have similar laws with which we must comply. We face the risk that
an employee or agent could be accused of violating one or more of these laws, particularly in geographies where significant overlap exists between local
government and healthcare industries. Such an accusation, even if unwarranted, could prove disruptive to our developmental and commercialization efforts.
Risks Related to Our Intellectual Property
Our success will depend on obtaining and maintaining effective patent and other intellectual property protection for our product candidates and
proprietary technology.
AeroVanc has received a U.S. Patent Notice of Allowance for its formulation in the U.S., AeroVanc’s primary market. AeroVanc has either been issued
patents or is prosecuting patent applications in numerous countries outside the U.S. We have no patent protection for Molgradex for the treatment of aPAP,
and primarily rely on the Orphan Drug exclusivity as our primary barrier to competition. Molgradex for the treatment of NTM has issued patents ex-U.S.
(under prosecution in the U.S.) with an additional international patent application pending. Both Molgradex and AeroVanc utilize proprietary delivery
devices with exclusive supply agreements. Molgradex receives additional protection via a proprietary cell bank used in the production of the drug
substance.
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Our success will depend on our ability to:
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obtain and maintain patent and other exclusivity rights with respect to our products and their uses;
prevent third parties from infringing upon our proprietary rights;
maintain proprietary know-how and trade secrets;
operate without infringing upon the patents and proprietary rights of others; and
obtain appropriate licenses to patents or proprietary rights held by third parties if infringement would otherwise occur, or if necessary, to
secure exclusive rights to them, both in the U.S. and in foreign countries.
The patent and intellectual property positions of biopharmaceutical companies generally are highly uncertain, involve complex legal and factual questions,
and have been and continue to be the subject of much litigation. There is no guarantee that we have or will develop or obtain the rights to products or
processes that are patentable, that patents will issue from any pending applications or that claims allowed will be sufficient to protect the technology we
develop or have developed or that is used by us, our CMOs, or our other service providers. In addition, any patents that are issued to us may be limited in
scope or challenged, invalidated, infringed, or circumvented, including by our competitors, and rights we have under issued patents may not provide
competitive advantages to us. If competitors can develop and commercialize technology and products similar to ours, our ability to successfully
commercialize our technology and products may be impaired.
Patent applications in the U.S. are confidential for a period of time until they are published, and publication of discoveries in scientific or patent literature
typically lags actual discoveries by several months. As a result, we cannot be certain that the inventors listed in any patent or patent application owned by
us were the first to conceive of the inventions covered by such patents and patent applications (for U.S. patent applications filed before March 16, 2013), or
that such inventors were the first to file patent applications for such inventions outside the U.S. and, after March 15, 2013, in the U.S. In addition, changes
in or different interpretations of patent laws in the U.S. and foreign countries may affect our patent rights and limit the number of patents we can obtain,
which could permit others to use our discoveries or to develop and commercialize our technology and products without any compensation to us.
Our AeroVanc patent is specific to the formulation of the AeroVanc powder. While this may prevent identical products from entering the market, it may not
preclude someone skilled in the art from inventing an alternate formulation approach with comparable or improved characteristics.
We also rely on unpatented know-how and trade secrets and continuing technological innovation to develop and maintain our competitive position, which
we seek to protect, in part, through confidentiality agreements with employees, consultants, collaborators, and others. We also have invention or patent
assignment agreements with our employees and certain consultants. The steps we have taken to protect our proprietary rights, however, may not be
adequate to preclude misappropriation of or otherwise protect our proprietary information or prevent infringement of our intellectual property rights, and
we may not have adequate remedies for any such misappropriation or infringement. In addition, it is possible that inventions relevant to our business could
be developed by a person not bound by an invention assignment agreement with us or independently discovered by a competitor.
We also intend to rely on regulatory exclusivity for protection of our product candidates, if approved for commercial sale. Implementation and enforcement
of regulatory exclusivity, which may consist of regulatory data protection and market protection, varies widely from country to country. Failure to qualify
for regulatory exclusivity, or failure to obtain or maintain the extent or duration of such protections that we expect for our product candidates, if approved,
could affect our decision on whether to market the products in a particular country or countries or could otherwise have an adverse impact on our revenue
or results of operations. For Molgradex, which is administered via nebulization, we may rely on regulatory exclusivity for the combination of Molgradex
and its delivery system. However, there is no assurance that our Molgradex product and its delivery system, if approved, will benefit from this type of
market protection.
We may rely on trademarks, trade names, and brand names to distinguish our products, if approved for commercial sale, from the products of our
competitors. We intend to seek approval for new names for AeroVanc and Molgradex that meet the FDA’s and foreign regulatory requirements. However,
our trademark applications may not be approved. Third parties may also oppose our trademark applications or otherwise challenge our use of the
trademarks, in which case we may expend substantial resources to defend our proposed or approved trademarks and may enter into agreements with third
parties that may limit our use of our trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our product,
which could result in loss of brand recognition and could require us to devote significant resources to advertising and marketing these new brands. For
example, we filed a trademark for the name “Savara” and were challenged. We decided to terminate the application, but we may revisit such filings at a
future date. Further, our competitors may infringe our trademarks or we may not have adequate resources to enforce our trademarks.
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Our success depends on our ability to prevent competitors from duplicating or developing and commercializing equivalent versions of our product
candidates, but patent protection may be difficult to obtain and any issued claims may be limited.
We have pending patent applications and issued patents in the U.S. and other countries covering the formulation of AeroVanc. However, these patents may
not provide us with significant competitive advantages, because the validity or enforceability of the patents may be challenged and, if instituted, one or
more of the challenges may be successful. Patents may be challenged in the U.S. under post-grant review proceedings, inter partes re-examination, ex parte
re-examination, or challenges in district court. Patents issued in foreign jurisdictions may be subjected to comparable proceedings lodged in various foreign
patent offices, or courts. These proceedings could result in either loss of the patent or loss or reduction in the scope of one or more of the claims of the
patent. Even if a patent issues and is held valid and enforceable, competitors may be able to design around our patents, such as by using pre-existing or
newly developed technology, in which case competitors may not infringe our issued claims and may be able to market and sell products that compete
directly with us before and after our patents expire.
We have filed for patent protection in the U.S. and other countries to cover various methods of therapeutic use of our product candidates, including the use
of Molgradex for treating NTM lung infections and AeroVanc for the treatment of MRSA infection in the lungs of CF patients. The potential use and
potential therapeutic benefits of systemically administered GM-CSF for systemic NTM disease have been described in case reports in published literature,
and therefore the use of an inhaled form of GM-CSF may be considered to lack novelty and an inventive step, and thereby to be unpatentable.
The patent prosecution process is expensive and time-consuming. We and any future licensors and licensees may not apply for or prosecute patents on
certain aspects of our product candidates at a reasonable cost, in a timely fashion, or at all. We may not have the right to control the preparation, filing, and
prosecution of some patent applications related to our product candidates or technologies. As a result, these patents and patent applications may not be
prosecuted and enforced in a manner consistent with our best interests. It is also possible that we or any future licensors or licensees will fail to identify
patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on
them. Further, it is possible that defects of form in the preparation or filing of our patent applications may exist, or may arise in the future, such as with
respect to proper priority claims, inventorship, assignment, or claim scope. If there are material defects in the form or preparation of our patents or patent
applications, such patents or applications may be invalid or unenforceable. In addition, one or more parties may independently develop similar technologies
or methods, duplicate our technologies or methods, or design around the patented aspects of our products, technologies, or methods. Any of these
circumstances could impair our ability to protect our products, if approved, in ways which may have an adverse impact on our business, financial condition,
and operating results.
Furthermore, the issuance of a patent is not conclusive as to its inventorship, scope, validity, or enforceability, and our owned and licensed patents may be
challenged in the courts or patent offices in and outside of the U.S. Such challenges may result in loss of exclusivity or freedom to operate or in patent
claims being narrowed, invalidated, or held unenforceable, in whole or in part, which could limit our ability to use our patents to stop others from using or
commercializing similar or identical products or technology, or limit the duration of the patent protection of our technology and drugs. Given the amount of
time required for the development, testing, and regulatory review of new drug candidates, patents protecting such candidates might expire before or shortly
after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others
from commercializing drugs similar or identical to ours once Orphan Drug and QIDP exclusivities have expired. See the section entitled “Risks Related to
Our Industry” for further description of Orphan Drug and QIDP exclusivities.
Enforcement of intellectual property rights in certain countries outside the U.S. has been limited or non-existent. Future enforcement of patents and
proprietary rights in many other countries will likely be problematic or unpredictable. Moreover, the issuance of a patent in one country does not assure the
issuance of a similar patent in another country. Claim interpretation and infringement laws vary by nation, so the extent of any patent protection is uncertain
and may vary in different jurisdictions.
Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment, and other
requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these
requirements.
Periodic maintenance fees, renewal fees, annuity fees, and various other governmental fees on patents and applications are required to be paid to the United
States Patent and Trademark Office (“USPTO”), and various governmental patent agencies outside of the U.S. in several stages over the lifetime of the
patents and applications. The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary,
fee payment, and other similar provisions during the patent application process and after a patent has been issued. There are situations in which non-
compliance can result in decreased patent term adjustment or in abandonment or lapse of the patent or patent application, leading to partial or complete loss
of patent rights in the relevant jurisdiction.
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Third parties may claim that our products, if approved, infringe on their proprietary rights and may challenge the approved use or uses of a product or
its patent rights through litigation or administrative proceedings, and defending such actions may be costly and time consuming, divert management
attention away from our business, and result in an unfavorable outcome that could have an adverse effect on our business.
Our commercial success depends on our ability and the ability of our CMOs and component suppliers to develop, manufacture, market, and sell our
products and product candidates and use our proprietary technologies without infringing the proprietary rights of third parties. Numerous U.S. and foreign
issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are or may be developing products.
Because patent applications can take many years to publish and issue, there currently may be pending applications, unknown to us, that may later result in
issued patents that our products, product candidates, or technologies infringe, or that the process of manufacturing our products or any of our respective
component materials, or the component materials themselves, infringe, or that the use of our products, product candidates, or technologies infringe.
We or our CMOs or component material suppliers may be exposed to, or threatened with, litigation by a third party alleging that our products, product
candidates, and/or technologies infringe its patents and/or other intellectual property rights, or that one or more of the processes for manufacturing our
products or any of our respective component materials, or the component materials themselves, or the use of our products, product candidates, or
technologies, infringe its patents and/or other intellectual property rights. If a third-party patent or other intellectual property right is found to cover our
products, product candidates, technologies, or our uses, or any of the underlying manufacturing processes or components, we could be required to pay
damages and could be unable to commercialize our products or use our technologies or methods unless we are able to obtain a license to the patent or
intellectual property right. A license may not be available to us in a timely manner or on acceptable terms, or at all. In addition, during litigation, the third-
party alleging infringement could obtain a preliminary injunction or other equitable remedy that could prohibit us from making, using, selling, or importing
our products, technologies, or methods.
There generally is a substantial amount of litigation involving patent and other intellectual property rights in the industries in which we operate and the cost
of such litigation may be considerable. We can provide no assurance that our product candidates or technologies will not infringe patents or rights owned
by others, licenses to which might not be available to us in a timely manner or on acceptable terms, or at all. If a third party claims that we or our CMOs or
component material suppliers infringe its intellectual property rights, we may face a number of issues, including, but not limited to:
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infringement and other intellectual property claims which, with or without merit, may be expensive and time consuming to litigate and may
divert management’s time and attention from our business;
substantial damages for infringement, including the potential for treble damages and attorneys’ fees, which we may have to pay if it is
determined that the product and/or its use at issue infringes or violates the third party’s rights;
a court prohibiting us from selling or licensing the product unless the third party licenses its intellectual property rights to us, which it may
not be required to do;
if a license is available from the third party, we may have to pay substantial royalties, fees and/or grant cross-licenses to the third party; and
redesigning our products or processes so they do not infringe, which may not be possible or may require substantial expense and time.
There may be issued or filed claims covering our products, product candidates, or technology or those of our CMOs or component material suppliers or the
use of our products, product candidates, or technologies. Additionally, such patents may be issued or filed in the future. Because of the large number of
patents issued and patent applications filed in the industries in which we operate, there is a risk that third parties may allege they have patent rights
encompassing our products, product candidates, or technologies, or those of our CMOs or component material suppliers, or uses of our products, product
candidates, or technologies.
In the future, it may be necessary for us to enforce our proprietary rights, or to determine the scope, validity, and unenforceability of other parties’
proprietary rights, through litigation or other dispute proceedings, which may be costly, and to the extent we are unsuccessful, adversely affect our rights. In
these proceedings, a court or administrative body could determine that our claims, including those related to enforcing patent rights, are not valid or that an
alleged infringer has not infringed our rights. The uncertainty resulting from the mere institution and continuation of any patent or other proprietary rights-
related litigation or interference proceeding could have a material and adverse effect on our business prospects, operating results, and financial condition.
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Risks Related to Our Industry
We expect competition in the marketplace for our product candidates, should any of them receive regulatory approval.
Molgradex and AeroVanc have received Orphan Drug Designation from the FDA and Molgradex has received Orphan Drug Designation from the EMA.
Orphan Drug Designation will provide market exclusivity in the U.S. for seven years and ten years in Europe, but only if (i) Molgradex and AeroVanc
receive market approval before a competitor using the same active compound for the same indication, (ii) we are able to produce sufficient supply to meet
demand in the marketplace, and (iii) another product with the same active ingredient is not deemed clinically superior. AeroVanc has also received QIDP
status extending market exclusivity by an additional five years in addition to any other exclusivity obtained in the U.S.
The industries in which we operate (biopharmaceutical, specialty pharmaceutical, biotechnology, and pharmaceutical) are highly competitive and subject to
rapid and significant change. Developments by others may render potential application of any of our product candidates in a particular indication obsolete
or noncompetitive, even prior to completion of its development and approval for that indication. If successfully developed and approved, we expect our
product candidates will face competition. We may not be able to compete successfully against organizations with competitive products, particularly large
pharmaceutical companies. Many of our potential competitors have significantly greater financial, technical, and human resources than us, and may be
better equipped to develop, manufacture, market, and distribute products. Many of these companies operate large, well-funded research, development, and
commercialization programs, have extensive experience in nonclinical and clinical studies, obtaining FDA and other regulatory approvals and
manufacturing and marketing products, and have multiple products that have been approved or are in late-stage development. These advantages may enable
them to receive approval from the FDA or any foreign regulatory agency before us and prevent us from competing due to their orphan drug protections.
Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical and
biotechnology companies. Furthermore, heightened awareness on the part of academic institutions, government agencies, and other public and private
research organizations of the potential commercial value of their inventions have led them to actively seek to commercialize the technologies they develop,
which increases competition for investment in our programs. Competitive products may be more effective, easier to dose, or more effectively marketed and
sold than ours, which would have a material adverse effect on our ability to generate revenue.
We are subject to uncertainty relating to healthcare reform measures and reimbursement policies that, if not favorable to our products, could hinder or
prevent our products’ commercial success, if any of our product candidates are approved.
The unavailability or inadequacy of third-party payer coverage and reimbursement could negatively affect the market acceptance of our product candidates
and the future revenues we may expect to receive from those products. The commercial success of our product candidates, if approved, will depend on the
extent to which the costs of such products will be covered by third-party payers, such as government health programs, commercial insurance, and other
organizations. Third-party payers are increasingly challenging the prices and examining the medical necessity and cost-effectiveness of medical products
and services, in addition to their safety and efficacy. These challenges to prices may be problematic to us since our products are targeted for a small number
of patients (those suffering from orphan diseases) thus requiring us to charge very high prices in order to recover development costs and achieve a profit on
our revenue. If these third-party payers do not consider our products to be cost-effective compared to other therapies, we may not obtain coverage for our
products after approval as a benefit under the third-party payers’ plans or, even if we do, the level of coverage or payment may not be sufficient to allow us
to sell our products on a profitable basis.
Significant uncertainty exists as to the reimbursement status for newly approved drug products, including coding, coverage, and payment. There is no
uniform policy requirement for coverage and reimbursement for drug products among third-party payers in the U.S., therefore coverage and reimbursement
for drug products can differ significantly from payer to payer. The coverage determination process is often a time-consuming and costly process that will
require us to provide scientific and clinical support for the use of our products to each payer separately, with no assurance that coverage and adequate
payment will be applied consistently or obtained. The process for determining whether a payer will cover and how much it will reimburse a product may be
separate from the process of seeking approval of the product or for setting the price of the product. Even if reimbursement is provided, market acceptance
of our products may be adversely affected if the amount of payment for our products proves to be unprofitable for healthcare providers or less profitable
than alternative treatments or if administrative burdens make our products less desirable to use. Third-party payer reimbursement to providers of our
products, if approved, may be subject to a bundled payment that also includes the procedure of administering our products or third-party payers may
require providers to perform additional patient testing to justify the use of our products. To the extent there is no separate payment for our product(s), there
may be further uncertainty as to the adequacy of reimbursement amounts.
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The continuing efforts of governments, private insurance companies, and other organizations to contain or reduce costs of healthcare may adversely affect:
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the rate and scope of adoption of our products by healthcare providers;
our ability to generate revenue or achieve or maintain profitability;
the future revenue and profitability of our potential customers, suppliers, and collaborators; and
our access to additional capital.
Our ability to successfully commercialize our products will depend on the extent to which governmental authorities, private health insurers, and other
organizations establish what we believe are appropriate coverage and reimbursement for our products. The containment of healthcare costs has become a
priority of federal and state governments worldwide and the prices of drug products have been a focus in this effort. For example, there have been several
recent U.S. Congressional inquiries and proposed bills designed to, among other things, bring more transparency to drug pricing, review the relationship
between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs, and President Trump has
stated that reducing drug pricing is a priority for his administration. We expect that federal, state, and local governments in the U.S., as well as in other
countries, will continue to consider legislation directed at lowering the total cost of healthcare. In addition, in certain foreign markets, the pricing of drug
products is subject to government control and reimbursement may in some cases be unavailable or insufficient. It is uncertain whether and how future
legislation, whether domestic or abroad, could affect prospects for our product candidates or what actions federal, state, or private payers for healthcare
treatment and services may take in response to any such healthcare reform proposals or legislation. Adoption of price controls and cost-containment
measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures may prevent or limit our ability to generate revenue,
attain profitability, or commercialize our product candidates, especially in light of our plans to price our product candidates at a high level.
Furthermore, we expect that healthcare reform measures that may be adopted in the future are unpredictable, and the potential impact on our operations and
financial position is uncertain, but may result in more rigorous coverage criteria, lower reimbursement, and additional downward pressure on the price we
may receive for approved products. Any reduction in reimbursement from Medicare or other government-funded programs may result in a similar
reduction in payments from private payers. The implementation of cost containment measures or other healthcare reforms may prevent us from being able
to generate revenue, attain profitability, or commercialize our products, if approved.
We face potential product liability exposure and, if successful claims are brought against us, we may incur substantial liability for a product or product
candidate and may have to limit its commercialization. In the future, we anticipate that we will need to obtain additional or increased product liability
insurance coverage and it is uncertain whether such increased or additional insurance coverage can be obtained on commercially reasonable terms, if
at all.
Our business (in particular, the use of our product candidates in clinical studies and the sale of any products for which we obtain marketing approval) will
expose us to product liability risks. Product liability claims might be brought against us by patients, healthcare providers, pharmaceutical companies, or
others selling or involved in the use of our products. If we cannot successfully defend ourselves against any such claims, we will incur substantial
liabilities. Regardless of merit or eventual outcome, liability claims may result in:
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decreased demand for our products and loss of revenue;
impairment of our business reputation;
delays in enrolling patients to participate in our clinical studies;
withdrawal of clinical study participants;
a “clinical hold,” suspension or termination of a clinical study or amendments to a study design;
significant costs of related litigation;
substantial monetary awards to patients or other claimants; and
the inability to commercialize our products and product candidates.
49
We maintain limited product liability insurance for our clinical studies, but our insurance coverage may not reimburse us or may not be sufficient to
reimburse us for all expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and, in the future, we may not be
able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses.
We expect that we will expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for any of our product
candidates, but we may be unable to obtain product liability insurance on commercially acceptable terms or may not be able to maintain such insurance at a
reasonable cost or in sufficient amounts to protect us against potential losses. Large judgments have been awarded in class action lawsuits based on drug
products that had unanticipated side effects. A successful product liability claim or series of claims brought against us, if judgments exceed our insurance
coverage, could consume a significant portion of our cash and adversely affect our business.
Risks Related to our Common Stock
Our stock price is expected to continue to be volatile.
The market price of our common stock has experienced substantial declines since we announced the top-line results of our IMPALA Phase 3 study of
Molgradex for aPAP on June 12, 2019, and our stock price has been and is expected to continue to be subject to significant volatility and fluctuations.
Market prices for securities of early-stage pharmaceutical, biotechnology, and other life sciences companies have historically been particularly volatile.
Some of the factors that may cause the market price of our common stock to fluctuate include:
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failed or inconclusive data results from our clinical studies;
our ability to obtain regulatory approvals for our product candidates, and delays or failures to obtain such approvals;
failure to meet or exceed any financial and development projections that we may provide to the public;
failure to meet or exceed the financial and development projections of the investment community;
failure of any of our product candidates, if approved, to achieve commercial success;
failure to maintain our existing third-party license and supply agreements;
failure by us or our licensors to prosecute, maintain, or enforce our intellectual property rights;
changes in laws or regulations applicable to our product candidates;
any inability to obtain adequate supply of our product candidates or the inability to do so at acceptable prices;
adverse regulatory authority decisions;
introduction of new products, services, or technologies by our competitors;
if securities or industry analysts do not publish research or reports about our business, or if they issue adverse or misleading opinions
regarding our business and stock;
failure to obtain sufficient capital to fund our business objectives;
sales of our common stock by us or our stockholders in the future;
trading volume of our common stock;
the perception of the pharmaceutical industry by the public, legislatures, regulators, and the investment community;
announcements of significant acquisitions, strategic partnerships, joint ventures, or capital commitments by us or our competitors;
disputes or other developments relating to proprietary rights, including patents, litigation matters, and our ability to obtain patent protection
for our technologies;
additions or departures of key personnel;
significant lawsuits, including patent or stockholder litigation;
changes in the market valuations of similar companies;
general market or macroeconomic conditions;
50
•
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announcements by commercial partners or competitors of new commercial products, clinical progress or the lack thereof, significant
contracts, commercial relationships, or capital commitments;
adverse publicity relating to the CF, aPAP, or NTM markets generally, including with respect to other products and potential products in such
markets;
the introduction of technological innovations or new therapies that compete with our products;
changes in the structure of health care payment systems; and
period-to-period fluctuations in our financial results.
Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual
companies. These broad market fluctuations may also adversely affect the trading price of our common stock.
In the past, following periods of volatility in the market price of a company’s securities, such as the decline in our stock price, stockholders have often
instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of
management attention and resources, which could significantly harm our profitability and reputation.
If we fail to satisfy all applicable Nasdaq continued listing requirements, including the $1.00 minimum closing bid price requirement, our common
stock may be delisted from Nasdaq, which could have an adverse impact on the liquidity and market price of our common stock.
Our common stock is currently listed on the Nasdaq Global Select Market, which has qualitative and quantitative continued listing requirements, including
corporate governance requirements, public float requirements, and a $1.00 minimum closing bid price requirement. If our common stock trades at closing
bid prices below $1.00 for 30 consecutive business days, or if we are unable to satisfy any of the other continued listing requirements, Nasdaq may take
steps to delist our common stock. Such a delisting would likely have an adverse effect on the market liquidity of our common stock, decrease the market
price of our common stock, result in the potential loss of confidence by investors, suppliers, customers and employees and fewer business development
opportunities, and adversely affect our ability to obtain financing for the continuation of our operations.
For example, on November 15, 2019, we received written notice from The Nasdaq Stock Market LLC indicating that, for the last thirty consecutive
business days, the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued listing on the Nasdaq Global
Select Market under Nasdaq Listing Rule 5550(a)(2). However, on December 10, 2019, we received written notice from The Nasdaq Stock Market LLC
stating that because our shares had a closing bid price at or above $1.00 per share for a minimum of ten consecutive business days, our stock had regained
compliance with the minimum bid price requirement of $1.00 per share for continued listing on the Nasdaq Global Select Market, as set forth in NASDAQ
Listing Rule 5450(a)(1).
We will continue to incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies.
We will continue to incur significant legal, accounting and other expenses, including costs associated with public company reporting requirements. We will
also continue to incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act, as well as rules
implemented by the SEC and Nasdaq. These rules and regulations may also make it difficult and expensive for us to obtain directors’ and officers’ liability
insurance. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers,
which may adversely affect investor confidence in us and cause our business or stock price to suffer.
We do not expect to pay any cash dividends in the foreseeable future.
We expect to retain any future earnings to fund the development and growth of our business and do not expect to pay any cash dividends. As a result,
capital appreciation, if any, of our common stock will be stockholders’ sole source of gain, if any, for the foreseeable future.
51
We have completed certain transactions that likely have resulted in an ownership change under Section 382 of the Internal Revenue Code limiting the
use of our net operating loss carryforwards and certain other tax attributes.
If a corporation undergoes an “ownership change” within the meaning of Sections 381, 382, and 383 of the Internal Revenue Code, the corporation’s net
operating loss carryforwards and certain other tax attributes arising from before the ownership change are subject to limitations on use after the ownership
change. In general, an ownership change occurs if there is a cumulative change in the corporation’s equity ownership by certain stockholders that exceeds
fifty percentage points over a rolling three-year period. Similar rules may apply under state tax laws. Our net operating loss carryforwards and certain other
tax attributes will be subject to limitations on use. Additional ownership changes in the future could result in additional limitations on our net operating loss
carryforwards. Consequently, even if we achieve profitability, we may not be able to utilize a material portion of our net operating loss carryforwards and
other tax attributes, which could have a material adverse effect on cash flow and results of operations.
Item 1B. Unresolved Staff Comments.
We do not have any unresolved comments issued by the SEC staff.
Item 2. Properties.
Our corporate headquarters are located in Austin, Texas, where we sublease approximately 6,151 square feet of office space pursuant to a sublease that
expires in 2021.
We believe that our existing facilities are adequate for our near-term needs, though additional space could be required based upon business activities. When
our existing lease expires, we may look for alternate space for our operations. We believe that suitable alternative space would be available on
commercially reasonable terms if required in the future.
Item 3. Legal Proceedings.
From time to time, we may become involved in various claims and legal proceedings. Regardless of outcome, litigation and other legal and administrative
proceedings can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. We are not
currently a party to any material pending litigation or other material legal proceeding.
Item 4. Mine Safety Disclosures.
Not applicable.
52
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock trades on the Nasdaq Global Select Market under the ticker symbol “SVRA.”
PART II
As of March 11, 2020, we had approximately 141 record holders of our common stock. The number of beneficial owners is substantially greater than the
number of record holders because a large portion of our common stock is held of record through brokerage firms in “street name.”
Unregistered Sales of Equity Securities
None that have not been previously reported.
Item 6. Selected Financial Data.
Not applicable.
53
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial
statements and related notes appearing elsewhere in this report. In addition to historical information, this discussion and analysis contains forward-
looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-
looking statements as a result of certain factors, including but not limited to those identified under Item 1A “Risk Factors” in this report.
Overview
Savara Inc. (together with its subsidiaries. “Savara,” the “Company,” “we” or “us”) is an orphan lung disease company. Our pipeline is comprised of
Molgradex, an inhaled granulocyte-macrophage colony-stimulating factor (“GM-CSF”), in Phase 3 development for autoimmune pulmonary alveolar
proteinosis (“aPAP”), in Phase 2a development for nontuberculous mycobacterial (“NTM”) lung infection, and in Phase 2a development for the treatment
of NTM lung infection in people living with cystic fibrosis (“CF”), and AeroVanc, inhaled vancomycin in Phase 3 development for treatment of persistent
Methicillin-resistant Staphylococcus aureus (“MRSA”) lung infection in individuals living with CF. Savara and its wholly owned subsidiaries operate in
one segment with its principal offices in Austin, Texas, USA.
Since inception, we have devoted substantially all of our efforts and resources to identifying and developing our product candidates, recruiting personnel,
and raising capital. We have incurred operating losses and negative cash flow from operations and have no material product revenue from inception to date.
From inception to December 31, 2019, we have raised net cash proceeds of approximately $264.1 million, primarily from public offerings of our common
stock, private placements of convertible preferred stock, and debt financings.
We have never been profitable and have incurred operating losses in each year since inception. Our net losses were $78.2 million and $61.5 million for the
years ended December 31, 2019 and 2018, respectively. As of December 31, 2019, we had an accumulated deficit of $207.9 million. Substantially all of our
operating losses resulted from expenses incurred in connection with our research and development programs and from general and administrative costs
associated with our operations.
We have chosen to operate by outsourcing our manufacturing and most of our clinical operations. We expect to incur significant additional expenses and
increase our operating losses for at least the next several years as we initiate and continue the clinical development of, and seek regulatory approval for, our
product candidates and add necessary personnel accordingly. We expect that our operating losses will fluctuate significantly from quarter to quarter and
year to year due to timing of clinical development programs and efforts to achieve regulatory approval.
As of December 31, 2019, we had cash and cash equivalents of $49.8 million and short-term investments of $72.0 million. We will continue to require
substantial additional capital to continue our clinical development and potential commercialization activities. Accordingly, we will need to raise substantial
additional capital to continue to fund our operations. The amount and timing of our future funding requirements will depend on many factors, including the
pace and results of our clinical development efforts. Failure to raise capital as and when needed, on favorable terms or at all, would have a negative impact
on our financial condition and our ability to develop our product candidates.
Breakthrough Designation
On December 23, 2019, the FDA granted us Breakthrough Therapy designation for Molgradex for the treatment of aPAP, a process designed to expedite the
development and review of drugs that are intended to treat a serious condition and preliminary clinical evidence indicates that the drug may demonstrate
substantial improvement over available therapy on clinically significant endpoint(s).
2017 Merger
On April 27, 2017, Savara completed its business combination with Mast, a publicly held company, in accordance with the terms of the Merger Agreement.
In connection with the Merger, Mast changed its name to Savara Inc.
54
2017 Comprehensive Tax Reform
In December 2017, the U.S. government enacted comprehensive tax legislation that includes significant changes to the taxation of business entities. These
changes include, among others, (i) a reduction to the corporate income tax rate, (ii) a partial limitation on the deductibility of business interest expense, (iii)
a shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a territorial system (along with certain rules designed to
prevent erosion of the U.S. income tax base) and (iv) a one-time tax on accumulated offshore earnings held in cash and illiquid assets, with the latter taxed
at a lower rate.
Further, the newly enacted comprehensive tax legislation, among other things, reduced the orphan drug credit from 50% to 25% of qualifying expenditures.
When and if we become profitable, this reduction in tax credits may result in an increased federal income tax burden on our orphan drug programs as it
may cause us to pay federal income taxes earlier under the revised tax law than under the prior law and, despite being partially off-set by a reduction in the
corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, may increase our total federal tax liability attributable to such programs.
Notwithstanding the reduction in the corporate income tax rate, the overall impact of this tax reform is uncertain, and our business and financial condition
could be affected.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and
judgments. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These
estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not
readily apparent from other sources. Actual results may differ materially from these estimates. We believe that the accounting policies discussed below are
critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and
estimates.
Accrued Research and Development Expenses
We record accrued expenses for estimated costs of our research and development activities conducted by external service providers, which include the
conduct of clinical trials and contract formulation and manufacturing activities. We record the estimated costs of development activities based upon the
estimated amount of services provided but not yet invoiced, and include these costs in accrued liabilities in the consolidated balance sheet and within
development expense in the consolidated statement of operations and comprehensive loss. These costs are a significant component of our research and
development expenses. We record accrued expenses for these costs based on the estimated amount of work completed and in accordance with agreements
established with these external service providers.
We estimate the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of
completion of the services and the agreed-upon fee to be paid for such services. We make significant judgments and estimates in determining the accrued
balance in each reporting period. As actual costs become known, we adjust our accrued estimates.
Business Combinations
We account for business combinations in accordance with Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations,” and as further
defined by Accounting Standards Update (“ASU”) 2017-01, “Business Combinations (Topic 805)” which requires the purchase price to be measured at fair
value. When the purchase consideration consists entirely of shares of our common stock, we calculate the purchase price by determining the fair value, as
of the acquisition date, of shares issued in connection with the closing of the acquisition and, if the transaction involves contingent consideration based on
achievement of milestones or earn-out events, the probability-weighted fair value, as of the acquisition date, of shares issuable upon the occurrence of
future events or conditions pursuant to the terms of the agreement governing the business combination. If the transaction involves such contingent
consideration, our calculation of the purchase price involves probability inputs that are highly judgmental due to the inherent unpredictability of drug
development, particularly by development-stage companies such as ours. We recognize estimated fair values of the tangible assets and intangible assets
acquired, including IPR&D, and liabilities assumed as of the acquisition date, and we record as goodwill any amount of the fair value of the tangible and
intangible assets acquired and liabilities assumed in excess of the purchase price.
55
Goodwill and Acquired IPR&D
In accordance with ASC Topic 350, “Intangibles – Goodwill and Other,” our goodwill and acquired IPR&D are determined to have indefinite lives and,
therefore, are not amortized. Instead, they are tested for impairment annually and between annual tests if we become aware of an event or a change in
circumstances that would indicate the carrying value may be impaired.
ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” outlines an impairment model providing us
the option to implement a one-step method for determining impairment of goodwill, thereby simplifying the subsequent measurement of goodwill by
eliminating Step 2 (quantitative calculation of measuring a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill
with the carrying amount of that goodwill) from the goodwill impairment test. Under the amendments in this guidance, an entity should perform its annual
or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment
charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total
amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the
carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.
With respect to the impairment testing of acquired IPR&D, ASU 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for
Impairment,” and ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment,” provides us a
two-step impairment process with the option to first assess qualitative factors to determine whether the existence of events or circumstances leads us to
determine that it is more-likely-than not (that is, a likelihood of more than 50%) that our acquired IPR&D is impaired. If we choose to first assess
qualitative factors and we determine that it is more-likely-than not acquired IPR&D is not impaired, we are not required to take further action to test for
impairment.
If we perform a quantitative assessment of acquired IPR&D, we compare its carrying value to its estimated fair value to determine whether an impairment
exists. In previous years, due to a lack of Level 1 or Level 2 inputs, the Multi-Period Excess Earnings Method (“MPEEM”), which is a form of the income
approach, was used to estimate the fair value of acquired IPR&D when performing a quantitative assessment. Under the MPEEM, the fair value of an
intangible asset is equal to the present value of the asset’s projected incremental after-tax cash flows (excess earnings) remaining after deducting the market
rates of return on the estimated value of contributory assets (contributory charge) over its remaining useful life. We evaluate potential impairment of our
acquired IPR&D annually on September 30 utilizing a qualitative approach and determining if it was more-likely-than not that the fair value was impaired.
We evaluate potential impairment of our acquired goodwill annually on June 30, performing the quantitative analysis based upon market capitalization.
While we continue to evaluate opportunities to monetize our acquired assets, we can provide no assurances that we will be able to do so. However, we
believe that our approach is a more appropriate method for assessing fair value in the context of our current business.
Our determinations as to whether, and if so, the extent to which, goodwill and acquired IPR&D become impaired are highly judgmental and, in the case of
applying the MPEEM approach to estimate fair value, are based on significant assumptions regarding our projected future financial condition and operating
results, changes in the manner of our use of the acquired assets, development of our acquired assets or our overall business strategy, and regulatory, market,
and economic environment and trends.
Share-based Compensation Expenses
We recognize the cost of stock-based awards granted to employees based on the estimated grant-date fair value of the awards. The value of the portion of
the award that is ultimately expected to vest is recognized as expense ratably over the requisite service period. We recognize the compensation costs for
awards that vest over several years on a straight-line basis over the vesting period. Forfeitures are recognized when they occur, which may result in the
reversal of compensation costs in subsequent periods as the forfeitures arise.
We estimate the grant-date fair value of a stock option award using the Black-Scholes option pricing model (“Black-Scholes model”). In determining the
grant-date fair value of a stock option award under the Black-Scholes model, we must make a number of assumptions, including the term of the award, the
volatility of the price of our common stock over the term of the award, and the risk-free interest rate. Changes in these or other assumptions could have a
material impact on the compensation expense we recognize.
Revenue
We record revenue based on a five-step model in accordance with ASC 606, “Revenue from Contracts with Customers.” To date, we have not generated
any product revenue from our product candidates.
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Milestone Revenue
With respect to the license agreement related to our Molgradex product, which includes certain milestone payments to be remunerated to us by the licensee,
we identify the performance obligations, determine the transaction price, allocate the contract transaction price to the performance obligations, and
recognize the revenue when (or as) the performance obligation is satisfied. We identify the performance obligations included within the license agreement
and evaluate which performance obligations are distinct.
The milestone payments are a form of variable consideration as the payments are contingent upon achievement of a substantive event. The milestone
payments are estimated and included in the transaction price when we determine, under the variable consideration constraint, that it is probable that there
will not be a significant reversal of cumulative revenue recognized in future periods. The transaction price is then allocated to each performance obligation
on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. At the
end of each subsequent reporting period, we re-evaluate the probability of achievement of such milestones and any related constraint, and if necessary,
adjust the estimate of the overall transaction price. The license agreement will terminate as of August 21, 2020, and we will record any deferred milestone
revenue on that date in accordance with ASC 606.
Grants and Awards
To date, we have recognized revenue solely from federal grants under the Small Business Innovation Research Program of the Department of Health and
Human Services, National Institutes of Health, and an award from the Cystic Fibrosis Foundation, a non-profit organization. We record revenue related to
the federal grants as qualifying costs are incurred, and when there is reasonable assurance that the performance conditions of the grant have been met and
the grant will be received. We record revenue related to an award from the Cystic Fibrosis Foundation upon completion and achievement of defined
milestones, and when there is reasonable assurance that the performance conditions of the award have been met and collectability is reasonably assured.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect of a change in tax rates on deferred tax assets and liabilities will be recognized in the period that includes the enactment date. A
valuation allowance is established against the deferred tax assets to reduce their carrying value to an amount that is more-likely-than not to be realized.
Financial Operations Overview
Research and Development Expenses
We recognize all research and development expenses as they are incurred. These expenses consist primarily of the following:
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expenses incurred under agreements with consultants and clinical trial sites that conduct research and development activities on our behalf;
laboratory and vendor expenses related to the execution of our clinical trials;
contract manufacturing expenses, primarily for the production of clinical supplies; and
internal costs that are associated with activities performed by our research and development organization and generally benefit multiple
programs. Where appropriate, these costs are allocated by product candidate. Unallocated internal research and development costs consist
primarily of:
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personnel costs, which include salaries, benefits and stock-based compensation expense;
allocated facilities and other expenses, which include expenses for maintenance of facilities and depreciation expense; and
regulatory expenses and technology license fees related to development activities.
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The largest component of our operating expenses has historically been our investment in research and development activities. The following table shows
our research and development expenses by product candidate for the years ended December 31, 2019 and 2018:
Product candidates:
Molgradex
AeroVanc
Other
Total research and development expenses
Year ended December 31,
2018
2019
(In thousands)
$
$
22,404 $
16,348
29
38,781 $
19,796
15,565
1,812
37,173
We expect research and development expenses will increase in the future as we advance our product candidates into and through clinical trials and pursue
regulatory approvals, which will require a significant increased investment in regulatory support and contract manufacturing and inventory build-up related
costs. In addition, we continue to evaluate opportunities to acquire or in-license other product candidates and technologies, which may result in higher
research and development expenses due to license fee and/or milestone payments.
The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in timely developing
and achieving regulatory approval for our product candidates. The probability of success of our product candidates may be affected by numerous factors,
including clinical data, competition, intellectual property rights, manufacturing capability and commercial viability. As a result, we are unable to accurately
determine the duration and completion costs of our development projects or when and to what extent we will generate revenue from the commercialization
and sale of any of our product candidates.
General and Administrative Expenses
General and administrative, or G&A, expenses primarily consist of salaries, benefits, and related costs for personnel in executive, finance and accounting,
legal and marketing functions, and professional and consulting fees for accounting, legal, investor relations, business development, commercial strategy
and research, human resources and information technology services. Other G&A expenses include facility lease and insurance costs.
Other Income/(Expense), Net
Other income/(expense) includes interest expense related to debt issuance costs and debt discount under our amended loan agreement with Silicon Valley
Bank. Interest expense is typically reported net of interest income which includes interest earned on our cash, cash equivalent, and short-term investment
balances. Other income/(expense) also includes net unrealized and realized gains and losses from foreign currency transactions, foreign exchange
derivatives not designated as hedging, refundable tax credits generated by some of our foreign subsidiaries, and securities subject to fair value accounting
as well as any other non-operating gains and losses.
Results of Operations — Comparison of Years Ended December 31, 2019 and 2018
Operating expenses:
Research and development
General and administrative
Impairment of acquired IPR&D
Impairment of goodwill
Depreciation
Total operating expenses
Loss from operations
Other income, net
Net loss before income taxes
Income tax benefit
Net loss
Year ended December 31,
2018
2019
(in thousands)
Dollar
Change
$
$
$
38,781
13,081
—
26,852
311
79,025
(79,025)
852
(78,173)
—
(78,173) $
37,173 $
10,654
21,692
—
526
70,045
(70,045)
1,472
(68,573)
7,057
(61,516) $
1,608
2,427
(21,692)
26,852
(215)
8,980
(8,980)
(620)
(9,600)
(7,057)
(16,657)
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Research and Development
Research and development expenses increased by $1.6 million, or 4.3%, to $38.8 million for the year ended December 31, 2019 from $37.2 million for the
year ended December 31, 2018. The increase was primarily due to increased development and regulatory costs associated with the development of
Molgradex for the treatment of aPAP, NTM, and NTM in patients with CF as well as development costs associated with the enrollment and other Phase 3
study activities of the AeroVanc program.
General and Administrative
General and administrative expenses increased by $2.4 million, or 22.8%, to $13.1 million for the year ended December 31, 2019 from $10.7 million for
the year ended December 31, 2018. The increase was primarily due to increased commercial costs related to market research and similar activities for
Molgradex, increases in personnel costs, legal, accounting, insurance, business development, and other operating activities.
Impairment of IPR&D and Goodwill
During the year ended December 31, 2019, we recognized $26.9 million in impairment charges to the carrying value of our goodwill following the results
of our IMPALA Phase 3 study of Molgradex for the treatment of aPAP. During the year ended December 31, 2018, we recognized a $21.7 million
impairment charge against the carrying value of acquired IPR&D related to an ancillary drug candidate previously assumed by us in our 2017 merger due
to unfavorable results from the Phase 2 study, and we are no longer supporting or pursuing this ancillary drug candidate.
Other Income, Net
Other income, net, decreased by $0.6 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily related to a
reduction of refundable research and development credits generated and earned through the year ended December 31, 2019 in Denmark and Australia.
Income Tax Benefit
Income tax benefit decreased by $7.1 million, or 100.0%, for the year ended December 31, 2019 versus the year ended December 31, 2018. During the first
quarter of 2018, we recorded a $4.6 million tax benefit related to the reversal of a deferred tax liability associated with the impairment of IPR&D
previously acquired by us in our 2017 merger. In addition, we recorded a tax benefit of $2.5 million in the fourth quarter of 2018 related to the reduction of
the valuation allowance on deferred tax assets related to our net operating losses with an indefinite carryforward period.
Liquidity and Capital Resources
Sources of Liquidity
Since inception through December 31, 2019, our operations have been financed primarily by net cash proceeds of approximately $264.1 million, primarily
from public offerings of common stock, private placements, and debt financings. As of December 31, 2019, we had $49.8 million in cash, $72.0 million in
short-term investments, and an accumulated deficit of $207.9 million. We expect that our research and development and general and administrative
expenses will increase, and, as a result, we anticipate that we will continue to incur increasing losses in the foreseeable future. Therefore, we will need to
raise additional capital to fund our operations, which may be through the issuance of additional equity and potentially through borrowings.
Debt Facility
On April 28, 2017 we entered into a loan and security agreement with Silicon Valley Bank, as amended on October 31, 2017 (the “Loan Agreement”),
which provided for a $15.0 million credit facility that was made available in two equal tranches. In December 2018, we entered into an amendment to the
Loan Agreement (the “Amendment”) to increase the amount of the term loan facility from $15.0 million to $45.0 million and make certain other changes.
The Loan Agreement, as amended by the Amendment, provides that the funds are available in two tranches, (i) $25.0 million became available upon the
effectiveness of the Amendment, of which $15.0 million was used to refinance the existing amount outstanding under the loan facility, and (ii) $20.0
million was to be made available upon our request prior to September 30, 2019, subject to certain conditions. As of September 30, 2019, we did not request
the funds under the second tranche. Accordingly, the availability of the $20.0 million under the second tranche has lapsed and those funds are no longer
available to us.
59
Silicon Valley Bank has been granted a perfected first priority lien in all of our assets with a negative pledge on our intellectual property. The Loan
Agreement contains customary affirmative and negative covenants, including among others, covenants limiting our ability and our subsidiaries’ ability to
dispose of assets, permit a change in control, merge or consolidate, make acquisitions, incur indebtedness, grant liens, make investments, make certain
restricted payments, and enter into transactions with affiliates, in each case subject to certain exceptions.
Following the Amendment, the loans bear interest at the prime rate reported in The Wall Street Journal, plus a spread of 3.0% (reduced from 4.25%).
Interest only payments are due through October 2020 followed by monthly payments of principal plus interest over the following 25 months and a maturity
date of November 1, 2022. The Loan Agreement, as amended by the Amendment, will also require (i) a prepayment fee (2.0% of funded amounts in
months 13-24 and 1.0% thereafter); and (ii) an end of term charge equal to 6.0% of the amount of principal borrowed which is amortized using thre
effective interest method over the term of the Loan Agreement. In connection with the Amendment, Savara paid Silicon Valley Bank a $0.6 million end of
term payment fee, and the prepayment penalty contemplated by the Loan Agreement was abated. Upon execution of the Amendment, Silicon Valley Bank
advanced us an additional $10.0 million, net of legal costs and $0.6 million for the end of term payment pursuant to the terms of the Loan Agreement, as
partially abated pursuant to the Amendment, to fully fund the amount of the first tranche under the Amendment. We did not draw any funds from the
second tranche under the Amendment.
On January 31, 2020, the Company executed a third amendment (the “Third Amendment”) to the loan and security agreement dated April 28, 2017, as
amended October 31, 2017 and December 4, 2018 with Silicon Valley Bank (the “Loan Agreement”), which provides for a $25 million term loan facility.
The Third Amendment extends the interest-only period of the loan repayment through June 30, 2022, with payments thereafter in equal monthly
installments of principal plus interest over 18 months. However, if by March 31, 2021, the Company does not have an ongoing Phase 3 or Phase 4 clinical
trial evaluating its Molgradex product for the treatment of autoimmune pulmonary alveolar proteinosis in which the first patient has been dosed, the
interest-only period will end and principal plus interest will be due in equal monthly installments over 24 months beginning on April 1, 2021.
Following the effective date of the Third Amendment, the Company was required to pay a portion of the end of period charge equal to $0.5 million under
the Loan Agreement to Silicon Valley Bank. The loans bear interest at the greater of (i) the prime rate reported in The Wall Street Journal, plus a spread of
3.0% or (ii) 7.75%. The Loan Agreement, as amended by the Third Amendment (the “Amended Loan Agreement”) will also require a prepayment fee
(2.0% of funded amounts in months 13-24, and 1.0% thereafter), and an end of term charge equal to 6.0% of the amount of principal borrowed.
In addition to customary affirmative and negative covenants, the Amended Loan Agreement contains an affirmative covenant requiring Savara to deliver
evidence by June 30, 2021, of the receipt of gross cash proceeds of at least $25.0 million from the exercise of currently outstanding warrants or the issuance
of other equity securities.
In connection with the execution of the Third Amendment, the Company entered into amendments to each of the outstanding warrants previously issued to
Silicon Valley Bank and its affiliate, totaling 77,792 shares, to amend the exercise price to be $2.87 per share. That amendment results in a decrease in the
fair value of these warrants, determined in accordance with the Black-Scholes-Merton option pricing model, of $0.1 million, which will be accounted for as
debt issuance costs and will be accreted as contra-interest expense using the effective interest method through the scheduled maturity date.
The capital is being utilized to fund our ongoing development programs and for general corporate purposes.
Common Stock Sales Agreement
On April 28, 2017, we entered into a Common Stock Sales Agreement with H.C. Wainwright & Co., LLC (“Wainwright”), as sales agent, which was
amended by Amendment No. 1 to the Common Stock Sales Agreement (the “Amendment”) on June 29, 2018 (the “Sales Agreement”), pursuant to which
we may offer and sell, from time to time, through Wainwright, shares of our common stock, par value $0.001 per share (the “Shares”), having an aggregate
offering price of not more than $60.0 million, in addition to the $2.3 million in shares sold prior to the Amendment. The Amendment was effective on July
13, 2018, at the time our Registration Statement on Form S-3, dated June 29, 2018, (the “New Registration Statement”) was declared effective by the SEC.
The Shares will be offered and sold pursuant to the New Registration Statement. Subject to the terms and conditions of the Sales Agreement, Wainwright
will use its commercially reasonable efforts to sell the Shares from time to time, based upon our instructions. We have provided Wainwright with
customary indemnification rights, and Wainwright will be entitled to a commission at a fixed commission rate equal to 3.0% of the gross proceeds per
Share sold. Sales of the Shares, if any, under the Sales Agreement may be made in transactions that are deemed to be “at the market offerings” as defined in
Rule 415 under the Securities Act of 1933, as amended. We have no obligation to sell any of the Shares and may at any time suspend sales under the Sales
Agreement or terminate the Sales Agreement.
During the years ended December 31, 2019 and 2018, we sold 4,769,726 shares and 48,600 shares of common stock under the Sales Agreement for net
proceeds of approximately $29.6 million and $0.5 million, respectively.
60
Public Offerings
On June 7, 2017, we completed an underwritten public offering consisting of 9,034,210 shares of our common stock, which included 613,157 shares upon
the partial exercise of the underwriters’ option to purchase additional shares of our common stock at the public offering price. The net proceeds from the
offering, after deducting the underwriting discounts and commissions and offering expenses, were approximately $39.5 million. The public offering was
executed under an existing shelf registration statement as previously filed with the SEC on August 12, 2015 and declared effective on August 19, 2015.
On October 27, 2017, we completed an underwritten public offering consisting of 6,037,500 shares of our common stock, which included 787,500 shares
upon the exercise of the underwriters’ option to purchase additional shares of our common stock at the public offering price and pre-funded warrants to
purchase 775,000 shares of our common stock. The net proceeds from the offering, after deducting the underwriting discounts and commissions and
offering expenses, were approximately $50.0 million. The public offering was executed under an existing shelf registration statement as previously filed
with the SEC on August 12, 2015 and declared effective on August 19, 2015.
On July 30, 2018, we completed an underwritten public offering consisting of 4,250,000 shares of our common stock at the public offering price. The net
proceeds from the offering, after deducting the underwriting discounts and commissions and offering expenses, were approximately $45.8 million. The July
2018 public offering was executed under the New Registration Statement.
We have used and intend to use the net proceeds from these offerings for working capital and general corporate purposes, which include, but are not limited
to, the funding of clinical development of and pursuing regulatory approval for our product candidates, the initiation of Molgradex pre-commercialization
activities, and general and administrative expenses.
Private Placement
On December 24, 2019, we completed a private placement in a public entity (the “Private Placement” or “PIPE”) under a Securities Purchase Agreement
(the “Purchase Agreement”) with certain institutional and accredited investors (the “Investors”), pursuant to which we issued and sold to the Investors
9,569,430 shares of our common stock and pre-funded warrants (“Pre-Funded PIPE Warrants”) to purchase an aggregate of 5,780,537 shares of our
common stock. The gross proceeds before deducting placement fees and offering expenses were approximately $26.8 million. We also issued
accompanying warrants (the “Milestone Warrants”) to purchase an aggregate of up to 32,577,209 additional shares of our common stock and may receive
up to approximately $48.2 million from the exercise of the Milestone Warrants prior to their expiration totaling aggregate gross proceeds of up to
approximately $75.0 million from the PIPE before deducting placement agent fees and estimated offering costs. The Milestone Warrants are exercisable at
any time prior to the earlier of thirty days following the achievement of a defined clinical milestone or two years after the closing date of the Private
Placement. The Pre-Funded PIPE Warrants are exercisable at any time after their original issuance and will not expire. In connection with the Private
Placement and the Purchase Agreement, we entered into a registration rights agreement with the Investors, pursuant to which, among other things, we have
agreed to prepare and file a registration statement with the SEC and plan to complete the filing by Q2 2020.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Cash used in operating activities
Cash provided by (used in) investing activities
Cash provided by financing activities
Effect of exchange rate changes
Net increase in cash
Year ended December 31,
2019
2018
(in thousands)
(45,123)
15,740
54,908
(22)
25,503
$
$
(39,275)
(13,619)
55,193
(119)
2,180
$
$
Cash flows from operating activities
Cash used in operating activities for the year ended December 31, 2019 was $45.1 million, consisting of a net loss of $78.2 million, which was partially
offset by non-cash charges of $32.2 million, mainly comprised of impairment of goodwill, depreciation, non-cash interest, fair value changes, accretion on
discount to short-term investments, amortization of debt issuance costs, and stock-based compensation, and further offset by a net decrease in assets and
liabilities of $0.8 million. The change in our net operating assets and liabilities was primarily due to an increase in accrued liabilities mostly related to
research and development costs for both AeroVanc and Molgradex.
61
Cash used in operating activities for the year ended December 31, 2018 was $39.3 million, consisting of a net loss of $61.5 million, which was partially
offset by noncash charges of $19.8 million mainly comprised of impairment of IPR&D, depreciation, noncash interest, fair value changes, provision for
deferred taxes, accretion of discount to short-term investments, amortization of debt issuance costs, and stock-based compensation, and increased by a net
increase in assets and liabilities of $2.4 million.
Cash flows from investing activities
Cash provided by investing activities for the year ended December 31, 2019 was primarily the result of net sale and maturities of short-term investments.
Cash used in investing activities for the year ended December 31, 2018 was the result of cash used for the purchase of short-term investments.
Cash flows from financing activities
Cash provided by financing activities for the year ended December 31, 2019 was primarily related to net proceeds of $25.2 million from the Private
Placement completed on December 24, 2019, and $29.6 million in net proceeds from the “at the market offering” under the Sales Agreement.
Cash provided by financing activities for the year ended December 31, 2018 was primarily related to net proceeds of $45.8 million from a public offering
completed on July 30, 2018, $0.5 million from the “at the market offering” under the Sales Agreement, and net increase in borrowings of $9.4 million from
our Loan Agreement, as revised by the Amendment, as partially offset by $0.5 million in principal payments on our capital lease obligation.
Future Funding Requirements
We have not generated any revenue from product sales. We do not know when, or if, we will generate any revenue from product sales. We do not expect to
generate any revenue from product sales unless and until we obtain regulatory approval for and commercialize any of our product candidates. At the same
time, we expect our expenses to increase in connection with our ongoing development and manufacturing activities, particularly as we continue the
research, development, manufacture and clinical trials of, and seeking of regulatory approval for, our product candidates. In addition, subject to obtaining
regulatory approval of any of our product candidates, we anticipate that we will need substantial additional funding in connection with our continuing
operations.
As of December 31, 2019, we had cash, cash equivalents, and short-term investments of $121.8 million. We will continue to require substantial additional
capital to continue our clinical development and potential commercialization activities. Accordingly, we will need to raise substantial additional capital to
continue to fund our operations. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of
our clinical development efforts. Failure to raise capital as and when needed, on favorable terms or at all, would have a negative impact on our financial
condition and our ability to develop our product candidates.
Until we can generate a sufficient amount of product revenue to finance our cash requirements, we expect to finance our future cash needs primarily
through the issuance of additional equity and potentially through borrowings, grants, and strategic alliances with partner companies. To the extent that we
raise additional capital through the issuance of additional equity or convertible debt securities, the ownership interest of our stockholders will be diluted,
and the terms of these securities may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if
available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt,
making capital expenditures, or declaring dividends. If we raise additional funds through marketing and distribution arrangements or other collaborations,
strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams,
research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity
or debt financings when needed, we may be required to delay, limit, reduce, or terminate our product development or commercialization efforts or grant
rights to develop and market product candidates to third parties that we would otherwise prefer to develop and market ourselves.
License and Royalty Agreements
We are also subject to certain contingent payments to the Cystic Fibrosis Foundation (“CFF”) in connection with a grant award. In September 2013, we
received a $1.7 million award (“CFF Award”) from CFF which was subsequently increased to $6.7 million as described below. The CFF Award includes
disbursements to us based on the achievement of certain milestones. We are subject to certain royalty payments due to CFF under the CFF Award based on
commercialization of our AeroVanc product and either the achievement of certain sales volumes or a change in control transaction, as defined below.
62
Commercial Approval Royalty
A royalty is payable to the CFF equal to three (3) times the amount of the CFF Award upon approval of our AeroVanc product for commercial use. The
royalty is payable in equal installments of 33% due 60 days after first commercial sale; 33% due within 90 days of the first anniversary of the first
commercial sale; and 34% due within 90 days of second anniversary of the first commercial sale. This royalty will be reduced upon change in control
transaction payments as described below or a sale or license of the AeroVanc program with a third party but not to exceed an amount equal to three (3)
times the CFF Award. As our product, AeroVanc, has not yet been approved for commercial use, we have not recorded a liability for the commercial
approval royalty.
Additional Royalties
In addition, if net sales of AeroVanc exceed $50.0 million for any calendar year occurring during the first five years after the first commercial sale, we must
remit payment to the CFF equal to one (1) times the CFF Award. Furthermore, if net sales of AeroVanc exceed $100.0 million for any calendar year
occurring during the first five years after first commercial sale, we must remit an additional payment to the CFF equal to one (1) times the CFF Award.
Given that we have not recognized any sales from our product, we have not recorded a liability for any amounts due as additional royalties.
Change in Control Royalty
Upon a change in control transaction, as defined below, we must remit a royalty payment to the CFF equal to 5% of the proceeds from the change in control
transaction but not to exceed an amount equal to three (3) times the CFF Award.
A change in control transaction is defined as the consummation (in a single or series of transactions) of a (i) merger, share exchange, or other
reorganization; (ii) sale by one or more stockholders of a majority voting power; or (iii) sale of substantially all of our assets. We have determined that a
change of control is not probable and as such, have not recorded a liability for the change in control royalty.
The CFF Award may not be assigned by any party (other than to an affiliate or to a successor to substantially all of such party’s assets or business to which
the CFF Award relates) without the consent of the other party.
If we initiate an “Interruption,” as defined under the CFF Award, whereby we cease to conduct, or cease to use commercially reasonable efforts to advance
the research and development or commercialization of the AeroVanc program for more than one year at any time before the first commercial sale of the
product under the AeroVanc program, we shall transfer an exclusive, worldwide license to the CFF of our research and development of the product under
the AeroVanc program, limited to the right to manufacture, have manufactured, license, sell, use, support, or offer to sell any related invention from our
AeroVanc program.
Amendment
On November 28, 2017, we entered into an amendment agreement, effective September 30, 2017, to the CFF Award (“Amended CFF Award”), pursuant to
which the amount of the development award available to us was increased by $5.0 million to an aggregate of $6.7 million. Pursuant to the terms of the
Amended CFF Award, if we elect to draw down funds on the increased award, we are obligated to make royalty payments to CFF upon the
commercialization of AeroVanc.
A payment equal to four (4) times the amount we receive under the Amended CFF Award is due in three installments: 33% due 60 days after first
commercial sale of AeroVanc; 33% due within 90 days after the first anniversary of the first commercial sale of AeroVanc; and 34% due within 90 days
after the second anniversary of the first commercial sale of AeroVanc. Additionally, if net sales of AeroVanc exceed $50.0 million for any calendar year
occurring during the first five years after the first commercial sale of AeroVanc, we must remit payment to CFF equal to the amount received by us under
the Amended CFF Award. Furthermore, if net sales exceed $100.0 million for any calendar year occurring during the first seven years after first
commercial sale of AeroVanc, we must remit an additional payment to CFF equal to the amount received by us under the Amended CFF Award. We are
also obligated to make royalty payments to CFF if we enter into a change of control transaction or a sale or license of the AeroVanc program with a third
party equal to 7.5% of the amount received from the third party in connection with such transaction, up to a total of four (4) times the amount received by
us under the Amended CFF Award. Any such payments are to be credited against the royalty payments due upon commercialization of AeroVanc, and we
must continue paying or cause the third party to assume any remaining royalties payable to CFF pursuant to the Amended CFF Award.
As of December 31, 2019 and 2018, we had drawn down $1.7 million, in total, solely under the CFF Award dated September 2013.
63
Manufacturing and Other Commitments and Contingencies
We are subject to various manufacturing royalties and payments and other commitments related to our product candidate, Molgradex.
For a summary of the contingent milestone payments and commitments, refer to Note 2, “Summary of Significant Accounting Policies - Manufacturing and
Other Commitments and Contingencies,” of the consolidated financial statements in this report.
Other Contracts
We enter into contracts in the normal course of business with various third parties for research studies, clinical trials, testing, and other services. These
contracts generally provide for termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not
material.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.
Management Outlook
Recent Accounting Pronouncements
See Note 2, “Summary of Significant Accounting Policies - Recent Accounting Pronouncements,” of the consolidated financial statements in this report for
a discussion of recent accounting pronouncements and their effect, if any, on us.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We have market risk exposure related to our cash, cash equivalents and short-term investment securities. Such interest-earning instruments carry a degree
of interest rate risk; however, we have not been exposed to nor do we anticipate being exposed to material risks due to changes in interest rates. A
hypothetical 1% change in interest rates during any of the periods presented would not have had a material impact on our audited consolidated financial
statements. Additionally, our investment securities are fixed income instruments denominated and payable in U.S. dollars and have short-term maturities,
typically less than twelve months, and typically carry credit ratings of “A” at a minimum by two of three nationally recognized statistical rating
organizations, specifically Moody’s, Standard & Poor’s or Fitch. As such, we do not believe that our cash, cash equivalents and short-term investment
securities have significant risk of default or illiquidity.
We have ongoing operations in Denmark and pay those vendors in local currency (Danish Krone) or Euros. We seek to limit the impact of foreign currency
fluctuations through the use of derivative instruments, and short-term foreign currency forward exchange contracts not designated as hedging instruments.
We did not recognize any significant exchange rate losses during the years ended December 31, 2019 and 2018. A 10% change in the Krone-to-dollar or
Euro-to-dollar exchange rate on December 31, 2019 would not have had a material effect on our results of operations or financial condition.
We also have interest rate exposure as a result of our Loan Agreement, as amended, with Silicon Valley Bank. As of December 31, 2019, the outstanding
gross principal amount of the secured term loan was $25.0 million. The loan bears interest at the prime rate reported in The Wall Street Journal, plus a
spread of 3.00%. Changes in the prime rate may therefore affect our interest expense associated with our secured term loan. If a 10% change in interest
rates from the interest rates on December 31, 2019 were to have occurred, this change would not have had a material effect on the value of our investment
portfolio or on our interest expense obligations with respect to outstanding borrowed amounts.
Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation has had a material effect on our results
of operations during the periods presented.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and supplementary financial information required by this item are filed with this report as described under Item 15.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the
effectiveness of our disclosure controls and procedures as of December 31, 2019, pursuant to and as required by Rule 13a-15(b) under the Exchange Act.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2019, our disclosure controls
and procedures, as defined by Rule 13a-15(e) under the Exchange Act, were effective and designed to ensure that (i) information required to be disclosed in
our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules
and forms, and (ii) information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosures.
65
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we
assessed the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). As a result of that assessment, management concluded that our
internal control over financial reporting was effective as of December 31, 2019 based on criteria in Internal Control - Integrated Framework (2013) issued
by the COSO. The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by RSM US LLP, an
independent registered public accounting firm, as stated in their report which appears in Item 15 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during Savara’s year ended December 31, 2019 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
Not applicable.
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PART III
Certain information required by Part III of this report is omitted from this report pursuant to General Instruction G(3) of Form 10-K because we will file a
definitive proxy statement pursuant to Regulation 14A for our 2020 annual meeting of stockholders (the “Proxy Statement”) not later than 120 days after
the end of the fiscal year covered by this report, and the information included in the Proxy Statement that is required by Part III of this report is
incorporated herein by reference.
Item 10. Directors, Executive Officers, and Corporate Governance.
Code of Ethics
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, or persons
performing similar functions, as well as all of our other officers, directors, and employees. This code of ethics is a part of our code of business conduct and
ethics, and is available on our corporate website at www.savarapharma.com. We intend to disclose future amendments to, or waivers of, certain provisions
of our code of ethics that apply to our principal executive officer, principal financial officer, principal accounting officer, or persons performing similar
functions on our corporate website within four business days following such amendment or waiver.
The other information required by this item will be set forth in the Proxy Statement and is incorporated into this report by reference.
Item 11. Executive Compensation.
The information required by this item will be set forth in the Proxy Statement and is incorporated into this report by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item will be set forth in the Proxy Statement and is incorporated into this report by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item will be set forth in the Proxy Statement and is incorporated into this report by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this item will be set forth in the Proxy Statement and is incorporated into this report by reference.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) Documents Filed. The following documents are filed as part of this report:
(1) Financial Statements. The following report of RSM US LLP and financial statements:
•
•
•
•
•
•
Report of Independent Registered Public Accounting Firm on Financial Statements and Internal Control over Financial Reporting
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2019 and 2018
Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the years ended
December 31, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. See subsection (c) below.
(3) Exhibits. See subsection (b) below.
(b) Exhibits. The exhibits filed or furnished with this report are set forth on the Exhibit Index immediately following the signature page of this report,
which Exhibit Index is incorporated herein by reference.
(c) Financial Statement Schedules. All schedules are omitted because they are not applicable or the required information is shown in the financial
statements or notes thereto.
Item 16. Form 10-K Summary.
Not applicable.
68
Exhibit Index
2.1
Agreement and Plan of Merger and Reorganization, dated January 6, 2017, by and among the Registrant, Aravas Inc. (formerly Savara Inc.)
and Victoria Merger Corp. (Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on January 9,
2017.)
2.2
Business Transfer Agreement, dated May 13, 2016, between Aravas Inc. (formerly Savara Inc.) and Serendex Pharmaceuticals A/S
(Incorporated by reference to Exhibit 2.6 to the Registrant’s Registration Statement on Form S-4 filed on February 10, 2017.)
3.1
Amended and Restated Certificate of Incorporation, as amended, of the Registrant (Incorporated by reference to Exhibit 3.1 to the
Registrant’s Registration Statement on Form S-3 filed on June 29, 2018.)
3.2
Composite Amended and Restated Bylaws, as amended, of the Registrant (Incorporated by reference to Exhibit 3.2 to the Registrant’s
Annual Report on Form 10-K filed on March 26, 2014.)
4.1
Form of common stock certificate of the Registrant (Incorporated by reference to Exhibit 4.1 to the Registrant’s Annual Report on Form 10-
K filed on March 14, 2018.)
4.2
Warrant Agreement, dated as of August 11, 2015, between the Registrant and Hercules Technology III, L.P. (Incorporated by reference to
Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on November 12, 2015.)
4.3
First Amendment to Warrant Agreement, dated as of September 28, 2015, between the Registrant and Hercules Technology III, L.P.
(Incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed on November 12, 2015.)
4.4
Second Amendment to Warrant Agreement, dated as of February 25, 2016, between the Registrant and Hercules Technology III, L.P.
(Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 29, 2016.)
4.5
Third Amendment to Warrant Agreement, dated as of March 3, 2017, between the registrant and Hercules Technology III, L.P.
(Incorporated by reference to Exhibit 4.8 to the Registrant’s Annual Report on Form 10-K filed on March 6, 2017.)
4.6
Form of Warrant Agreement entered into on February 16, 2016 between the Registrant and American Stock Transfer & Trust Company,
LLC (Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on February 11, 2016.)
4.7
Form of Warrant Certificate for warrants to acquire common stock of the Registrant issued by the Registrant on February 16, 2016
(Incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on February 11, 2016.)
4.8
Warrant to Purchase Shares of Common Stock of the Registrant issued to Life Science Loans II, LLC on April 28, 2017 (Incorporated by
reference to Exhibit 4.3 to the Registrant’s Quarterly Report on Form 10-Q filed on May 5, 2017.)
4.9
Warrant to Purchase Shares of Common Stock of the Registrant issued to Silicon Valley Bank on April 28, 2017 (Incorporated by reference
to Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q filed on May 5, 2017.)
4.10
Amendment to Warrant to Purchase Shares of Common Stock of the Registrant issued to Life Science Loans II, LLC on June 26, 2017.
(Incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q filed on August 9, 2017.)
4.11
Amendment to Warrant to Purchase Shares of Common Stock of the Registrant issued to SVB Financial Group on June 26, 2017.
(Incorporated by reference to Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 9, 2017.)
4.12
Warrant to Purchase Shares of Common Stock of the Registrant issued to Life Science Loans II, LLC on June 26, 2017. (Incorporated by
reference to Exhibit 4.3 to the Registrant’s Quarterly Report on Form 10-Q filed on August 9, 2017.)
4.13
Warrant to Purchase Shares of Common Stock of the Registrant issued to Silicon Valley Bank on June 26, 2017. (Incorporated by reference
to Exhibit 4.4 to the Registrant’s Quarterly Report on Form 10-Q filed on August 9, 2017.)
4.14
Form of Pre-Funded Warrant (Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on October 25,
2017.)
69
4.15
Warrant to Purchase Shares of Common Stock of the Registrant issued to Life Science Loans II, LLC on December 4, 2018. (Incorporated
by reference to Exhibit 4.19 to the Registrant’s Annual Report on Form 10-K filed on March 13, 2019.)
4.16
Warrant to Purchase Shares of Common Stock of the Registrant issued to Silicon Valley Bank on December 4, 2018. (Incorporated by
reference to Exhibit 4.20 to the Registrant’s Annual Report on Form 10-K filed on March 13, 2019.)
4.17
Form of Common Stock Purchase Warrant (Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed
on December 20, 2019.)
4.18
Form of Pre-Funded Common Stock Purchase Warrant (Incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form
8-K filed on December 20, 2019.)
4.19
Second Amendment to Warrant to Purchase Common Stock dated January 31, 2020, to Warrant to Purchase Common Stock of the
Registrant issued to Life Science Loans II, LLC on April 28, 2017 (as amended by that certain Amendment to Warrant to Purchase
Common Stock dated as of June 26, 2017) (Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed
on February 3, 2020.)
4.20
Second Amendment to Warrant to Purchase Common Stock dated January 31, 2020, to Warrant to Purchase Common Stock of the
Registrant issued to Silicon Valley Bank on April 28, 2017 (as amended by that certain Amendment to Warrant to Purchase Common Stock
dated as of June 26, 2017) (Incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on February 3,
2020.)
4.21
4.22
4.23
4.24
Amendment to Warrant to Purchase Common Stock of the Registrant dated January 31, 2020, to Warrant to Purchase Common Stock of the
Registrant issued to Life Science Loans II, LLC on June 26, 2017 (Incorporated by reference to Exhibit 4.3 to the Registrant’s Current
Report on Form 8-K filed on February 3, 2020.)
Amendment to Warrant to Purchase Common Stock of the Registrant dated January 31, 2020, to Warrant to Purchase Common Stock of the
Registrant issued to Silicon Valley Bank on June 26, 2017 (Incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report on
Form 8-K filed on February 3, 2020.)
Amendment to Warrant to Purchase Common Stock of the Registrant dated January 31, 2020, to Warrant to Purchase Common Stock of the
Registrant issued to Life Science Loans II, LLC on December 4, 2018 (Incorporated by reference to Exhibit 4.5 to the Registrant’s Current
Report on Form 8-K filed on February 3, 2020.)
Amendment to Warrant to Purchase Common Stock of the Registrant dated January 31, 2020, to Warrant to Purchase Common Stock of the
Registrant issued to Silicon Valley Bank on December 4, 2018 (Incorporated by reference to Exhibit 4.6 to the Registrant’s Current Report
on Form 8-K filed on February 3, 2020.)
4.25
Description of Registered Securities.
10.1
Common Stock Sales Agreement, dated April 28, 2017, between Savara Inc. and H.C. Wainwright & Co., LLC (Incorporated by reference
to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on April 28, 2017.)
10.2
Loan and Security Agreement, dated April 28, 2017, among Savara Inc., Aravas Inc. and Silicon Valley Bank (Incorporated by reference to
Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on May 5, 2017.)
10.3
First Amendment dated October 31, 2017, to Loan and Security Agreement, dated April 28, 2017, among Savara Inc., Aravas Inc. and
Silicon Valley Bank. (Incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed on November 8,
2017.)
10.4
# Savara Inc. 2015 Omnibus Incentive Plan, as amended and restated (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current
Report on Form 8-K filed on June 7, 2018.)
10.5
# Form of Non-Statutory Stock Option Grant Agreement—Director (for grants to non-employee directors) under the 2015 Omnibus Incentive
Plan (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on June 16, 2015.)
10.6
# Form of Incentive Stock Option Grant Agreement – Exempt Employees under the 2015 Omnibus Incentive Plan (Incorporated by reference
to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on June 16, 2015.)
10.7
# Form of Incentive Stock Option Grant Agreement – Non-Exempt Employees under the 2015 Omnibus Incentive Plan (Incorporated by
reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on June 16, 2015.)
10.8
# Form of Non-Statutory Stock Option Grant Agreement – General under the 2015 Omnibus Incentive Plan (Incorporated by reference to
Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K filed on March 14, 2018.)
10.9
# Form of Incentive Stock Option Grant Agreement – Exempt Employees, in accordance with Danish employment law, under the 2015 Omnibus
Incentive Plan. (Incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K filed on March 14, 2018.)
70
10.10
# Form of Grant of Restricted Stock Units under the 2015 Omnibus Incentive Plan. (Incorporated by reference to Exhibit
10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on November 8, 2017.)
10.11
# Aravas Inc. (formerly Savara Inc.) Stock Option Plan (Incorporated by reference to Exhibit 10.53 to the Registrant’s Registration Statement
on Form S-4 filed on February 10, 2017.)
10.12
# Aravas Inc. (formerly Savara Inc.) Form of Incentive Stock Option Agreement (Incorporated by reference to Exhibit 10.54 to the
Registrant’s Registration Statement on Form S-4 filed on February 10, 2017.)
10.13
# Executive Employment Agreement, dated March 9, 2017, between Aravas Inc. (formerly Savara Inc.) and Robert Neville (Incorporated by
reference to Exhibit 10.56 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-4 filed on March 13, 2017.)
10.14
# Executive Employment Agreement, dated March 9, 2017, between Aravas Inc. (formerly Savara Inc.) and Taneli Jouhikainen (Incorporated
by reference to Exhibit 10.57 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-4 filed on March 13, 2017.)
10.15
# Executive Employment Agreement, dated March 9, 2017, between Aravas Inc. (formerly Savara Inc.) and David Lowrance (Incorporated
by reference to Exhibit 10.58 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-4 filed on March 13, 2017.)
10.16
# Form of Director and Officer Indemnification Agreement (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on
Form 8-K filed on October 23, 2006.)
10.17
+ Supply Agreement, dated September 26, 2016, between Aravas Inc. (formerly Savara Inc.) and Xellia Pharmaceuticals ApS (Incorporated
by reference to Exhibit 10.59 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-4 filed on March 13, 2017.)
10.18
+ Supply Agreement, effective September 1, 2012, between Aravas Inc. (formerly Savara Inc.) and Plastiape SpA, as amended by
Amendment No. 1, dated June 1, 2016 (Incorporated by reference to Exhibit 10.60 to Amendment No. 1 to the Registrant’s Registration
Statement on Form S-4 filed on March 13, 2017.)
10.19
+ Commercial Supply Agreement dated April 24, 2015 between PARI Pharma GmbH and Serendex Pharmaceuticals A/S (Incorporated by
reference to Exhibit 10.62 to the Registrant’s Registration Statement on Form S-4 filed on February 10, 2017.)
10.20
+ Research Collaboration and License Agreement dated November 7, 2014 between PARI Pharma GmbH and Serendex Pharmaceuticals A/S
(Incorporated by reference to Exhibit 10.63 to the Registrant’s Registration Statement on Form S-4 filed on February 10, 2017.)
10.21
Sublease Agreement between Savara Inc. and Clubessential, LLC dated November 28, 2017 (Incorporated by reference to Exhibit 10.1 to
the Registrant’s Current Report on Form 8-K filed on December 4, 2017.)
10.22
Settlement Agreement between Savara Inc. and Serenova A/S dated September 1, 2017 (Incorporated by reference to Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q filed on November 8, 2017.)
10.23
Research Program Award Letter Agreement between Savara Inc. and Cystic Fibrosis Foundation Therapeutics, Inc. dated September 30,
2013, as amended by Amendment No. 1, effective September 30, 2017 (Incorporated by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K filed on November 30, 2017.)
10.24
Sublease Agreement by and between the registrant and Santarus, Inc., effective as of June 19, 2014 (Incorporated by reference to Exhibit
10.1 to the Registrant’s Current Report on Form 8-K filed on June 30, 2014.)
10.25
Amendment No. 1 to Common Stock Sales Agreement, dated June 29, 2018, between Savara Inc. and H.C. Wainwright & Co., LLC.
(Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed on June 29, 2018.)
10.26
+ Amendment No. 1, effective May 23, 2018, to the Research Collaboration and License Agreement between Savara Inc. (as successor in
interest to Serendex Pharmaceuticals A/S) and PARI Pharma GmbH dated November 7, 2014 (Incorporated by reference to Exhibit 10.3 of
the Registrant’s Quarterly Report on Form 10-Q filed on August 9, 2018.)
10.27
# Amendment to Executive Employment Agreement, dated as of August 3, 2018, by and among Savara Inc. and Taneli Jouhikainen
(Incorporated by reference to Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q filed on August 9, 2018.)
10.28
# Amendment to Executive Employment Agreement, dated as of August 3, 2018, by and among Savara Inc. and Dave Lowrance
(Incorporated by reference to Exhibit 10.5 of the Registrant’s Quarterly Report on Form 10-Q filed on August 9, 2018.)
10.29
# Amendment to Executive Employment Agreement, dated as of August 3, 2018, by and among Savara Inc. and Robert Neville (Incorporated by
reference to Exhibit 10.6 of the Registrant’s Quarterly Report on Form 10-Q filed on August 9, 2018.)
71
10.30
Second Amendment, dated December 4, 2018, to Loan and Security Agreement, dated April 28, 2017, as amended on October 31, 2017,
among Savara Inc., Aravas Inc. and Silicon Valley Bank. (Incorporated by reference to Exhibit 10.31 to the Registrant’s Annual Report on
Form 10-K filed on March 13, 2019.)
10.31
Securities Purchase Agreement (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on
December 20, 2019.)
10.32
Registration Rights Agreement (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on
December 20, 2019.)
10.33
+ Manufacture and Supply Agreement, dated as of April 26, 2019, between Savara ApS and GEMABIOTECH SAU (Incorporated by
reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q filed on May 9, 2019.)
10.34
Amendment dated May 27, 2019 to the Business Transfer Agreement Between Savara Inc. and Serendex Pharmaceuticals A/S, dated May
13, 2016, between Savara Inc. and Serendex Pharmaceuticals A/S. (Incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly
Report on Form 10-Q filed on August 8, 2019.)
10.35
+ Master Manufacturing Services Agreement, dated June 26, 2019, between Savara ApS and Patheon UK Limited. (Incorporated by reference
to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q filed on August 8, 2019.)
10.36
10.37
10.38
Restricted Stock Unit Agreement (Inducement Grant) between Badrul Chowdhury and Savara Inc. dated November 26, 2019.
Non-statutory Stock Option Agreement (Inducement Award) between Badrul Chowdhury and Savara Inc. dated November 26, 2019.
Third Amendment, dated January 31, 2020, to Loan and Security Agreement, dated April 28, 2017, as amended on October 31, 2017 and
December 4, 2018, among the Registrant, Aravas Inc. and Silicon Valley Bank (Incorporated by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K filed on February 3, 2020.)
10.39
Executive Employment Agreement, dated September 6, 2019, between Savara Inc. and Badrul Chowdhury, Chief Medical Officer.
21.1
23.1
23.2
24.1
31.1
31.2
32.1
List of Subsidiaries (Incorporated by reference to Exhibit 21.1 of the Registrant’s Annual Report 10-K filed on March 14, 2018.)
Consent of RSM US LLP, Independent Registered Public Accounting Firm
Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm
Power of Attorney included on page 73 of this Form 10-K
Certification of principal executive officer pursuant to Rule 13a-14(a)/15d-14(a)
Certification of principal financial officer pursuant to Rule 13a-14(a)/15d-14(a)
** Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
# Indicates management contract or compensatory plan
+ Indicates confidential treatment has been granted to certain portions of this exhibit, which portions have been omitted and filed separately
with the SEC.
** These certifications are being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and are not being filed for purposes of
Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the registrant, whether
made before or after the date hereof, regardless of any general incorporation by reference language in such filing.
72
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 12, 2020
Savara Inc.
By:
POWER OF ATTORNEY
/s/ Robert Neville
Robert Neville
Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Robert Neville and
Dave Lowrance, and each of them acting individually, as his or her attorney-in-fact, each with full power of substitution, for him or her in any and all
capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney to any
and all amendments to said Report.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of
the Registrant in the capacities and on the dates indicated.
Name
/s/ Robert Neville
Robert Neville
/s/ Dave Lowrance
Dave Lowrance
/s/ David Ramsay
David Ramsay
/s/ Matthew Pauls
Matthew Pauls
/s/ Joseph McCracken
Joseph McCracken
/s/ Nevan Elam
Nevan Elam
/s/ Rick Hawkins
Rick Hawkins
/s/ An Van Es-Johansson
An Van Es-Johansson
/s/ Ricky Sun
Ricky Sun
Title
Date
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
73
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2019 and 2018
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018
Notes to Consolidated Financial Statements
F-1
F-2
F-5
F-6
F-7
F-8
F-9
To the Stockholders and the Board of Directors of Savara Inc.
Report of Independent Registered Public Accounting Firm
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Savara Inc. and its subsidiaries (the Company) as of December 31, 2019, the related
consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for the period ended December 31, 2019,
and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly,
in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the period
ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's
internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 12, 2020 expressed an unqualified opinion on
the effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company
in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ RSM US LLP
We have served as the Company's auditor since 2019.
Austin, Texas
March 12, 2020
F-2
To the Stockholders and the Board of Directors of Savara Inc.
Report of Independent Registered Public Accounting Firm
Opinion on the Internal Control Over Financial Reporting
We have audited Savara Inc.'s (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated
balance sheet as of December 31, 2019, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and
cash flows for the year ended December 31, 2019, and the related notes to the consolidated financial statements of the Company and our report dated
March 12, 2020 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ RSM US LLP
Austin, Texas
March 12, 2020
F-3
To the Board of Directors and Stockholders of Savara Inc.
Report of Independent Registered Public Accounting Firm
Opinion on the Financial Statements
We have audited the consolidated balance sheet of Savara Inc. and its subsidiaries (the “Company”) as of December 31, 2018 and the related consolidated
statements of operations and comprehensive loss, of changes in stockholders’ equity, and of cash flows for the year then ended, including the related notes
(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis
for our opinion.
/s/ PricewaterhouseCoopers LLP
Austin, Texas
March 13, 2019
We served as the Company's auditor from 2015 to 2019.
F-4
Savara Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except for share and per share amounts)
As of December 31,
2019
2018
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
In-process R&D
Goodwill
Other non-current assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Debt facility
Total current liabilities
Long-term liabilities:
Debt facility
Contingent consideration
Other long-term liabilities
Total liabilities
Stockholders’ equity:
Common stock, $0.001 par value, 200,000,000 shares authorized as of
December 31, 2019 and 2018; 50,790,441 and 35,146,096 shares issued
and outstanding as of December 31, 2019 and 2018, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders' equity
$
$
$
$
49,804 $
71,957
2,306
124,067
352
11,111
—
673
136,203 $
3,409 $
5,471
2,000
10,880
23,112
—
513
34,505
52
309,555
(17)
(207,892)
101,698
136,203 $
24,301
86,529
2,514
113,344
522
11,372
26,918
131
152,287
3,879
3,375
—
7,254
24,530
12,214
70
44,068
36
237,702
200
(129,719)
108,219
152,287
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Savara Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except for share and per share amounts)
Operating expenses:
Research and development
General and administrative
Impairment of acquired IPR&D
Impairment of goodwill
Depreciation
Total operating expenses
Loss from operations
Other income, net:
Interest income (expense), net
Foreign currency exchange gain (loss)
Tax credit income
Change in fair value of financial instruments
Total other income
Loss before income taxes
Income tax benefit
Net loss
Net loss per share:
Basic and diluted
Weighted-average common shares outstanding
Basic and diluted
Other comprehensive income (expense):
Loss on foreign currency translation
Unrealized gain on short-term investments
Total comprehensive loss
Years ended December 31,
2019
2018
38,781 $
13,081
—
26,852
311
79,025
(79,025)
(70)
(78)
1,213
(213)
852
(78,173)
—
(78,173) $
37,173
10,654
21,692
—
526
70,045
(70,045)
11
71
1,454
(64)
1,472
(68,573)
7,057
(61,516)
(1.95) $
(1.85)
40,027,758
33,300,704
(296)
79
(78,390) $
(773)
15
(62,274)
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Savara Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2019 and 2018
(in thousands, except share amounts)
Common Stock
Balance on December 31, 2017
Issuance of common stock upon public offering, net closing costs
Issuance of common stock upon at the market offerings, net
Issuance of common stock for settlement of RSUs
Issuance of common stock upon cashless exercise of stock options
Issuance of common stock upon exercise of stock options
Issuance of common stock upon exercise of warrants
Common stock issued for acquisition of assets
Issuance of detachable warrants with debt instrument
Stock-based compensation
Foreign exchange translation adjustment
Unrealized gain on short-term investments
Net loss incurred
Balance on December 31, 2018
Issuance of securities in private placement, net closing costs
Issuance of common stock upon at the market sales, net
Issuance of common stock upon settlement of contingent liability
Issuance of common stock for settlement of RSUs
Net issuance of common stock upon cashless exercise of warrants
Issuance of common stock upon exercise of stock options
Stock-based compensation
Foreign exchange translation adjustment
Unrealized gain on short investments
Net loss incurred
Balance on December 31, 2019
Number of
Shares
30,509,522
4,250,000
48,600
50,625
115,754
61,893
2,123
107,579
—
—
—
—
—
35,146,096
9,569,430
4,769,726
1,105,216
52,125
11,119
136,729
—
—
—
—
50,790,441
Amount
$
$
$
Stockholders’ Equity
Additional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (loss)
Total
32
4
—
—
—
—
—
—
—
—
—
—
—
36
10
5
1
—
—
—
—
—
—
—
52
$
$
$
186,522
45,788
505
—
—
58
19
995
78
3,737
—
—
—
237,702
25,237
29,587
12,477
—
—
111
4,441
—
—
—
309,555
$
$
$
(68,203 ) $
—
—
—
—
—
—
—
—
—
—
—
(61,516 )
(129,719 ) $
—
—
—
—
—
—
—
—
—
(78,173 )
(207,892 ) $
$
958
—
—
—
—
—
—
—
—
—
(773 )
15
—
200
—
—
—
—
—
—
—
(296 )
79
—
(17 ) $
$
119,309
45,792
505
—
—
58
19
995
78
3,737
(773 )
15
(61,516 )
108,219
25,247
29,592
12,478
—
—
111
4,441
(296 )
79
(78,173 )
101,698
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Savara Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization including right-of-use assets
Impairment of acquired IPR&D
Impairment of goodwill
Change in fair value of financial instruments
Change in fair value of contingent consideration
Non-cash interest (income) / expense
Write-off of IPR&D upon acquisition
Foreign currency (gain) loss
Amortization of debt issuance costs
Accretion on discount to short-term investments
Gain on short-term investments
Stock-based compensation
Benefit for deferred taxes
Changes in operating assets and liabilities:
Prepaid expenses and other current assets
Non-current assets
Accounts payable and accrued expenses and other current liabilities
Net cash used in operating activities
Cash flows from investing activities:
Purchase of property and equipment
Purchase of available-for-sale securities, net
Maturities of available-for-sale securities
Sales of available-for-sale securities, net
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from debt facility, net
Issuance of common stock upon exercise of warrants
Issuance of common stock upon public offering, net
Issuance of securities in private financing, net
Issuance of common stock upon at the market offerings, net
Proceeds from exercise of stock options
Capital lease obligation principal payments
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents beginning of period
Cash and cash equivalents end of period
Non-cash transactions:
Common stock issued for IPR&D, net
Settlement of contingent consideration
Supplemental disclosure of cash flow information:
Cash paid for interest
Years ended December 31,
2019
2018
$
(78,173)
$
(61,516)
1,010
—
26,852
213
264
(72)
—
78
582
(1,161)
(4)
4,441
—
148
131
568
(45,123)
(148)
(122,945)
124,700
14,133
15,740
—
—
—
25,247
29,592
110
(41)
54,908
(22)
25,503
24,301
49,804
—
12,478
$
$
$
$
$
$
$
526
21,692
—
64
266
75
995
(71)
468
(900)
—
3,737
(7,057)
900
—
1,546
(39,275)
(141)
(122,494)
98,746
10,270
(13,619)
9,365
19
45,792
—
505
58
(546)
55,193
(119)
2,180
22,121
24,301
995
—
2,099
$
1,406
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Savara Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Description of Business and Basis of Presentation
Description of Business
Savara Inc. (together with its subsidiaries. “Savara,” the “Company,” “we” or “us”) is an orphan lung disease company. The Company’s pipeline comprises
of Molgradex, an inhaled granulocyte-macrophage colony-stimulating factor (“GM-CSF”), in Phase 3 development for autoimmune pulmonary alveolar
proteinosis (“aPAP”), in Phase 2a development for nontuberculous mycobacterial (“NTM”) lung infection, and in Phase 2a development for the treatment
of NTM lung infection in people living with cystic fibrosis (“CF”), and AeroVanc, inhaled vancomycin in Phase 3 development for treatment of persistent
Methicillin-resistant Staphylococcus aureus (“MRSA”) lung infection in individuals living with CF. The Company and its wholly owned subsidiaries
operate in one segment with its principal offices in Austin, Texas, USA.
Since inception, Savara has devoted substantially all of its efforts and resources to identifying and developing its product candidates, recruiting personnel,
and raising capital. Savara has incurred operating losses and negative cash flow from operations and has no product revenue from inception to date. The
Company has not yet commenced commercial operations.
Basis of Presentation
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”)
as defined by the Financial Accounting Standards Board (the “FASB”). Certain prior year amounts have been reclassified for consistency with the current
period presentation.
2. Summary of Significant Accounting Policies
Liquidity
As of December 31, 2019, the Company had an accumulated deficit of approximately $207.9 million. The Company used cash from operations of
approximately $45.1 million for the year ended December 31, 2019. The cost to further develop and obtain regulatory approval for any drug is substantial
and, as noted below, the Company may have to take certain steps to maintain a positive cash position. Accordingly, the Company will need additional
capital to further fund the development of, and seek regulatory approvals for, its product candidates and begin to commercialize any approved products.
Currently, the Company is primarily focused on the development of respiratory drugs and believes such activities will result in the Company’s continued
incurrence of significant research and development and other expenses related to those programs. If the clinical trials for any of the Company’s product
candidates fail or produce unsuccessful results and those product candidates do not gain regulatory approval, or if any of the Company’s product
candidates, if approved, fail to achieve market acceptance, the Company may never become profitable. Even if the Company achieves profitability in the
future, it may not be able to sustain profitability in subsequent periods. The Company intends to cover its future operating expenses through cash and cash
equivalents on hand and through a combination of equity offerings, debt financings, government or other third-party funding, and other collaborations and
strategic alliances. The Company cannot be sure that additional financing will be available when needed or that, if available, financing will be obtained on
terms favorable to the Company or its stockholders.
The Company had cash and cash equivalents of $49.8 million and short-term investments of $72.0 million as of December 31, 2019, which is sufficient to
fund the Company's operations for the twelve months subsequent to the issuance date of its consolidated financial statements for the year ended December
31, 2019. We intend to continue to raise additional capital as needed through the issuance of additional equity and potentially through borrowings, and
strategic alliances with partner companies. However, if such financings are not available timely and at adequate levels, the Company will need to re-
evaluate its long-term operating plans. The consolidated financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
Principles of Consolidation
The consolidated financial statements of the Company are stated in U.S. dollars. These financial statements include the accounts of the Company and its
wholly-owned subsidiaries. The financial statements of the Company’s wholly-owned subsidiaries are recorded in their functional currency and translated
into the reporting currency. The cumulative effect of changes in exchange rates between the foreign entity’s functional currency and the reporting currency
is reported in “Accumulated other comprehensive income (loss).” All intercompany transactions and accounts have been eliminated in consolidation.
F-9
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires the Company to make certain estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Management’s estimates include those related to the accrual of research and
development costs, control premiums used in goodwill and IPR&D reviews, certain financial instruments recorded at fair value, stock-based compensation,
contingent consideration prior to its settlement during the year ended December 31, 2019, and the valuation allowance for deferred tax assets. The
Company bases its estimates on historical experience and on various other market-specific and relevant assumptions that it believes to be reasonable under
the circumstances. Accordingly, actual results could be materially different from those estimates.
Risks and Uncertainties
The product candidates being developed by the Company require approval from the U.S. Food and Drug Administration (the “FDA”) or foreign regulatory
agencies prior to commercial sales. There can be no assurance that the Company’s product candidates will receive the necessary approvals. If the Company
is denied regulatory approval of its product candidates, or if approval is delayed, it will have a material adverse impact on the Company’s business, results
of operations and financial position.
The Company is subject to a number of risks similar to other life science companies, including, but not limited to, risks related to the successful discovery
and development of drug candidates, raising additional capital, development of competing drugs and therapies, protection of proprietary technology and
market acceptance of the Company’s products. As a result of these and other factors and the related uncertainties, there can be no assurance of the
Company’s future success.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and institutional bank money market accounts with original maturities of three months or less when acquired and
are stated at cost, which approximates fair value.
Short-term Investments
The Company has classified its investments in debt securities with readily determinable fair value as available-for-sale securities. These securities are
carried at estimated fair value with the aggregate unrealized gains and losses related to these investments reflected as a part of “Accumulated other
comprehensive income (loss)” within stockholders’ equity.
The fair value of the investments is based on the specific quoted market price of the securities or comparable securities at the balance sheet dates.
Investments in debt securities are considered to be impaired when a decline in fair value is judged to be other than temporary because the Company either
intends to sell or it is more-likely-than not that it will have to sell the impaired security before recovery. Once a decline in fair value is determined to be
other than temporary, an impairment charge is recorded and a new cost basis in the investment is established.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents and foreign
exchange derivatives not designated as hedging. The Company places its cash and cash equivalents with a limited number of financial institutions and at
times may exceed the amount of insurance provided on such deposits.
Accrued Research and Development Costs
The Company records the costs associated with research, nonclinical studies, clinical trials, and manufacturing development as incurred. These costs are a
significant component of the Company’s research and development expenses, with a substantial portion of the Company’s on-going research and
development activities conducted by third-party service providers, including contract research and manufacturing organizations.
The Company accrues for expenses resulting from obligations under agreements with contract research organizations (“CROs”), contract manufacturing
organizations (“CMOs”), and other outside service providers for which payment flows do not match the periods over which materials or services are
provided to the Company. Accruals are recorded based on estimates of services received and efforts expended pursuant to agreements established with
CROs, CMOs, and other outside service providers. These estimates are typically based on contracted amounts applied to the proportion of work performed
and determined through analysis with internal personnel and external service providers as to the progress or stage of completion of the services. The
Company makes significant judgments and estimates in determining the accrual balance in each reporting period. In the event advance payments are made
to a CRO, CMO, or outside service provider, the payments will be recorded as a prepaid asset which will be amortized or expensed as the contracted
services are performed. As actual costs become known, the Company adjusts its prepaids and accruals. Inputs, such as the services performed, the number
of patients enrolled, or the study duration, may vary from the Company’s estimates resulting in adjustments to research and development expense in future
periods. Changes in these estimates that result in material changes to the Company’s accruals could materially affect the Company’s results of operations.
To date, the Company has not experienced any material deviations between accrued and actual research and development expenses.
F-10
Business Combinations
Assets acquired and liabilities assumed as part of a business acquisition are recorded at their estimated fair value at the date of acquisition. The excess of
purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining fair value of identifiable assets,
particularly intangibles, and liabilities acquired also requires management to make estimates, which are based on all available information and, in some
cases, assumptions with respect to the timing and amount of future revenue and expenses associated with an asset.
Goodwill, Acquired In-Process Research and Development and Deferred Tax Liability
Goodwill represents the excess of purchase price over the fair value of net assets acquired by the Company. Goodwill is not amortized, but assessed for
impairment on an annual basis or more frequently if impairment indicators exist. Current guidance issued by the FASB, as previously adopted by the
Company, provides an impairment model whereby the Company has the option to implement a one-step method for determining impairment of goodwill,
simplifying the subsequent measurement of goodwill by eliminating Step 2 (quantitative calculation of measuring a goodwill impairment loss by
comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill) from the goodwill impairment test. Under the
amendments in this guidance, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying
amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however,
the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax
effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.
Acquired in-process research and development (“IPR&D”) is considered an indefinite-lived intangible asset and is assessed for impairment annually or
more frequently if impairment indicators exist. The Company adopted accounting guidance related to its annual acquired IPR&D impairment test, a two-
step method, which allows the Company to first assess qualitative factors before performing a quantitative assessment of the fair value of a reporting unit.
If it is determined on the basis of qualitative factors that the fair value of the IPR&D is more likely than not less than the carrying amount, a quantitative
impairment test is required.
If the associated research and development effort is abandoned, the related asset will be written-off, and the Company will record a noncash impairment
loss on its consolidated statements of operations and comprehensive loss. For those products that reach commercialization, the IPR&D asset will be
amortized over its estimated useful life.
The Company performs its annual goodwill impairment test and IPR&D impairment test, as described above, as of June 30th and September 30th,
respectively, or whenever an event or change in circumstances occurs that would require reassessment of the recoverability of those assets.
During the year ended December 31, 2018, the Company experienced a $0.2 million and $0.6 million decrease in the carrying value of goodwill and
IPR&D, respectively, related to its acquisition of Serendex A/S (“Serendex”) on July 15, 2016, which was due to foreign currency translation. In addition,
during the year ended December 31, 2018, the Company recorded $21.7 million of impairment charges and a corresponding decrease to the carrying value
of acquired IPR&D related to a drug candidate acquired through a merger in April 2017. The acquired drug candidate demonstrated unfavorable results in a
phase 2 study. As a result of the IPR&D impairment charges recorded in the first quarter of 2018, the Company reduced the associated deferred tax liability
related to the acquired IPR&D from the merger by $4.6 million and recorded an income tax benefit. The Company additionally performed impairment tests
for goodwill and IPR&D as of June 30, 2018 and September 30, 2018, respectively, and noted there were no further triggering events or indicators of
impairment as of December 31, 2018.
For the year ended December 31, 2019, the Company experienced a decrease of approximately $0.3 million in the carrying value of IPR&D, which was
due to foreign currency translation. In June 2019, the Company determined that the results from its Phase 3 study for the use of Molgradex for the
treatment of aPAP required a current assessment for impairment of both its IPR&D and goodwill. Upon completion of the aforementioned qualitative and
quantitative impairment testing of its IPR&D and quantitative impairment testing of its goodwill, the Company concluded that there was no impairment to
its IPR&D; however, goodwill was impaired resulting in an impairment of $7.4 million in the carrying value of goodwill. The Company also determined
that a triggering event had occurred during the fourth quarter of 2019 under which the Company’s stock price experienced another significant decline
requiring the impairment testing of its goodwill which resulted in an impairment charge of $19.4 million in the fourth quarter of 2019 reducing the
Company’s carrying value of its goodwill to its fair value, which was determined to be zero. Similarly, the Company completed the aforementioned
qualitative and quantitative impairment testing of its IPR&D following this fourth quarter 2019 triggering event and concluded that there was no
impairment to its IPR&D.
F-11
Tax Credit Receivable
The Company has recorded a Danish tax credit earned by its subsidiary, Savara ApS, as of December 31, 2019. Under Danish tax law, Denmark remits a
research and development tax credit equal to 22% of qualified research and development expenditures, not to exceed established thresholds. As of
December 31, 2019, the Danish tax credit of approximately $0.8 million, which was generated during the year ended December 31, 2019, is recorded in
“Prepaid expenses and other current assets” and is expected to be received in the fourth quarter of 2020.
The Company also recognized tax credit income for the year ended December 31, 2019 as provided by the Australian Taxation Office for qualified research
and development expenditures incurred through our subsidiary, Savara Australia Pty. Limited. Under Australian tax law, Australia remits a research and
development tax credit equal to 43.5% of qualified research and development expenditures, not to exceed established thresholds. As of December 31, 2019,
credits totaling approximately $0.4 million had been generated but not yet received and such amount is recorded in “Prepaid expenses and other current
assets” with expectation of receipt in the first half of the year ending December 31, 2020.
Leases
In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) as codified in Accounting
Standards Codification (“ASC”) No. 842 (“ASC 842”). ASU 2016-02, ASC 842, and additional issued guidance are intended to improve financial
reporting of leasing transactions by requiring organizations that lease assets to recognize assets and liabilities for the rights and obligations created by
leases that extend more than twelve months. This accounting update also requires additional disclosures surrounding the amount, timing, and uncertainty of
cash flows arising from leases. ASU 2016-02 is effective for financial statements issued for annual and interim periods beginning after December 15, 2018
for public business entities. The Company adopted ASU 2016-02 as of January 1, 2019 using the effective date transition method of implementation
offered under ASU 2018-11, “Leases (Topic 842) – Targeted Improvements” issued in July 2018 (“ASU 2018-11”), under which entities may change their
date of initial application of ASU 2016-02 to the beginning of the period of adoption, or January 1, 2019, in the case of Savara. Accordingly, the Company
is required to apply the prior lease guidance pursuant to ASC Topic 840 “Leases” in the comparative periods, provide the disclosures required by ASC
Topic 840 for all periods that continue to be presented in accordance with ASC Topic 840, recognize the effects of applying ASC 842 as a cumulative-
effect adjustment to retained earnings as of January 1, 2019, if any, and provide certain disclosures under ASC 842 (see Note 11). The Company has also
elected the package of practical expedients, applied by class of underlying asset, permitted in ASU 2018-11. Accordingly, the Company accounted for its
existing operating leases as operating leases under the new guidance, without reassessing (a) whether the contracts contain a lease under ASC 842, (b)
whether classification of the operating leases would be different in accordance with ASC 842, and (c) whether the unamortized initial direct costs before
transition adjustments (as of the period of adoption) would have met the definition of initial direct costs in ASC 842 at lease commencement, and the
Company did not separate lease and non-lease components.
As a result of the adoption of the new lease accounting guidance using the effective date transition method, on January 1, 2019, the Company recognized
(a) a lease liability of approximately $1.4 million, which represents the present value of the remaining lease payments, as of the date of adoption, of
approximately $1.5 million, discounted using the Company’s incremental borrowing rate of 8.5%, and (b) a right-of-use asset of approximately $1.4
million. The adoption of the new standard did not result in any adjustment to the Company’s retained earnings as of January 1, 2019. The adoption of this
standard did not have a material impact on the Company’s consolidated balance sheets, cash used/provided from operating, investing, or financing activities
in the consolidated statements of cash flows, or on the Company’s operating results. The most significant impact was the recognition of right-of-use assets
for operating leases, which are reflected in “Other non-current assets,” and lease liabilities for operating leases, which are reflected in “Accrued expenses
and other current liabilities,” for the current portion of the lease liabilities, and in “Other long-term liabilities” for the non-current portion of the lease
liabilities, respectively (See Note 11).
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision making group, in making decisions on how to allocate resources and assess performance. Our chief operating
decision maker is the chief executive officer. We have one operating segment, specialty pharmaceuticals within the respiratory system.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is determined on a straight-line basis over the estimated useful
lives of the assets, which range from three to five years. Repairs and maintenance that do not improve or extend the useful life of the respective asset are
charged to expense as incurred.
F-12
Patents and Intellectual Property
As the Company’s products are currently under research and development and are not currently approved for market, costs incurred in connection with
patent applications are expensed as incurred due to the uncertainty of the future economic benefits of the underlying patents and intellectual property.
Fair Value of Financial Instruments
The accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding fair value
measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific
asset or liability.
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as
assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the
Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value.
The three tiers are defined as follows:
•
•
•
Level 1 – Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets;
Level 2 – Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for
identical or similar assets and liabilities; and
Level 3 – Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions.
Financial instruments carried at fair value include cash and cash equivalents, short-term investments, contingent consideration (prior to its settlement and
full satisfaction in May 2019) and foreign exchange derivatives not designated as hedging instruments.
Financial instruments not carried at fair value include accounts payable and accrued liabilities. The carrying amounts of these financial instruments
approximate fair value due to the highly liquid nature of these short-term instruments.
Revenue Recognition
The Company will record revenue based on a five-step model in accordance with ASC 606, “Revenue from Contracts with Customers.” To date, the
Company has not generated any product revenue from its drug candidates. The Company’s ability to generate product revenues, which the Company does
not expect will occur in the next two to three years, if ever, will depend heavily on the successful development, regulatory approval, and eventual
commercialization of the Company’s product candidates.
Milestone Revenue
The Company is subject to a license agreement related to its Molgradex product candidate (see Note 14), which includes certain milestone payments to be
remunerated by the licensee to Savara. Pursuant to the license agreement, the Company identifies the performance obligations, determines the transaction
price, allocates the contract transaction price to the performance obligations, and recognizes the revenue when (or as) the performance obligation is
satisfied. The Company identifies the performance obligations included within the license agreement and evaluates which performance obligations are
distinct.
The milestone payments are a form of variable consideration as the payments are contingent upon achievement of a substantive event. The milestone
payments are estimated and included in the transaction price when the Company determines, under the variable consideration constraint, that it is probable
that there will not be a significant reversal of cumulative revenue recognized in future periods. The transaction price is then allocated to each performance
obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the
contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such milestones and any
related constraint, and if necessary, adjusts the estimate of the overall transaction price.
F-13
Net Loss per Share
Basic net loss attributable to common stockholders per share is calculated by dividing the net loss attributable to common stockholders by the weighted-
average number of shares of common stock, pre-funded warrants, restricted stock and restricted stock units outstanding during the period without
consideration of common stock equivalents. Since the Company was in a loss position for all periods presented, diluted net loss per share is the same as
basic net loss per share for all periods presented as the inclusion of all potential dilutive securities would have been antidilutive.
Stock-Based Compensation
The Company recognizes the cost of stock-based awards granted to employees based on the estimated grant-date fair value of the awards. The value of the
portion of the award is recognized as expense ratably as the award vests over the requisite service period. The Company recognizes the compensation costs
for awards that vest over several years on a straight-line basis over the vesting period (see Note 13). Forfeitures are recognized when they occur, which may
result in the reversal of compensation costs in subsequent periods as the forfeitures arise.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for
the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities will be recognized in the period that includes the enactment
date. A valuation allowance is established against the deferred tax assets to reduce their carrying value to an amount that is more-likely-than not to be
realized.
Manufacturing and Other Commitments and Contingencies
The Company is subject to various manufacturing royalties and payments related to its product candidate, Molgradex. Under a manufacture and supply
agreement with the active pharmaceutical ingredients (“API”) manufacturer, Savara must make certain payments to the API manufacturer upon
achievement of certain milestones. Additionally, upon first receipt of marketing approval by Savara from a regulatory authority in a country for a product
containing the API for therapeutic use in humans and ending the earlier of (i) ten (10) years thereafter or (ii) the date a biosimilar of such product is first
sold in such country, Savara shall pay the API manufacturer a royalty equal to low-single digits of the net sales in that country.
Pursuant to a license agreement between the Company and a Japanese licensee regarding the development and commercialization of Molgradex for the
treatment of aPAP in Japan, the Company shall fund the licensee fifty percent (50%), up to a maximum of approximately $0.8 million, of the external costs
associated with specific regulatory and filing activities to be conducted by the licensee. As of December 31, 2019, no costs have been incurred.
Under an agreement with a medical education and research foundation entered into on October 8, 2018, the Company is subject to a milestone payment for
the use of proprietary information and material in intellectual property filings related to the application of Molgradex in the treatment of NTM. The
Company will owe royalties to the foundation based on net sales of Molgradex for the treatment of NTM equal to one half of one percent (0.5%) after
publication of the intellectual property filings and one quarter of one percent (0.25%) prior to the publication or in the event publication does not occur,
with respect to the specified intellectual property filings.
The Company is also subject to certain contingent milestone payments, disclosed in the following table, payable to the manufacturer of the nebulizer used
to administer Molgradex. In addition to these milestones, the Company will owe a royalty to the manufacturer of the nebulizer based on net sales. The
royalty rate ranges from three and one half percent (3.5%) to five percent (5%) depending on the device technology used by the Company to administer the
product.
F-14
Manufacturing and Other Contingent Milestone and Co-Development Payments (in thousands):
Molgradex API manufacturer:
Achievement of certain milestones related to validation
of API and regulatory approval of Molgradex
Molgradex nebulizer manufacturer:
Achievement of various development activities and
regulatory approval of nebulizer utilized to administer
Molgradex
Molgradex Japanese licensee:
Co-development and regulatory costs
Medical education and research foundation:
First commercial sale in the U.S. of Molgradex in treatment
of NTM
Total manufacturing and other commitments
$
December 31,
2019
$
2,450
7,634
750
500
11,334
The milestones and co-marketing commitments disclosed above reflect the activities that have (i) not been met or incurred; (ii) not been remunerated; and
(iii) not accrued, as the activities are not deemed probable or reasonably estimable, as of December 31, 2019.
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements
for Fair Value Measurement.” The update eliminates, adds, and modifies certain disclosure requirements for fair value measurements as part of its
disclosure framework project. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal
years, with early adoption permitted. The Company has reviewed ASU 2018-13 and concluded that it does not have a material impact on our consolidated
financial statements.
In November 2018, the FASB issued ASU 2018-18, “Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic
606.” The update clarifies that certain transactions between collaborative partners should be accounted for as revenue under the new revenue standard ASC
606 when the collaborative partner is a customer, specifies the unit of account for determining whether a transaction with a customer is a distinct good or
service under ASC 606, and precludes a company from presenting transactions with a collaborative partner that are not in the scope of ASC 606 together
with revenue from contracts with customers. ASU 2018-18 is effective for fiscal years beginning after December 15, 2019 and for interim periods within
those fiscal years, with early adoption permitted. The Company has reviewed ASU 2018-18 and concluded that it has no impact on our consolidated
financial statements.
In March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements,” which aims to clarify and revise guidance for certain
lessors and clarify interim transition disclosure requirements for ASC 842. ASU 2019-01 is effective for fiscal years beginning after December 15, 2019
and for interim periods within those fiscal years, with early adoption permitted. The Company has reviewed ASU 2019-01 and concluded that it does not
have a material impact on our consolidated financial statements.
In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives
and Hedging, and Topic 825, Financial Instruments.” The Company has reviewed ASU 2019-01 and concluded that it has no impact on our consolidated
financial statements.
In November 2019, the FASB issued ASU 2019-08, “Compensation—Stock Compensation (Topic 718) and Revenue from Contracts with Customers
(Topic 606): Codification Improvements—Share-Based Consideration Payable to a Customer” which requires that an entity measure and classify share-
based payment awards granted to a customer by applying the guidance in Topic 718 whereby the amount recorded as a reduction of the transaction price is
required to be measured on the basis of the grant-date fair value of the share-based payment award in accordance with Topic 718. The Company has
reviewed ASU 2019-08 and concluded that it has no impact on our consolidated financial statements.
In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses” as a separate update
for improvements to the amendments in ASU 2016-13 to increase stakeholder awareness of those amendments and to expedite the improvement process.
The Company has reviewed ASU 2019-11 and concluded that it does not have a material impact on our consolidated financial statements.
F-15
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” which aims to simplify the
accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and improve consistent application of and simplify
GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company has reviewed ASU 2019-12 and concluded that it does not
have a material impact on our consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic
323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging
Issues Task Force)” which affect all entities that apply the guidance in Topics 321, 323, and 815 and (1) elect to apply the measurement alternative or (2)
enter into a forward contract or purchase an option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option,
would be accounted for under the equity method of accounting. The Company has reviewed ASU 2020-01 and concluded that it does not have a material
impact on our consolidated financial statements.
In February 2020, the FASB issued ASU 2020-02, “Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842)—Amendments to SEC
Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No.
2016-02, Leases (Topic 842) (SEC Update).” The company is currently reviewing ASU 2020-02 and its impact on our consolidated financial statements.
3. Prepaid expenses and other current assets
Prepaid expenses, consisted of (in thousands):
R&D tax credit receivable
Prepaid contracted research and development costs
VAT receivable
Prepaid insurance
Foreign currency exchange derivative
Deposits and other
Total prepaid expenses and other current assets
4. Accrued expenses and other current liabilities
Accrued expenses and other liabilities, consisted of (in thousands):
Accrued contracted research and development costs
Accrued general and administrative costs
Accrued compensation
Forward currency exchange derivative
Deferred revenue
Lease liability
Current portion of capital lease obligation
$
$
$
Total accrued expenses and other current liabilities
$
F-16
December 31,
2019
2018
1,253 $
184
364
247
7
251
2,306 $
1,263
561
421
162
—
107
2,514
December 31,
2019
2018
2,018 $
1,710
1,303
—
—
440
—
5,471 $
2,044
371
643
26
250
—
41
3,375
5. Short-term Investments
Short-term Investments in Available-for-Sale Securities
The Company’s investment policy seeks to preserve capital and maintain sufficient liquidity to meet operational and other needs of the business. The
following table summarizes, by major security type, the Company’s investments (in thousands):
As of December 31, 2019
Short-term investments
U.S. government securities
Asset backed securities
Corporate securities
Commercial paper
Total short-term investments
As of December 31, 2018
Short-term investments
U.S. government securities
Asset backed securities
Corporate securities
Commercial paper
Total short-term investments
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
15,629 $
8,789
30,556
16,935
71,909 $
11 $
10
30
—
51 $
(2) $
—
(1)
—
(3) $
15,638
8,799
30,585
16,935
71,957
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
15,967 $
8,595
19,975
42,022
86,559 $
— $
—
—
—
— $
(2) $
(7)
(21)
—
(30) $
15,965
8,588
19,954
42,022
86,529
$
$
$
$
The Company has classified its investments as available-for-sale securities. These securities are carried at estimated fair value with the aggregate
unrealized gains and losses related to these investments reflected as a part of “Accumulated other comprehensive income (loss)” in the consolidated
balance sheets. Classification as short-term or long-term is based upon whether the maturity of the debt securities is less than or greater than twelve
months.
There were no significant realized gains or losses related to investments for the years ended December 31, 2019 and 2018.
6. Property and Equipment, Net
Property and equipment, net consisted of (in thousands):
Research and development equipment
Equipment
Furniture and fixtures
Leasehold improvements
Total property and equipment
Less accumulated depreciation
Property and equipment, net
December 31,
2019
2018
$
$
1,102 $
676
105
143
2,026
(1,674)
352 $
1,102
625
163
—
1,890
(1,368)
522
Depreciation expense for the years ended December 31, 2019 and 2018 was $0.3 million and $0.5 million, respectively.
F-17
7. Debt Facility
On April 28, 2017, the Company entered into a loan and security agreement with Silicon Valley Bank, as amended on October 31, 2017 (the “Loan
Agreement”), which provided for a $15.0 million credit facility that was made available in two equal tranches. In December 2018, the Company entered
into an amendment to the Loan Agreement (the “Loan Amendment”) to increase the amount of the term loan facility from $15.0 million to $45.0 million
and make certain other changes. The Loan Agreement, as amended, provides that the funds are available in two tranches: (i) $25.0 million became
available upon the effectiveness of the Loan Amendment, of which $15.0 million was used to refinance the existing amount outstanding under the loan
facility, and (ii) $20.0 million, the availability of which expired on September 30, 2019.
Silicon Valley Bank has been granted a perfected first priority lien in all of our assets with a negative pledge on our intellectual property. The Loan
Agreement, as amended, contains customary affirmative and negative covenants, including among others, covenants limiting our ability and our
subsidiaries’ ability to dispose of assets, permit a change in control, merge or consolidate, make acquisitions, incur indebtedness, grant liens, make
investments, make certain restricted payments, and enter into transactions with affiliates, in each case subject to certain exceptions.
Following the Loan Amendment, the loans bear interest at the prime rate reported in The Wall Street Journal, plus a spread of 3.0%. Interest only payments
are due through October 2020 followed by monthly payments of principal plus interest over the following twenty-five (25) months and a maturity date of
November 1, 2022. The Loan Agreement, as amended, includes (i) a prepayment fee (2.0% of funded amounts in months 13-24 and 1.0% thereafter); and
(ii) an end of term charge equal to 6.0% of the amount of principal borrowed. Savara paid minimal legal costs directly attributable to the Loan Amendment
and previously paid $0.1 million in legal costs directly attributable to the original issuance of the debt instrument. Such charges were accounted for as debt
issuance costs and are being amortized to interest expense using the effective interest method through the scheduled maturity date.
The end of term charge equal to 6.0% of the amount of principal borrowed will be due on the scheduled maturity date and is being recognized as an
increase to the principal with a corresponding charge to interest expense over the term of the facility using the effective interest method.
Upon the funding of each tranche, as described above, under the Loan Agreement, the Company was obligated to issue warrants to purchase shares of its
common stock, as described below.
Upon funding the first tranche of the Loan Agreement, the Company issued warrants to purchase 24,725 shares of the Company’s common stock at an
exercise price of $9.10 per share, with a ten-year life, expiring April 28, 2027 (“April 2017 Warrants”). Upon funding the second tranche of the Loan
Agreement, the Company issued warrants to purchase 41,736 shares of the Company’s common stock at an exercise price of $5.39 per share with a ten-
year life, expiring June 15, 2027 (“June 2017 Warrants”). The April 2017 Warrants and June 2017 Warrants were valued using the Black-Scholes option
pricing model with the following assumptions: volatility of 71.42% and 71.57%, respectively, expected term of ten years, risk-free interest rate of 2.33%
and 2.16%, respectively, and a zero-dividend yield. The collective warrant fair value of $0.4 million has been recorded as a debt discount and is being
amortized through interest expense using the effective interest method through the scheduled maturity date.
Upon the funding of the tranche in connection with the Loan Amendment, the Company was obligated to issue warrants to purchase 11,332 shares of the
Company’s common stock at an exercise price of $8.824 per share with a ten-year life, expiring December 4, 2028 (“December 2018 Warrants”). The
December 2018 Warrants were valued using the Black-Scholes option pricing model with the following assumptions: volatility of 80.09%, expected term
of ten years, risk-free interest rate of 2.98%, and a zero-dividend yield. The collective warrant fair value of approximately $0.1 million has been recorded
as a debt discount and is being amortized through interest expense using the effective interest method through the scheduled maturity date, as amended and
described above.
Summary of Carrying Value
The following table summarizes the components of the debt facility carrying value (in thousands):
Principal payments to lender and end of term charge
Debt issuance costs
Debt discount related to warrants
Carrying value
As of December 31, 2019
Short-term
2,000 $
—
—
2,000 $
Long-term
23,452
(182)
(158)
23,112
$
$
The carrying value of the debt facility approximates fair value.
F-18
Future minimum payments under the debt facility are as follows (in thousands):
Year ending December 31,
2020
2021
2022
Total future minimum payments
Unamortized end of term charge
Debt issuance costs and debt discount
Total minimum payment
Short-term portion
Long-term debt facility
$
$
2,000
12,000
12,500
26,500
(1,048)
(340)
25,112
(2,000)
23,112
8. Fair Value Measurements
The Company measures and reports certain financial instruments at fair value on a recurring basis and evaluates its financial instruments subject to fair
value measurements on a recurring basis to determine the appropriate level in which to classify them in each reporting period.
The Company determined that certain investments in debt securities classified as available-for-sale securities were Level 1 financial instruments.
Additional investments in corporate debt securities, commercial paper, asset-backed securities, and repurchase agreements are considered Level 2 financial
instruments because the Company has access to quoted prices but does not have visibility to the volume and frequency of trading for all of these
investments. For the Company’s investments, a market approach is used for recurring fair value measurements and the valuation techniques use inputs that
are observable, or can be corroborated by observable data, in an active marketplace.
Foreign exchange derivatives not designated as hedging instruments are considered Level 2 financial instruments. The Company’s foreign exchange
derivative instruments are typically short-term in nature.
The Company also determined that the contingent consideration, as settled in full during the second quarter of 2019, was a Level 3 financial instrument.
F-19
The fair value of these instruments as of December 31, 2019 and 2018 was as follows (in thousands):
As of December 31, 2019:
Cash equivalents:
U.S. Treasury money market funds
Repurchase agreements
Short-term investments:
U.S. government securities
Asset backed securities
Corporate securities
Commercial paper
Other assets:
Foreign exchange derivatives not designated as hedging
instruments
As of December 31, 2018:
Cash equivalents:
U.S. Treasury money market funds
Commercial paper
Corporate securities
Short-term investments:
U.S. government securities
Asset backed securities
Corporate securities
Commercial paper
Liabilities:
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
$
$
13,530
—
$
15,638
—
—
—
$
—
6,000
$
—
8,799
30,585
16,935
—
7
$
$
14,710
—
—
15,965
—
—
—
$
$
—
4,411
2,371
—
8,588
19,954
42,022
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Contingent consideration
Foreign exchange derivatives not designated as hedging
instruments
$
—
$
—
$
12,214
—
26
—
The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial instrument for the year ended December 31,
2019 and 2018 (in thousands):
Balance at December 31, 2017
Change in fair value
Balance at December 31, 2018
Change in fair value
Settlement of contingent liability
Balance at December 31, 2019
Contingent
Consideration
11,948
266
12,214
219
(12,433)
—
$
$
$
Prior to its settlement in Q2 2019, the Company recorded changes in fair value of the contingent consideration in general and administrative expense.
The Company did not transfer any assets measured at fair value on a recurring basis to or from Level 1, Level 2, and Level 3 during the years ended
December 31, 2019 and 2018.
F-20
9. Derivative Financial Instruments
In the normal course of business, the Company is exposed to the impact of foreign currency fluctuations. The Company seeks to limit these risks by
following risk management policies and procedures, including the use of derivatives. The Company’s derivative contracts, which are not designated as
hedging instruments, principally address short-term foreign currency exchange. The estimated fair value of the derivative contracts was based upon the
relative exchange rate as of the balance sheet date. Accordingly, any gains or losses resulting from variances between this exchange rate at the contract
inception date were recognized as “Other income (net)” in the consolidated statements of operations and comprehensive loss. As of December 31, 2019,
there were approximately $3.0 million of unsettled forward exchange contracts to purchase foreign currency and a corresponding liability of approximately
$3.0 million consisting of forward exchange contract obligations, resulting in minimal net derivative financial instruments, recorded at their estimated fair
value in “Accrued expenses and other current liabilities.”
10. Shareholders’ Equity
Public Offerings
On July 30, 2018, the Company completed an underwritten public offering consisting of 4,250,000 shares of its common stock at a price to the public of
$11.50 per share. The net proceeds from the offering, after deducting the underwriting discounts and commissions and offering expenses, were
approximately $45.8 million. The July 2018 public offering was executed under a shelf registration agreement filed with the Securities and Exchange
Commission on June 29, 2018 and declared effective on July 13, 2018 (the “Registration Statement”).
The Company has used and intends to use the net proceeds from this offering for working capital and general corporate purposes, which include, but are
not limited to, the funding of clinical development of and pursuing regulatory approval for our product candidates, the initiation of Molgradex pre-
commercialization activities, and general and administrative expenses.
Private Placement
On December 24, 2019, we completed a private placement in a public entity (the “Private Placement” or “PIPE”) under a Securities Purchase Agreement
(the “Purchase Agreement”) with certain institutional and accredited investors (the “Investors”), pursuant to which we issued and sold to the Investors
9,569,430 shares of our common stock at a price of $1.745 per share and pre-funded warrants (“Pre-Funded PIPE Warrants”) to purchase an aggregate of
5,780,537 shares of common stock at $1.744 per share (or $1.745 minus par value of $.001). The net proceeds after deducting placement fees and offering
expenses were approximately $25.2 million. We also issued accompanying warrants (the “Milestone Warrants”), with an exercise price of $1.48 per share,
to purchase an aggregate of up to 32,577,209 additional shares of common stock and may receive up to approximately $48.2 million from the exercise of
the Milestone Warrants prior to their expiration, totaling aggregate gross proceeds of up to approximately $75.0 million from the PIPE before deducting
placement agent fees and estimated offering expenses. The Milestone Warrants are exercisable at any time prior to the earlier of thirty days following the
achievement of a defined clinical milestone or two years after the closing date of the Private Placement. The Pre-Funded PIPE Warrants are exercisable at
any time after their original issuance and will not expire.
We intend to use the net proceeds from the Private Placement to fund a new clinical trial of Molgradex for the treatment of aPAP and for other general
corporate purposes.
In connection with the Private Placement and the Purchase Agreement, the Company entered into a registration rights agreement (the “Registration Rights
Agreement”) with the Investors, pursuant to which, among other things, the Company has agreed to prepare and file with the SEC a registration statement,
no later than one hundred twenty (120) days following the closing date of December 24, 2019, to register for resale the shares of common stock sold in the
Private Placement and the shares of common stock underlying the Milestone Warrants and Pre-Funded PIPE Warrants described above.
F-21
The Company determined that the securities issued in the PIPE were free-standing and that the Pre-Funded PIPE Warrants and Milestone Warrants did not
contain any settlement obligations that would result in liability classification under ASC 480 “Distinguishing Liability from Equity.” Since the settlement
of the Pre-Funded PIPE Warrants and Milestone Warrants were initially permitted in unregistered shares, indexed to the Company’s stock, and satisfy the
other criteria under ASC 815 “Derivatives and Hedgeing,” the Pre-Funded PIPE Warrants and Milestone Warrants qualify for equity classification and were
valued using the Black-Scholes Option Pricing model with the following assumptions: volatility of 90.39%, expected term of two years, risk-free interest
rate of 1.63%, and a zero-dividend yield. The net proceeds from the Private Placement were allocated among the instruments based upon their relative fair
values resulting in carry values of the respective instruments as follows (in thousands):
Relative Fair Value
Allocation
Financial instruments:
Common Stock and Pre-Funded PIPE Warrants
Milestone Warrants
Total Net Proceeds from Private Placement
December 24, 2019
$
11,713
13,534
25,247
$
Common Stock Sales Agreement
On April 28, 2017, the Company entered into a Common Stock Sales Agreement with H.C. Wainwright & Co., LLC (“Wainwright”), as sales agent, which
was amended by Amendment No. 1 to the Common Stock Agreement (the “Amendment”) on June 29, 2018 (the “Sales Agreement”), pursuant to which
the Company may offer and sell, from time to time, through Wainwright, shares of Savara’s common stock, par value $0.001 per share (the “Shares”),
having an aggregate offering price of not more than $60.0 million, in addition to the $2.3 million in shares sold prior to the Amendment. The Amendment
was effective on July 13, 2018, at the time the New Registration Statement was declared effective by the Securities and Exchange Commission. The Shares
will be offered and sold pursuant to the New Registration Statement. Subject to the terms and conditions of the Sales Agreement, Wainwright will use its
commercially reasonable efforts to sell the Shares from time to time, based upon the Company’s instructions. The Company has provided Wainwright with
customary indemnification rights, and Wainwright will be entitled to a commission at a fixed commission rate equal to 3.0% of the gross proceeds per
Share sold. Sales of the Shares, if any, under the Sales Agreement may be made in transactions that are deemed to be “at the market offerings” as defined in
Rule 415 under the Securities Act of 1933, as amended. The Company has no obligation to sell any of the Shares and may at any time suspend sales under
the Sales Agreement or terminate the Sales Agreement.
During the years ended December 31, 2019 and 2018, the Company sold 4,769,726 and 48,600 shares of common stock under the Sales Agreement for net
proceeds of approximately $29.6 million and $0.5 million, respectively.
Common Stock
The Company’s amended and restated certificate of incorporation, as amended in June 2018, authorizes the Company to issue 201 million shares of
common and preferred stock, consisting of 200 million shares of common stock with $0.001 par value per share and one million shares of preferred stock
with $0.001 par value per share. The following is a summary of the Company’s common stock at December 31, 2019 and 2018.
Common stock authorized
Common stock outstanding
December 31
2019
2018
200,000,000 200,000,000
35,146,096
50,790,441
F-22
The Company’s shares of common stock reserved for issuance as of December 31, 2019 and 2018 were as follows:
Warrants acquired in merger
Warrants converted in connection with merger
April 2017 Warrants
June 2017 Warrants
December 2018 Warrants
2017 Pre-Funded Warrants
Pre-Funded PIPE Warrants
Milestone Warrants
Stock options outstanding
Issued and nonvested RSUs
Total shares reserved
December 31,
2019
403,927
72,869
24,725
41,736
11,332
775,000
5,780,537
32,577,209
4,541,432
315,625
44,544,392
2018
750,840
72,869
24,725
41,736
11,332
775,000
—
—
3,077,264
156,250
4,910,016
Warrants
The following table summarizes the outstanding warrants for the Company’s common stock as of December 31, 2019:
Shares Underlying
Outstanding Warrants
Exercise Price
403,927
72,869
775,000
24,725
41,736
11,332
5,780,537
32,577,209
39,687,335
$
$
$
$
$
$
$
$
29.40
8.98
0.01
9.10
5.39
8.824
0.001
1.48
Expiration Date
February 2021
June 2021
October 2024
April 2027
June 2027
December 2028
None
December 2021 or 30 days after
clinical milestone
11. Commitments
Operating Leases
We are obligated under operating leases and subleases for office space. On November 29, 2017, we entered into a sublease agreement for office space for
our corporate headquarters in Austin, Texas. The term of the sublease commenced on January 1, 2018 and will continue until July 31, 2021, with annual
rental payments of approximately $0.2 million, paid over monthly installments, subject to increases of approximately 2% annually on the anniversary of the
commencement date of the sublease term. However, monthly base rent for the first month of the sublease term was abated.
We lease office space in Copenhagen, Denmark under a lease with an effective date of November 1, 2018 and that expires on September 30, 2022. The
lease in Copenhagen can be terminated by the lessee and lessor no earlier than March 31, 2022 for vacating the premises by September 30, 2022 and
contains an option to extend the lease term to remain in force until it is terminated in writing by either the lessee or lessor with a six month notice period
from the first day of the month following September 30, 2022. For the year ended December 31, 2019, it is not reasonably certain the Company will
exercise the extension options inherent in the lease. Our annual rent is approximately $0.1 million, paid over monthly installments, subject to annual
increases equal to the Danish consumer price index, or approximately 2% annually.
On March 23, 2017, we sublet office space located in San Diego, California with rentable office space of approximately 13,707 square feet, which
previously served as a predecessor’s corporate headquarters, to a third party as the Company no longer had an ongoing need for this facility. The term of
the sub-sublease commenced on July 1, 2017 and expires on May 31, 2020, coterminous with a sublease agreement dated June 19, 2014 with the sublessor.
As of December 31, 2019, annual rent under the sub-sublease is approximately $0.5 million, payable in monthly installments.
F-23
We previously leased office space for our corporate headquarters in Austin, Texas, pursuant to an operating lease dated November 19, 2012, as amended
May 22, 2015, under which we were obligated to remit annual rental payments of approximately $0.1 million payable in monthly installments for the
period January 1, 2018 through November 30, 2019. Our obligation under this lease has expired. On November 29, 2017, we entered into a sublease
agreement pursuant to which the sublessee assumed the office space and rental payments effective January 1, 2018 through November 30, 2019 except for
the first month rent on January 2018.
The following is a maturity analysis of the annual undiscounted cash flows reconciled to the carrying value of the operating lease liabilities as of December
31, 2019 (in thousands):
Year ending December 31,
2020
2021
2022
Total future minimum lease payments
Less imputed interest
Total
Operating cash flows from operating leases
Weighted-average remaining lease term (in months) - operating
leases
Weighted-average discount rate - operating leases
$
$
$
$
478
184
67
729
(42)
687
786
18.7
8.5%
As of December 31, 2019, the carrying value of the right-of-use assets for the operating leases was $0.7 million, which is reflected in “Other non-current
assets,” and the carrying value of the lease liabilities for operating leases was $0.7 million, of which $0.4 million related to the current portion of the lease
liabilities is recorded in “Accrued expenses and other current liabilities,” and $0.3 million related to the non-current portion of the lease liabilities is
recorded in “Other long-term liabilities.”
Contingent Royalty and Milestone Payments
The Company is also subject to certain contingent royalty payments to the Cystic Fibrosis Foundation as further described below, and certain manufacturers
of Molgradex and related suppliers as described in Note 2.
CFF Award
In September 2013, the Company received a $1.7 million award (the “CFF Award”) from the Cystic Fibrosis Foundation (“CFF”) related to the
development of the Company’s AeroVanc product. The CFF Award includes disbursements to the Company based upon the achievement of certain
milestones. If the milestone payments are achieved, requested, and received by the Company, Savara is then subject to royalty payments, due to the CFF, as
follows: (i) based on commercialization of AeroVanc an amount equal to three (3) times the amount of the CFF Award; (ii) upon the achievement of net
sales exceeding $50 million for any calendar year during the first five years after the first commercial sale, an amount equal to one (1) times the amount of
the CFF Award; (iii) upon the achievement of net sales exceeding $100 million for any calendar year during the first five years after the
first commercial sale, an amount equal to one (1) times the amount of the CFF Award; (iv) upon a change in control transaction, as defined in the CFF
Award agreement, occurring prior to the second anniversary date of the effective date of the CFF Award, September 30, 2015, an amount equal to 5% of the
proceeds from the change in control transaction but not to exceed an amount equal to two (2) times the CFF Award proceeds received; and (v) upon a
change in control transaction occurring after the second anniversary date of the effective date of the CFF Award, an amount equal to 5% of the proceeds
from the change in control transaction or a sale or license of the AeroVanc program with a third party but not to exceed an amount equal to (3) three times
the CFF Award.
Since the Company has earned the full amount of the CFF Award, or $1.7 million, during the periods preceding the years ended December 31, 2019 and
2018, it recognized grant revenue in the requisite prior periods accordingly and is subject to the royalty obligations described above as calculated on the full
amount of the CFF Award received. However, as the Company has not recognized any sales from AeroVanc, the Company has not recorded a liability for
any amounts due as additional royalties.
F-24
On November 28, 2017, Savara entered into an amendment (the “Award Amendment”) to the CFF Award, as amended (the “Amended CFF Award”),
pursuant to which the amount of the development award available to Savara was increased by $5.0 million to an aggregate of $6.7 million. Pursuant to the
terms of the Amended CFF Award, if Savara elects to draw down funds on the increased award, it is obligated to make royalty payments to CFF as follows:
(i) based on commercialization of AeroVanc an amount equal to four (4) times the amount Savara receives under the Amended CFF Award; (ii) upon the
achievement of net sales exceeding $50 million for any calendar year during the first five years after the first commercial sale, a payment equal to the
amount Savara receives under the Amended CFF Award; (iii) upon the achievement of net sales exceeding $100 million for any calendar year during the
first seven years after the first commercial sale, an amount equal to one (1) times the amount of the Amended CFF Award; and (iv) upon the consummation
of a change of control transaction, as defined in the Amended CFF Award agreement, or a sale or license of the AeroVanc program with a third party, an
amount equal to 7.5% of the amount received from the third party in connection with such transaction, up to a total of four (4) times the amount received
by Savara under the Amended CFF Award with any such payments credited against the royalty payments due upon commercialization of AeroVanc, and
under which Savara must continue paying or cause the third party to assume any remaining royalties payable to CFF pursuant to the Amended CFF Award.
As of December 31, 2019 and 2018, the Company had made no draws against the amount following the Award Amendment.
Risk Management
The Company maintains various forms of insurance that the Company's management believes are adequate to reduce the exposure to these risks to an
acceptable level.
Employment Agreements
Certain executive officers are entitled to payments if they are terminated without cause or resign for good reason (each as defined in the employment
agreements). Upon termination without cause, and not as a result of death or disability, or resignation for good reason, each of such officers is entitled to
receive a payment of base salary for twelve months and a pro-rated portion of their unpaid bonus following termination of employment, and such officer
will be entitled to continue to receive coverage under medical and dental benefit plans for twelve months or until such officer is covered under a separate
plan from another employer. Upon a termination other than for cause or resignation for good reason within twelve months following a change in control,
each of such officers is entitled to receive a payment of base salary for eighteen months and one-hundred percent of their unpaid bonus following
termination of employment and such officer will be entitled to continue to receive coverage under medical and dental benefit plans for twelve months or
until such officer is covered under a separate plan from another employer and will also be entitled to certain acceleration of such officer’s outstanding
nonvested options at the time of such termination.
12. Related Parties
Pursuant to the Company’s public offering on June 7, 2017 (Note 10), Zambon SpA (“Zambon”) purchased 4,693,540 shares of the Company's common
stock resulting in ownership of approximately 13.4% of the Company's outstanding shares and voting interests as of December 31, 2018 and was thereby
considered a related party to the Company for the year ended December 31, 2018. Due to a reduction of Zambon’s percentage ownership of common stock
of the Company during the year ended December 31, 2019, Zambon no longer qualifies as a related party as of December 31, 2019.
Pursuant to the Private Placement on December 24, 2019 (Note 10), Bain Capital Life Science Investors, LLC and affiliates (“Bain”), acquired 4,571,139
shares of the Company’s common stock, 3,615,498 Pre-Funded PIPE Warrants, and 17,374,517 Milestone Warrants and was has a right to designate a
member of the Company’s board of directors. As an investor with the right to designate a member of the Company’s board of directors, Bain has significant
influence over the Company and is thereby considered a related party as of December 31, 2019.
13. Stock-Based Compensation
A. 2008 Stock Option Plan
The Company adopted the Savara Inc. Stock Option Plan (the “2008 Plan”), pursuant to which the Company had reserved shares for issuance to
employees, directors, and consultants. The 2008 Plan includes (i) the option grant program providing for both incentive and non-qualified stock options, as
defined by the Internal Revenue Code, and (ii) the stock issuance program providing for the issuance of awards that are valued based upon common stock,
including restricted stock, dividend equivalents, stock appreciation rights, phantom stock, and performance units. The 2008 Plan also allows eligible
persons to purchase shares of common stock at an amount determined by the plan administrator. Upon a participant’s termination, the Company retains the
right to repurchase nonvested shares issued in conjunction with the stock issuance program at the fair market value per share as of the date of termination.
F-25
Prior to the merger in April 2017, the Company had issued incentive and non-qualified options and restricted stock to employees and non-employees under
the 2008 Plan. The terms of the stock options, including the exercise price per share and vesting provisions, were determined by the board of directors.
Stock options were granted at exercise prices not less than the estimated fair market value of the Company’s common stock at the date of grant based upon
objective and subjective factors including: third-party valuations, preferred stock transactions with third parties, current operating and financial
performance, management estimates and future expectations. Stock option grants typically vest quarterly over three to four years and expire ten years from
the grant date, and restricted stock grants typically vest on a quarterly basis over four years and expire ten years from the grant date.
Changes in 2008 Plan
Subsequent to the merger in April 2017, the Company no longer issues awards under the 2008 Plan.
B. 2015 Omnibus Incentive Option Plan
The Company operates the 2015 Omnibus Incentive Plan (the “2015 Plan”), which was amended and approved by stockholders in June 2018. The 2015
Plan provides for the grant of incentive and non-statutory stock options, as well as share appreciation rights, restricted shares, restricted stock units
(“RSUs”), performance units, shares and other stock-based awards. Share-based awards are subject to terms and conditions established by our board of
directors or the compensation committee of our board of directors. As of December 31, 2019, the number of shares of our common stock available for grant
under the 2015 Plan was 272,211 shares.
Shares of common stock that are subject to awards granted under the 2015 Plan shall be counted against the shares available for issuance under this plan as
one share for each share subject to a stock option or stock appreciation right and as 1.34 shares for each share subject to an award other than a stock option
or a stock appreciation right such as an RSU. If any shares of common stock subject to an award granted under any of our stockholder-approved, equity-
based incentive plans are forfeited, or an award expires or is settled for cash pursuant to the terms of an award, the shares subject to the award may be used
again for awards under the 2015 Plan to the extent of the forfeiture, expiration or cash settlement. The shares of common stock will be added back as one
share for every share of common stock if the shares were subject to a stock option or stock appreciation right, and as 1.34 shares for every share of common
stock if the shares were subject to an award other than a stock option or stock appreciation right.
Under the 2015 Plan, the purchase price of shares of common stock covered by a stock option cannot be less than 100% of the fair market value of the
common stock on the date the stock option is granted. Fair market value of the common stock is generally equal to the closing price for the common stock
on the principal securities exchange on which the common stock is traded on the date the stock option is granted (or if there was no closing price on that
date, on the last preceding date on which a closing price was reported).
Stock Options and Restricted Stock Units
The Company values stock options using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including the risk-
free interest rate, expected life, expected stock price volatility and dividend yield. The risk-free interest rate assumption is based upon observed interest
rates for constant maturity U.S. Treasury securities consistent with the expected term of the Company’s employee stock options. The expected life
represents the period of time the stock options are expected to be outstanding and is based on the simplified method. The Company uses the simplified
method due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected life of the stock
options. Expected volatility is based on historical volatilities for publicly traded stock of comparable companies over the estimated expected life of the
stock options. The Company assumes no dividend yield because dividends are not expected to be paid in the near future, which is consistent with the
Company’s history of not paying dividends. The valuation of stock options is also impacted by the valuation of common stock. Stock option awards
generally have ten-year contractual terms and vest over four years for issuances to employees based on continuous service; however, the 2015 Plan allows
for other vesting periods.
Fair Value Assumptions for 2015 Plan
The following table summarizes the assumptions used for estimating the fair value of stock options granted to employees for the years ended December 31,
2019 and 2018:
Risk-free interest rate
Expected term (years)
Expected volatility
Dividend yield
2019
2018
1.39% - 2.60%
2.75% - 3.09%
6.19 - 7.05
79.9% - 91.3%
0%
7.05
79% - 81%
0%
F-26
The following table summarizes the assumptions used for estimating the fair value of stock options granted to non-employees for the years ended
December 31, 2019 and 2018:
Risk-free interest rate
Expected term (years)
Expected volatility
Dividend yield
C. Stock-Based Award Activity
2019
1.62% - 1.92%
6.16 - 9.96
83.9% - 91.3%
0%
2018
2.82%
7.05
80%
0%
The following tables provide a summary for the 2008 Plan and 2015 Plan of stock option activity for employees and non-employees, restricted stock, and
RSU activity for the year ended December 31, 2019:
Stock Options:
Outstanding at December 31, 2018
Granted
Exercised
Expired/cancelled/forfeited
Outstanding at December 31, 2019
Options exercisable at December 31, 2019
Vested and expected to vest at December 31, 2019
RSUs:
Outstanding at December 31, 2018
Granted
Vested
Expired/cancelled/forfeited
Outstanding at December 31, 2019
Shares
Underlying
Option Awards
Weighted-
Average
Exercise Price
Weighted-Average
Remaining
Contractual Life
Aggregate
Intrinsic Value (in
000's)
3,077,264 $
1,665,625
(136,729)
(64,728)
4,541,432 $
1,901,039 $
4,541,432 $
6.28
3.22
0.81
8.85
5.29
5.29
5.29
8.30 $
9.80
8.25 $
6.83 $
8.25 $
7,975
461
277
461
Shares
Underlying
Option Awards
Weighted-Average
Grant Date Fair
Value
156,250 $
234,000
(52,125)
(22,500)
315,625 $
9.59
1.19
9.20
9.23
3.45
Restricted Stock:
The following table summarizes the restricted stock activity for the years ended December 31, 2019 and 2018:
Nonvested at December 31, 2017
Granted
Vested
Forfeited
Nonvested at December 31, 2018
Granted
Vested
Forfeited
Nonvested at December 31, 2019
Restricted Shares
Weighted-Average
Grant Date Fair
Value
16,190 $
—
(16,190)
—
—
—
—
—
— $
0.65
—
0.65
—
—
—
—
—
—
F-27
The total fair value of restricted stock that vested during the years ended December 31, 2019 and 2018 was $0 and $0.2 million, respectively. As of
December 31, 2019, there was no remaining compensation cost related to nonvested restricted stock not yet recognized.
During the years ended December 31, 2019 and 2018, the Company did not issue any shares of restricted stock to employees under the 2008 Plan.
The following table provides a summary of options issued to employees and non-employees that are outstanding and vested as of December 31, 2019:
Exercise Price
$0.52 - $0.82
$1.01 - $1.57
$1.59 - $5.13
$5.85 - $9.93
$10.01 - $15.21
Number Outstanding
243,103
1,212,289
1,128,180
588,756
1,369,104
4,541,432
Weighted-Average
Life (in Years)
3.66
5.99
6.78
7.83
8.51
Number Exercisable
243,103
482,428
382,578
195,915
597,015
1,901,039
Weighted-Average
Life (in Years)
3.66
8.28
8.58
8.51
8.66
The weighted-average grant date fair values for the Company’s stock options granted during the years ended December 31, 2019 and 2018 were $2.30 per
share and $10.07 per share, respectively. The total compensation cost related to nonvested stock options not yet recognized as of December 31, 2019 was
$9.9 million, which will be recognized over a weighted-average period of approximately 2.6 years. Stock options to purchase 136,729 shares and 186,138
shares were exercised during the years ended December 31, 2019 and 2018, respectively.
During the years ended December 31, 2019 and 2018, the Company granted options to purchase a total of 60,000 and 0 shares of common stock to non-
employees, respectively, under the 2015 Plan.
The Company recorded a minimal amount of stock-based compensation expense for options issued to non-employees for the years ended December 31,
2019 and 2018, respectively. As of December 31, 2019, options to purchase 10,000 shares were held by non-employees and were vested and outstanding.
D. Stock-Based Compensation
Stock-based compensation expense is included in the following line items in the accompanying statements of operations and comprehensive loss for the
years ended December 31, 2019 and 2018 (in thousands):
Research and development
General and administrative
Total stock-based compensation
Year ended December 31,
2018
2019
$
$
2,123 $
2,318
4,441 $
1,626
2,111
3,737
14. License Agreement
The Company entered into a license agreement on May 12, 2016, as amended on June 4, 2018 (the “License Agreement”), with a licensee (the “Licensee”)
under which the Licensee received an exclusive right to import, market, sell, distribute, and promote Molgradex in Japan for the treatment of aPAP. In
return, the Licensee will pay the Company marketing and regulatory-based milestone payments and sales-based royalties. In October 2018, the Company
achieved a milestone payment pursuant to the License Agreement resulting in the receipt of $0.3 million from the Licensee. As of December 31, 2019, the
Company has determined that it has not met all of the performance obligations under the License Agreement and, accordingly, has recorded the milestone
payment as deferred revenue in “Other long-term liabilities” in the Company’s consolidated balance sheet until such time the performance obligations are
met.
F-28
15. Income Taxes
The components of loss before income taxes for the years ended December 31, 2019 and 2018 are as follows (in thousands):
Domestic
Foreign
Total
December 31,
2019
(52,440) $
(25,733)
(78,173) $
2018
(48,868)
(19,705)
(68,573)
$
$
The Company did not record a federal tax benefit or expense for the year ended December 31, 2019. However, a tax benefit of approximately $4.6 million
for income tax was recorded during the year ended December 31, 2018 due to the reduction of the Company’s deferred tax liability related to the
impairment and corresponding decrease to the carrying value of IPR&D associated with a drug candidate assumed in the April 2017 merger. The Company
recorded no state provision for income taxes for the years ended December 31, 2019 and 2018, due to revenues below the minimum tax threshold. The
components of the benefit for income taxes are as follows for the years ended December 31, 2019 and 2018 (in thousands):
Current:
Federal
State
Foreign
Total Current
Deferred:
Federal
State
Foreign
Total Deferred
Total income tax expense (benefit)
December 31,
2019
2018
—
—
—
—
—
—
—
—
—
$
$
—
—
124
124
(4,555)
—
(2,626)
(7,181)
(7,057)
$
$
A reconciliation of the expected income tax results computed using the federal statutory income tax rate to the Company’s effective income tax rate is as
follows for the years ended December 31, 2019 and 2018 (in thousands):
Income tax expense (benefit) computed at federal statutory tax
rate
Change in valuation allowance
Orphan drug & research credits generated
Orphan drug & research credit expense disallowance
Impact of foreign operations
Goodwill impairment
Other permanent differences
Total
December 31,
2019
2018
$
$
(16,416)
12,780
(2,855)
278
(312)
5,671
854
—
$
$
(14,706)
8,692
(2,945)
1,164
(305)
—
1,043
(7,057)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company has established a valuation allowance due to uncertainties regarding the realization
of deferred tax assets based upon the Company’s lack of earnings history. During the years ended December 31, 2019 and 2018, the valuation allowance
increased by $12.8 million and $8.7 million, respectively.
F-29
Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
Deferred tax liabilities:
Prepaid assets
Intangible assets
Other
Total deferred tax liabilities
Deferred tax assets:
Net operating loss carryforwards
Amortization
Credit carryforwards
Accrued liabilities & other
Total deferred tax assets
Subtotal
Valuation allowance
Net deferred taxes
December 31,
2019
2018
—
2,143
516
2,659
30,953
97
15,654
365
47,069
44,410
(44,410)
—
$
$
—
2,845
251
3,096
21,406
208
12,706
318
34,638
31,542
(31,542)
—
$
$
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (the “Tax Act”), reducing the U.S. corporate income tax rate to 21%
effective January 1, 2018. The Company reflected the income tax effects of the Tax Act as of December 31, 2017 and had no significant adjustments to
provisional amounts as of December 31, 2018.
Subsequent to the enactment of the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts
and Jobs Act,” which allows companies to record provisional amounts related to the effects of the Tax Act to the extent that a company’s accounting for
certain income tax effects of the Tax Act is incomplete but the company is able to determine a reasonable estimate during a measurement period not to
extend beyond one year from the enactment date. As of December 31, 2019 and 2018, we have completed our accounting and measurement analyses
related to the income tax effects of the Tax Act, and no significant adjustments to the provisional amounts were recorded during the year ended December
31, 2019 and 2018.
The Company reclassified certain foreign refundable tax credits generated by both its Danish and Australian subsidiaries of approximately $1.5 million
from “Income tax benefit” to “Other income, net” on the Consolidated Statements of Operation and Comprehensive Loss for the year ended December 31,
2018 and believes the adjustment is not material to the current or prior annual or interim periods.
As of December 31, 2019 and 2018, the Company had foreign net operating loss (“NOL”) carryforwards of approximately $40.3 million and $23.1 million,
respectively, which have an indefinite carryforward period. During the fourth quarter of 2018, the Company corrected its accounting to include deferred tax
liabilities related to indefinite lived in-process research and development assets as a source of income in determining the realizability of net operating losses
with an indefinite carryforward period. The Company recorded a tax benefit of $2.5 million in the fourth quarter of 2018 related to the reduction of the
valuation allowance on deferred tax assets related to net operating losses with an indefinite carryforward period of which $1.8 million related to annual
periods prior to 2018. The Company believes the adjustment is not material to the current or prior annual or interim periods. As of December 31, 2019 and
2018, the Company had NOL’s for federal income tax purposes of approximately $103.8 million and $77.7 million, respectively. As of December 31, 2019
and 2018, the Company also had available research and orphan drug tax credit carryforwards for federal income tax purposes of approximately $15.3
million and $12.5 million, respectively. If not utilized, these carryforwards expire at various dates beginning in 2028. As of December 31, 2019 and 2018,
the Company had state research and development tax credit carryforwards of approximately $0.4 million and $0.3 million, respectively, which will begin to
expire in 2034 if not utilized.
F-30
Utilization of the NOL and tax credit carryforwards may be subject to an annual limitation due to ownership change limitations that have occurred
previously or that could occur in the future, as provided by Section 382 of the Internal Revenue Code of 1986 (“Section 382”), as well as similar state
provisions. Ownership changes may limit the amount of NOL carryforwards and tax credit carryforwards that can be utilized annually to offset future
taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions that increase the ownership of
5% shareholders in the stock of a corporation by more than 50 percentage points in the aggregate over a three-year period. The Company has not performed
a study to determine whether any ownership change has occurred since the Company’s formation through December 31, 2019. However, the Company
believes that it has experienced at least two ownership changes in the past and that it may experience additional ownership changes as a result of
subsequent shifts in its stock ownership. Should there be an ownership change that has occurred or will occur, the Company’s ability to utilize existing
carryforwards could be substantially restricted and may result in the expiration of such carryforwards prior to utilization.
The Company applies the accounting guidance in ASC 740 “Income Taxes” related to accounting for uncertainty in income taxes. The Company’s reserves
related to taxes are based on a determination of whether, and how much of, a tax benefit taken by the Company in its tax filings or positions is more likely
than not to be realized following resolution of any potential contingencies present related to the tax benefit. As of December 31, 2019 and 2018, the
Company had no unrecognized tax benefits. During the years ended December 31, 2019 and 2018, the Company had no interest and penalties related to
income taxes.
The Company files income tax returns in the U.S. federal, state, and foreign jurisdictions. As of December 31, 2019, the statute of limitations for
assessment by the Internal Revenue Service (“IRS”) is open for the 2016 and subsequent tax years, although carryforward attributes that were generated for
tax years prior to then may still be adjusted upon examination by the IRSs if they either have been, or will be, used in a future period. The 2015 and
subsequent tax years remain open and subject to examination by the state taxing authorities. The 2017 and subsequent tax years remain open and subject to
examination by the foreign taxing authorities. There are currently no federal, state, or foreign income tax audits in progress.
16. Net Loss per Share
Basic net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding. Diluted net loss per share is
computed similarly to basic net loss per share except the denominator is increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted net loss per share is the same as
basic net loss per common share, since the effects of potentially dilutive securities are antidilutive.
As of December 31, 2019 and 2018 potentially dilutive securities include:
Awards under equity incentive plan
Nonvested restricted shares and restricted stock units
Warrants to purchase common stock
Total
Year ended December 31,
2018
3,077,264
156,250
901,502
4,135,016
2019
4,541,432
315,625
33,131,798
37,988,855
The following table calculates basic earnings per share of common stock and diluted earnings per share of common stock for the years ended December 31,
2019 and 2018 (in thousands, except share and per share amounts):
Net loss
Net loss attributable to common stockholders
Undistributed earnings and net loss attributable to
common stockholders, basic and diluted
Weighted-average common shares outstanding, basic
and diluted
Basic and diluted EPS
F-31
Year ended December 31,
2019
2018
(78,173) $
(78,173) $
(61,516)
(61,516)
(78,173) $
(61,516)
40,027,758
33,300,704
(1.95) $
(1.85)
$
$
$
$
17. Quarterly Financial Data (Unaudited)
The following table summarizes unaudited quarterly financial data for the years ended December 31, 2019 and 2018 (in thousands, except per share
amounts):
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2019
Revenues
Operating loss
Net loss
Basic and diluted net loss per share
Revenues
Operating loss
Net loss
Basic and diluted net loss per share*
— $
$
—
— $
$ (12,920) $ (22,154) $ (12,442) $ (31,509)
$ (12,112) $ (21,939) $ (12,403) $ (31,719)
(0.72)
$
(0.30) $
(0.34) $
(0.57) $
— $
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2018
— $
$
—
— $
$ (32,107) $ (11,906) $ (12,784) $ (13,248)
$ (26,849) $ (11,593) $ (12,560) $ (10,514)
(0.29)
$
(0.36) $
(0.86) $
(0.37) $
— $
* During the fourth quarter of 2018, the Company identified and corrected for pre-funded warrants that were excluded from the basic and diluted net loss
per share calculation. The Company considered both quantitative and qualitative factors in assessing the impact of the exclusion of these pre-funded
warrants to the calculation of basic and diluted net loss per share and concluded that the exclusion was not material to any prior periods presented. The
Company has revised the basic and diluted net loss per share calculation for the three months ended March 31, 2018, June 30, 2018, and September 30,
2018 in the table above. The related impact was a reduction to the basic and diluted net loss per share calculations in the amount of two cents, one cent, and
one cent for the three months ended March 31, 2018, June 30, 2018, and September 30, 2018, respectively.
18. Subsequent Events
Debt Facility
On January 31, 2020, the Company executed a third amendment (the “Third Amendment”) to the loan and security agreement dated April 28, 2017, as
amended October 31, 2017 and December 4, 2018 with Silicon Valley Bank (the “Loan Agreement”), which provides for a $25 million term loan facility.
The Third Amendment extends the interest-only period of the loan repayment through June 30, 2022, with payments thereafter in equal monthly
installments of principal plus interest over 18 months. However, if by March 31, 2021, the Company does not have an ongoing Phase 3 or Phase 4 clinical
trial evaluating its Molgradex product for the treatment of autoimmune pulmonary alveolar proteinosis in which the first patient has been dosed, the
interest-only period will end and principal plus interest will be due in equal monthly installments over 24 months beginning on April 1, 2021.
Following the effective date of the Third Amendment, the Company was required to pay a portion of the end of period charge equal to $0.5 million under
the Loan Agreement to Silicon Valley Bank. The loans bear interest at the greater of (i) the prime rate reported in The Wall Street Journal, plus a spread of
3.0% or (ii) 7.75%. The Loan Agreement, as amended by the Third Amendment (the “Amended Loan Agreement”) will also require a prepayment fee
(2.0% of funded amounts in months 13-24, and 1.0% thereafter), and an end of term charge equal to 6.0% of the amount of principal borrowed.
In addition to customary affirmative and negative covenants, the Amended Loan Agreement contains an affirmative covenant requiring Savara to deliver
evidence by June 30, 2021, of the receipt of gross cash proceeds of at least $25.0 million from the exercise of currently outstanding warrants or the issuance
of other equity securities.
F-32
In connection with the execution of the Third Amendment, the Company entered into amendments to each of the outstanding warrants previously issued to
Silicon Valley Bank and its affiliate, totaling 77,792 shares, to amend the exercise price to be $2.87 per share. That amendment results in a decrease in the
fair value of these warrants, determined in accordance with the Black-Scholes-Merton option pricing model, of $0.1 million, which will be accounted for as
debt issuance costs and will be accreted as contra-interest expense using the effective interest method through the scheduled maturity date.
The Company has analyzed the Third Loan Amendment and concluded that the debt restructuring results in modification accounting under ASC 470
“Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent).”
CFF Award and Partial Termination Letter Agreement
Effective February 6, 2020, the CFF and Savara entered into a termination agreement under which the Amended CFF Award was terminated immediately
(“Termination Agreement). Under the terms of the Termination Agreement, the Award Amendment is to be disregarded, and the $5.0 million award is no
longer available to the Company.
However, Savara shall retain the $1.7 million award previously received from the CFF under the CFF Award related to the development of the Company’s
AeroVanc product and certain key provisions of the CFF Award shall survive pursuant to the Termination Agreement, including Savara’s obligation to
make royalty payments to the CFF upon the achievement of certain milestones (see Note 11).
License Agreement
On February 21, 2020, the Company received notification from the Licensee of its intent to terminate the License Agreement (see Note 14). Therefore, the
License Agreement will be terminated as of August 21, 2020.
F-33
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12
OF THE SECURITIES EXCHANGE ACT OF 1934
Exhibit 4.25
General
The following description of registered securities of Savara Inc. (“us,” “our,” “we” or the “Company”) is intended as a summary only and
therefore is not a complete description. This description is based upon, and is qualified by reference to, our amended and restated certificate of
incorporation, our amended and restated bylaws and applicable provisions of the Delaware General Corporation Law (“DGCL”). You should read our
amended and restated certificate of incorporation and amended and restated bylaws, which are incorporated by reference as Exhibit 3.1 and Exhibit 3.2,
respectively, to the Annual Report on Form 10-K of which this Exhibit is a part, for the provisions that are important to you.
Our authorized capital stock consists of 201,000,000 shares, with a par value of $0.001 per share, of which:
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200,000,000 shares are designated as common stock; and
1,000,000 shares are designated as preferred stock.
Our common stock is registered under Section 12(b) of the Securities Exchange Act of 1934, as amended.
Description of Common Stock
Our certificate of incorporation authorizes us to issue 200,000,000 shares of common stock, par value $0.001 per share. Additional shares of
authorized common stock may be issued, as authorized by our board of directors from time to time, without stockholder approval, except as may be
required by applicable securities exchange requirements. The holders of common stock possess exclusive voting rights in us, except to the extent our board
of directors specifies voting power with respect to any other class of securities issued in the future. Each holder of our common stock is entitled to one vote
for each share held of record on each matter submitted to a vote of stockholders, including the election of directors. Stockholders do not have any right to
cumulate votes in the election of directors.
Subject to preferences that may be granted to the holders of preferred stock, each holder of our common stock is entitled to share ratably in
distributions to stockholders and to receive ratably such dividends as may be declared by our board of directors out of funds legally available therefor. In
the event of our liquidation, dissolution or winding up, the holders of our common stock will be entitled to receive, after payment of all of our debts and
liabilities and of all sums to which holders of any preferred stock may be entitled, the distribution of any of our remaining assets. Holders of our common
stock have no conversion, exchange, sinking fund or redemption rights and have no preemptive rights to subscribe for any of our securities. All of the
outstanding shares of our common stock are fully paid and non-assessable.
Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and Bylaws
Provisions of the DGCL, our certificate of incorporation and our bylaws could make it more difficult to acquire us by means of a tender offer, a
proxy contest or otherwise, or to remove incumbent officers and directors. These provisions, summarized below, are expected to discourage certain types of
coercive takeover practices and takeover bids that our board of directors may consider inadequate and to encourage persons seeking to acquire control of us
to first negotiate with our board of directors. We believe that the benefits of increased protection of our ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging takeover or acquisition proposals because,
among other things, negotiation of these proposals could result in an improvement of their terms. This summary does not purport to be complete and is
qualified in its entirety by reference to the DGCL and our certificate of incorporation and bylaws.
Certificate of Incorporation and Bylaws
Preferred Stock. Under our certificate of incorporation, our board of directors has the power to authorize the issuance of up to 1,000,000 shares
of preferred stock, all of which are currently undesignated, and to determine the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without further vote or action by our stockholders. The issuance of preferred stock may:
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delay, defer or prevent a change in control;
discourage bids for our common stock at a premium over the market price of our common stock;
adversely affect the voting and other rights of the holders of our common stock; and
discourage acquisition proposals or tender offers for our shares and, as a consequence, inhibit fluctuations in the market price of our
shares that could result from actual or rumored takeover attempts.
Advance Notice Requirement. Stockholder nominations of individuals for election to our board of directors and stockholder proposals of other
matters to be brought before an annual meeting of our stockholders must comply with the advance notice procedures set forth in our bylaws. Generally, to
be timely, such notice must be received at our principal executive offices no later than the date specified in our proxy statement released to stockholders in
connection with the preceding year’s annual meeting of stockholders, which date shall be not earlier than the 120th day, nor later than the close of business
on the 90th day, prior to the first anniversary of the date of the preceding year’s annual meeting of stockholders.
Special Meeting Requirements. Our bylaws provide that special meetings of our stockholders may be called only at the request of our board of
directors, president (unless there is a chief executive officer who is not the president, in which case a special meeting may be called at any time by the chief
executive officer and not the president) or chair of the board of directors. Only such business shall be considered at a special meeting as shall have been
stated in the notice for such meeting.
No Cumulative Voting. Our certificate of incorporation does not include a provision for cumulative voting for directors.
Indemnification. Our certificate of incorporation and bylaws provide that we will indemnify our officers and directors against losses as they
incur in investigations and legal proceedings resulting from their services to us, which may include service in connection with takeover defense measures.
Removal of Directors. Our bylaws provide that the affirmative vote of the holders of at least 75% of our voting stock then outstanding is
required to remove our directors, either with or without cause.
Authorized but Unissued Shares. Our authorized but unissued shares of common stock and preferred stock will be available for future issuance
without stockholder approval. We may use additional shares for a variety of purposes, including future public offerings to raise additional capital, to fund
acquisitions and as employee compensation. The existence of authorized but unissued shares of common stock and preferred stock could render more
difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.
Delaware Anti-Takeover Statute
We are subject to Section 203 of the DGCL, an anti-takeover law. In general, Section 203 prohibits, with some exceptions, a publicly held
Delaware corporation from engaging in a “business combination” with any “interested stockholder” for a period of three years following the date that
stockholder became an interested stockholder, unless:
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prior to that date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares of voting stock outstanding (but not the voting stock owned by the interested stockholder) those shares
owned by persons who are directors and officers and by excluding employee stock plans in which employee participants do not have the
right to determine whether shares held subject to the plan will be tendered in a tender or exchange offer; or
on or subsequent to that date, the business combination is approved by the board of directors of the corporation and authorized at an
annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66-2/3% of the outstanding
voting stock that is not owned by the interested stockholder.
Section 203 defines “business combination” to include any of the following:
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any merger or consolidation involving the corporation and the interested stockholder;
any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;
subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to
the interested stockholder;
any merger or consolidation involving the corporation and the interested stockholder;
any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; or
the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by
or through the corporation.
In general, Section 203 defines an “interested stockholder” as any person who, together with the person’s affiliates and associates, beneficially
owns, or within three years prior to the determination of interested stockholder status did beneficially own, 15% or more of the outstanding voting stock of
the corporation.
The above provisions may deter a hostile takeover or delay a change in control.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company.
The NASDAQ Global Select Market Listing
Our common stock is listed on the NASDAQ Global Select Market under the symbol “SVRA.”
SAVARA INC.
NOTICE OF GRANT OF RESTRICTED STOCK UNITS
Exhibit 10.36
The Awardee has been granted an award of Restricted Stock Units (the “Award”) pursuant to the Savara Inc. 2015 Omnibus
Incentive Plan (the “Plan”), each of which represents the right to receive on the applicable Settlement Date one (1) Share of
common stock of Savara Inc. (the “Company”), as follows:
Awardee:
Grant Date:
[DATE]
Number of Restricted Stock
Units:
, subject to adjustment as provided by the Restricted Stock Units
Agreement.
Settlement Date:
Vested Units:
For each Restricted Stock Unit, except as otherwise provided by the Restricted
Stock Units Agreement, the first date that is administratively practicable following
the date on which such unit becomes a Vested Unit (if any) in accordance with the
vesting schedule set forth below; but no later than March 15th of the calendar year
following the calendar year in which the Restricted Stock Units become Vested
Units.
Except as provided by the Restricted Stock Units Agreement and provided that the
Awardee’s service has not terminated, the Number of Restricted Stock Units shall
become Vested Units as follows:
[Insert Vesting Schedule]
Notwithstanding the foregoing, in the event Awardee ceases providing Services to
the Company due to the Company’s, or a successor of the Company’s termination of
Awardee’s service other than for Cause or Awardee’s death or disability or due to
Awardee’s resignation for Good Reason, in either case within 24 months following a
Change in Control, the Restricted Stock Units shall become fully vested and free
from restrictions.
For the purposes of this Award, “Cause” shall mean the commission of any act of
fraud, embezzlement or dishonesty by Awardee, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Company or an
Affiliate or a successor company (or a subsidiary or parent thereof), or any other
intentional misconduct by such person adversely affecting the business affairs of the
Company or an Affiliate or a successor company (or a subsidiary or parent thereof)
in a material manner.
For purposes of this Award, “Good Reason” shall mean, in each case without
Awardee’s explicit written consent, which Awardee may withhold or provide in
Awardee’s sole and absolute discretion, (i) a reduction by the Company or an
Affiliate or a successor company (or a subsidiary or parent thereof) of more than
10% in Awardee’s rate of annual base salary as in effect immediately prior to such
Change in Control; (ii) a reduction by the Company or an Affiliate or a successor
company (or a subsidiary or parent thereof) of more than 10% of Awardee’s
individual annual target or bonus opportunity, except under circumstances where the
Company or the Affiliate or the successor company (or a subsidiary or parent
thereof) implement changes to the bonus structure of similarly situated employees,
including but not limited to changes to the bonus structure designed to integrate the
Company’s or the Affiliate’s personnel with other personnel of the successor
company (or a subsidiary or parent thereof); (iii) a change in position that materially
reduces Awardee’s level of responsibility, including the level of person to whom
Awardee reports; or (iv) a relocation following the Change in Control of Grantee’s
primary office location (A) by more than 50 miles or (B) that would reasonably be
expected to increase Awardee’s commute such that Awardee’s total (i.e., round-trip)
commute would reasonably be expected to increase by more than one hour per day;
provided, however, that no such occurrence shall constitute Good Reason unless (x)
the Awardee gives the Company a written notice of termination for Good Reason
not more than 30 days after the initial existence of the condition, (y) the grounds for
termination (if susceptible to correction) are not corrected by the Company within
30 days of its receipt of such notice, and (z) the Awardee’s termination of
employment occurs within 90 days following the Company’s receipt of such notice.
By their signatures below or by electronic acceptance or authentication in a form authorized by the Company, the Company and
the Awardee agree that the Award is governed by this Grant Notice and by the provisions of the Plan and the Restricted Stock
Units Agreement, both of which are made a part of this document. The Awardee acknowledges that copies of the Plan, Restricted
Stock Units Agreement, and the prospectus for the Plan have been made available to the Awardee.
Thus, the Awardee shall not be entitled to this Award, which shall not be treated as having been granted, until this Agreement is
executed. The Awardee represents that the Awardee has read and is familiar with the provisions of the Plan and Restricted Stock
Units Agreement, and hereby accepts the Award subject to all of their terms and conditions.
SAVARA INC.
By:
Its:
Address: Savara Inc.
6836 Bee Cave Road,
Building III, Suite 200
Austin, TX 78746
AWARDEE:
Signature:
Date:
Address:
ATTACHMENTS:
Restricted Stock Units Agreement; 2015 Omnibus Incentive Plan, as amended to the Grant Date
SAVARA INC.
RESTRICTED STOCK UNITS AGREEMENT
Savara Inc. (“Savara” or the “Company”) has granted to the Awardee named in the Notice of Grant of Restricted Stock Units
(the “Grant Notice”) to which this Restricted Stock Units Agreement (the “Agreement”) is attached an Award consisting of
Restricted Stock Units (the “Units”) subject to the terms and conditions set forth in the Grant Notice and this Agreement. The
Award has been granted pursuant to and shall in all respects be subject to the terms conditions of the Savara Inc. 2015 Omnibus
Incentive Plan (the “Plan”), as amended to the Grant Date attached as Exhibit A, the provisions of which are incorporated herein
by reference. By signing the Grant Notice, the Awardee: (a) acknowledges receipt of and represents that the Awardee has read
and is familiar with the Grant Notice, this Agreement, the Plan and a prospectus for the Plan prepared in connection with the
registration with the Securities and Exchange Commission of the shares issuable pursuant to the Award (the “Plan Prospectus”),
(b) accepts the Award subject to all of the terms and conditions of the Grant Notice, this Agreement and the Plan and (c) agrees to
accept as binding, conclusive and final all decisions or interpretations of the Company’s Board of Directors or its delegatee(s)
(collectively, the “Board”) upon any questions arising under the Grant Notice, this Agreement or the Plan.
1.
DEFINITIONS AND CONSTRUCTION.
1.1
Grant Notice or the Plan.
Definitions. Unless otherwise defined herein, capitalized terms shall have the meanings assigned in the
1.2
Construction. Captions and titles contained herein are for convenience only and shall not affect the
meaning or interpretation of any provision of this Agreement. Except when otherwise indicated by the context, the singular shall
include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context
clearly requires otherwise.
2.
ADMINISTRATION.
All questions of interpretation concerning the Grant Notice, this Agreement and the Plan shall be determined by the Board. All
such determinations shall be final and binding upon all persons having an interest in the Award as provided by the Plan. Any
Officer shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is
the responsibility of or which is allocated to the Company herein, provided the Officer has apparent or actual authority with
respect to such matter, right, obligation, or election.
3.
THE AWARD.
3.1
Grant of Units. On the Grant Date, the Awardee shall acquire, subject to the provisions of this Agreement,
the Number of Restricted Stock Units set forth in the Grant Notice, subject to adjustment as provided in Section 9 of this
Agreement. Each Unit represents a right to receive on a date determined in accordance with the Grant Notice and this Agreement
one (1) Share.
3.2
No Monetary Payment Required. The Awardee is not required to make any monetary payment (other
than applicable tax withholding, if any) as a condition to receiving the Units or Shares issued upon settlement of the Units, the
consideration for which shall be past services actually rendered and/or future services to be rendered to the Company or an
affiliate. Notwithstanding the foregoing, if required by applicable state corporate law, the Awardee shall furnish consideration in
the form of cash or past services rendered having a value not less than the par value of the Shares issued upon settlement of the
Units.
4.
VESTING OF UNITS.
The Units shall vest and become Vested Units as provided in the Grant Notice.
5.
COMPANY REACQUISITION RIGHT.
5.1
Grant of Company Reacquisition Right. Except to the extent otherwise provided in an employment
agreement between the Company or an Affiliate and the Awardee, the Plan or this Agreement, in the event that the Awardee’s
Service terminates for any reason or no reason, with or without cause, the Awardee shall forfeit and the Company shall
automatically reacquire all Units which are not, as of the time of such termination, Vested Units (“Unvested Units”), and the
Awardee shall not be entitled to any payment therefor (the “Company Reacquisition Right”).
5.2
Dividends, Distributions and Adjustments. Upon a dividend or distribution to the stockholders of the
Company paid in shares of Stock or other property, or any other adjustment upon a change in the capital structure of the
Company as described in Section 10.2 of the Plan, any and all new, substituted or additional securities or other property (other
than regular, periodic dividends paid on Shares pursuant to the Company’s dividend policy) to which the Awardee is entitled by
reason of the Awardee’s ownership of Unvested Units shall be immediately subject to the Company Reacquisition Right and
included in the terms “Units” and “Unvested Units” for all purposes of the Company Reacquisition Right with the same force and
effect as the Unvested Units immediately prior to the dividend, distribution or adjustment, as the case may be. For purposes of
determining the number of Vested Units following a dividend, distribution or adjustment, credited Service shall include all
service with the Company or an Affiliate at the time the service is rendered.
6.
SETTLEMENT OF THE AWARD.
6.1
Issuance of Shares. Subject to the provisions of Section 6.3 of this Agreement, the Company shall issue to
the Awardee on the settlement date with respect to each Vested Unit to be settled on such date one (1) Share. Shares issued in
settlement of Units shall not be subject to any restriction on transfer other than any such restriction as may be required pursuant
to Section 6.3 of this Agreement, Section 7 of this Agreement, other applicable laws, insider trading policies or any agreement
between the Awardee and the Company applicable to the Shares (collectively, “Share Sale Restrictions”).
6.2
Beneficial Ownership of Shares; Certificate Registration. The Awardee hereby authorizes the Company,
in its sole discretion, to deposit for the benefit of the Awardee with the broker designated by the Company with which the
Awardee has an account, any or all Shares acquired by the Awardee pursuant to the settlement of the Award. Except as provided
by the preceding sentence, a certificate for the Shares as to which the Award is settled shall be registered in the name of the
Awardee, or, if applicable, in the names of the heirs of the Awardee.
6.3
Restrictions on Grant of the Award and Issuance of Shares. The grant of the Award and issuance of
Shares upon settlement of the Award shall be subject to compliance with all applicable requirements of federal, state or foreign
law with respect to such securities. No Shares may be issued hereunder if the issuance of such Shares would constitute a violation
of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Shares may then be listed. The inability of the Company to obtain from any regulatory body
having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance of any
shares subject to the Award shall relieve the Company of any liability in respect of the failure to issue such Shares as to which
such requisite authority shall not have been obtained. As a condition to the settlement of the Award, the Company may require
the Awardee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or
regulation and to make any representation or warranty with respect thereto as may be requested by the Company.
6.4
Fractional Shares. The Company shall not be required to issue fractional Shares upon the settlement of the
Award.
6.5
Section 409A. It is the intent of this Agreement that it and all payments and benefits hereunder be exempt
from, or comply with, the requirements of Section 409A so that none of the Restricted Stock Units provided under this
Agreements or Shares issuable thereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities
herein will be interpreted to be so exempt or so comply. Each payment payable under this Agreement is intended to constitute a
separate payment for purposes of Treasury Regulation Section 1.409A-2(b)(2). However, in no event with the Company
reimburse Awardee, or be otherwise responsible for, any taxes or costs that may be imposed on Awardee as a result of Section
409A. For purposes of this Agreement “Section 409A” means Section 409A of the Code and any final Treasury Regulations and
Internal Revenue Service guidance thereunder, as each may be amended from time to time.
7.
TAX WITHHOLDING.
7.1
In General. At the time the Grant Notice is executed, or at any time thereafter as requested by the
Company, the Awardee hereby authorizes withholding from payroll and any other amounts payable to the Awardee, and
otherwise agrees to make adequate provision for, any sums required to satisfy the federal, state, local and foreign tax (including
any social insurance) withholding obligations of the Company and its affiliates, if any, which arise in connection with the Award,
the vesting of Units or the issuance of Shares in settlement thereof. The Company shall have no obligation to deliver shares of
Stock until such tax withholding obligations of the Company have been satisfied by the Awardee.
7.2
Assignment of Sale Proceeds; Payment of Tax Withholding by Check. Subject to compliance with
applicable law and any Share Sale Restrictions, the Company may permit the Awardee to satisfy the tax withholding obligations
in accordance with procedures established by the Company providing for either (i) delivery by the Awardee to the Company or a
broker approved by the Company of properly executed instructions, in a form approved by the Company, providing for the
assignment to the Company of the proceeds of a sale with respect to some or all of the Shares being acquired upon settlement of
Units, or (ii) payment by check.
7.3
Withholding in Shares. The Company may require, or permit, the Awardee to satisfy all or any portion of
the Company’s or Affiliate’s tax withholding obligations by deducting from the Shares otherwise deliverable to the Awardee in
settlement of the Award a number of whole Shares having a fair market value, as determined by the Company as of the date on
which the tax withholding obligations arise, not in excess of the amount of such tax withholding obligations determined by the
applicable minimum statutory withholding rates.
8.
DEATH OF AWARDEE.
Any distribution or delivery to be made to Awardee under this Agreement will, if Awardee is then deceased, be made to
Awardee’s designated beneficiary, or if no beneficiary survives Awardee, to Awardee’s estate. Any such transferee must furnish
the Company with (i) written notice of his or her status as transferee and (ii) evidence satisfactory to the Company to establish the
validity of the transfer and compliance with any laws or regulations pertaining to said transfer.
9.
ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE.
Subject to any required action by the stockholders of the Company and the requirements of Section 409A to the extent applicable,
in the event of any change in the Shares effected without receipt of consideration by the Company, whether through merger,
consolidation, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stock split, reverse stock split,
split-up, split-off, spin-off, combination of shares, exchange of shares, or similar change in the capital structure of the Company,
or in the event of payment of a dividend or distribution to the stockholders of the Company in a form other than Shares
(excepting normal cash dividends) that has a material effect on the Fair Market Value of Shares, appropriate and proportionate
adjustments shall be made in the number of Units subject to the Award and/or the number and kind of shares to be issued in
settlement of the Award, in order to prevent dilution or enlargement of the Awardee’s rights under the Award. For purposes of the
foregoing, conversion of any convertible securities of the Company shall not be treated as “effected without receipt of
consideration by the Company.” Any fractional Share resulting from an adjustment pursuant to this Section shall be rounded
down to the nearest whole number. Such adjustments shall be determined by the Board, and its determination shall be final,
binding and conclusive.
10.
RIGHTS AS A STOCKHOLDER OR EMPLOYEE.
The Awardee shall have no rights as a stockholder with respect to any Shares which may be issued in settlement of this Award
until the date of the issuance of a certificate for such Shares (as evidenced by the appropriate entry on the books of the Company
or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights
for which the record date is prior to the date such certificate is issued, except as provided in Section 9 of this Agreement. If the
Awardee is an Employee, the Awardee understands and acknowledges that, except as otherwise provided in a separate, written
employment agreement between the Company or an Affiliate and the Awardee, the Awardee’s employment is “at will” and is for
no specified term. Nothing in this Agreement shall confer upon the Awardee any right to continue in the service of the Company
or an Affiliate or interfere in any way with any right to terminate the Awardee’s service at any time.
11.
LEGENDS.
The Company may at any time place legends referencing any applicable federal, state or foreign securities law restrictions on all
certificates representing Shares issued pursuant to this Agreement. The Awardee shall, at the request of the Company, promptly
present to the Company any and all certificates representing Shares acquired pursuant to this Award in the possession of the
Awardee in order to carry out the provisions of this Section.
12.
MISCELLANEOUS PROVISIONS.
12.1
Termination or Amendment. The Board may terminate or amend the Plan or this Agreement at any
time; provided, however, that except as provided in Section 11 of the Plan in connection with a Change in Control, no such
termination or amendment may adversely affect the Awardee’s rights under this Agreement without the consent of the Awardee
unless such termination or amendment is necessary to comply with applicable law or government regulation, including, but not
limited to, Section 409A. No amendment or addition to this Agreement shall be effective unless in writing.
12.2
Nontransferability of the Award. Prior to the issuance of Shares on the applicable Settlement Date,
neither this Award nor any Units subject to this Award shall be subject in any manner to anticipation, alienation, sale, exchange,
transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Awardee or the Awardee’s beneficiary, except
transfer by will or by the laws of descent and distribution. All rights with respect to the Award shall be exercisable during the
Awardee’s lifetime only by the Awardee or the Awardee’s guardian or legal representative.
12.3
Further Instruments. The parties hereto agree to execute such further instruments and to take such
further action as may reasonably be necessary to carry out the intent of this Agreement.
12.4
Binding Effect. This Agreement shall inure to the benefit of the successors and assigns of the Company
and, subject to the restrictions on transfer set forth herein, be binding upon the Awardee and the Awardee’s heirs, executors,
administrators, successors and assigns.
12.5
Delivery of Documents and Notices. Any document relating to participation in the Plan or any notice
required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this
Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery, electronic delivery at the e-
mail address, if any, provided for the Awardee by the Company or any Affiliate, or upon deposit in the U.S. Post Office or foreign
postal service, by registered or certified mail, or with a nationally recognized overnight courier service, with postage and fees
prepaid, addressed to the other party at the address shown below that party’s signature to the Grant Notice or at such other
address as such party may designate in writing from time to time to the other party.
(a) Description of Electronic Delivery. The Plan documents, which may include but do not necessarily
include: the Plan, the Grant Notice, this Agreement, the Plan Prospectus, and any reports of the Company provided
generally to the Company’s stockholders, may be delivered to the Awardee electronically. In addition, the Awardee
may deliver electronically the Grant Notice to the Company or to such third party involved in administering the Plan
as the Company may designate from time to time. Such means of electronic delivery may include but do not
necessarily include the delivery of a link to a Company intranet or the Internet site of a third party involved in
administering the Plan, the delivery of the document via e-mail or such other means of electronic delivery specified by
the Company.
(b) Consent to Electronic Delivery. The Awardee acknowledges that the Awardee has read Section 12.5(a)
of this Agreement and consents to the electronic delivery of the Plan documents and Grant Notice, as described in
Section 12.5(a). The Awardee acknowledges that he or she may receive from the Company a paper copy of any
documents delivered electronically at no cost to the Awardee by contacting the Company by telephone or in writing.
The Awardee further acknowledges that the Awardee will be provided with a paper copy of any documents if the
attempted electronic delivery of such documents fails. Similarly, the Awardee understands that the Awardee must
provide the Company or any designated third party administrator with a paper copy of any documents if the attempted
electronic delivery of such documents fails. The Awardee may revoke his or her consent to the electronic delivery of
documents described in Section 12.5(a) or may change the electronic mail address to which such documents are to be
delivered (if Awardee has provided an electronic mail address) at any time by notifying the Company of such revoked
consent or revised e-mail address by telephone, postal service or electronic mail. Finally, the Awardee understands that
he or she is not required to consent to electronic delivery of documents described in Section 12.5(a).
12.6
Integrated Agreement. The Grant Notice, this Agreement and the Plan, together with any employment,
service or other agreement between the Awardee and the Company or an Affiliate referring to the Award, shall constitute the
entire understanding and agreement of the Awardee and the Company or an Affiliate with respect to the subject matter contained
herein or therein and supersede any prior agreements, understandings, restrictions, representations, or warranties among the
Awardee and the Company or an Affiliate with respect to such subject matter other than those as set forth or provided for herein
or therein. To the extent contemplated herein or therein, the provisions of the Grant Notice, this Agreement and the Plan shall
survive any settlement of the Award and shall remain in full force and effect.
12.7
Applicable Law. This Agreement shall be governed by the laws of the State of California as such laws
are applied to agreements between California residents entered into and to be performed entirely within the State of California.
12.8
Counterparts. The Grant Notice may be executed in counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same instrument.
NON-STATUTORY STOCK OPTION AGREEMENT (INDUCEMENT AWARD)
SAVARA INC.
EXHIBIT 10.37
THIS NON-STATUTORY STOCK OPTION GRANT AGREEMENT (this “Agreement”), effective as of November 26, 2019 (the
“Grant Date”), is entered into by and between Savara Inc., a Delaware corporation (the “Company”), and Badrul Chowdhury (the “Grantee”).
1.
Grant of Option. The Company hereby grants to the Grantee a non-statutory stock option (the “Option”) to purchase 300,000 shares
of common stock of the Company, par value $0.001 per share (the “Shares”), at the exercise price of $1.01 per Share (the “Exercise Price”). The Option is
not intended to qualify as an incentive stock option under Section 422 of the Code. The Option is granted outside of the Company’s 2015 Omnibus
Incentive Plan (the “Plan”) as an “inducement grant” within the meaning of NASDAQ Listing Rule 5635(c)(4). While this Option was granted outside the
Plan, this Agreement will be governed in all respects as if issued under the Plan, as currently in effect and as may be amended hereafter from time to time,
which is incorporated herein by reference.
2.
Subject to the Plan/Administration. Although not granted under the Plan, this Agreement is subject to the provisions of the
Plan, and, unless the context requires otherwise, terms used herein shall have the same meaning as in the Plan. In the event of a conflict between
the provisions of the Plan and this Agreement, the Plan shall control. All questions of interpretation concerning this Agreement and the Plan
shall be determined by the Committee or its designee. All such determinations shall be final or conclusive, and binding upon all persons having
an interest in the Option as provided in the Plan.
3.
Term of Option. Unless the Option terminates earlier pursuant to the provisions of this Agreement, the Option shall expire
ten years from the Grant Date, except as provided in paragraph (d) of Section 6.
4.
Vesting. The Option shall become vested with respect to 1/16th of the Shares on each three month anniversary of November
15, 2019 until all of the Shares have vested; provided, however, that the Grantee is providing Services on each such vesting date.
5.
Exercise of Option
(a)
Manner of Exercise. To the extent vested, the Option may be exercised, in whole or in part, by delivering notice to the
Company in accordance with paragraph (g) of Section 8 in such form as the Company may require from time to time (the “Exercise Notice”). Such
Exercise Notice shall specify the number of Shares subject to the Option as to which the Option is being exercised, and shall be accompanied by full
payment of the Exercise Price of such Shares in a manner permitted under the terms of Section 5.5 of the Plan, except that payment with previously
acquired Shares may only be made with the consent of the Committee. The Option may be exercised only in multiples of whole Shares and no fractional
Shares shall be issued.
exercised, the Company shall issue to the Grantee the applicable number of Shares in the form of fully paid and non-assessable Shares.
(b)
Issuance of Shares. Upon exercise of the Option and payment of the Exercise Price for the Shares as to which the Option is
appropriately adjusted, if applicable, as provided in Section 12.2 of the Plan.
(c)
Capitalization Adjustments. The number of Shares subject to the Option and the Exercise Price shall be equitably and
(d)
Withholding. No Shares will be issued on exercise of the Option unless and until the Grantee pays to the Company, or
makes satisfactory arrangements with the Company for payment of, any federal, state or local taxes required by law to be withheld in respect of the
exercise of the Option. The Grantee hereby agrees that the Company may withhold from the Optionee’s wages or other remuneration the applicable
taxes. At the discretion of the Company, the applicable taxes may be withheld in kind from the Shares otherwise deliverable to the Grantee on exercise of
the Option, up to the Grantee’s minimum required withholding rate or such other rate that will not trigger a negative accounting impact.
6.
Termination of Option
(a)
Termination of Employment or Service Relationship Other Than Due to Retirement, Death, Disability or Cause. Unless the
Option has earlier terminated, the Option shall terminate in its entirety, regardless of whether the Option is vested, ninety (90) days after the date the
Grantee ceases to provide Services for any reason other than, as applicable, the Grantee's Retirement, death, Disability or termination for Cause. Except as
provided in paragraphs (b), (c) or (d) of this Section, any portion of the Option that is not vested at the time the Grantee ceases to provide Services shall
immediately terminate.
(b)
Retirement. Upon the Retirement of the Grantee, unless the Option has earlier terminated, the Option shall continue in effect
(and, for purposes of vesting pursuant to Section 4, the Grantee shall be deemed to continue to be providing Services) until the earlier of (i) two (2) years
after the Grantee’s Retirement (or, if later, the fifth anniversary of the Grant Date), and (ii) the expiration of the Option’s term pursuant to Section 3. For
purposes of this Agreement, “Retirement” shall mean termination of the Grantee’s employment with the Company and its Affiliates, or a successor
company (or a subsidiary or parent thereof) and their respective subsidiaries, other than for Cause (a) if (i) the Grantee is then at least age 60 and (ii) the
sum of the Grantee’s age and years of continuous Service with the Company and its Affiliates is then equal to at least 70 or (b) if the Committee
characterizes such termination as a “Retirement” for purposes of this Agreement. For clarity, this Section 6(b) shall apply only to Grantees who are
Employees at the time of termination.
(c)
Death. Upon the Grantee's death, unless the Option has earlier terminated, the Grantee's executor or personal representative,
the person to whom the Option shall have been transferred by will or the laws of descent and distribution, or such other permitted transferee, as the case
may be, may exercise the Option in accordance with paragraph (a) of Section 5, to the extent vested, provided such exercise occurs within twelve (12)
months after the date of the Grantee's death or the end of the term of the Option pursuant to Section 3, whichever is earlier.
(d)
Disability. In the event that the Grantee ceases to provide Services by reason of Disability, unless the Option has earlier
terminated, the Option may be exercised, in accordance with paragraph (a) of Section 5, to the extent vested, provided such exercise occurs within six (6)
months after the date of Disability or the end of the term of the Option pursuant to Section 3, whichever is earlier. For purposes of this Agreement,
“Disability” shall mean the Grantee’s becoming disabled within the meaning of Section 22(e)(3) of the Code, or as otherwise determined by the Committee
in its discretion. The Committee may require such proof of Disability as the Committee in its sole and absolute discretion deems appropriate and the
Committee’s determination as to whether the Grantee has incurred a Disability shall be final and binding on all parties concerned.
(e)
Termination for Cause. Upon termination by the Company or an Affiliate or a successor company (or a subsidiary or parent
thereof) of the Grantee’s Service for Cause, unless the Option has earlier terminated, the Option shall immediately terminate in its entirety and shall
thereafter not be exercisable to any extent whatsoever. For purposes of this Agreement, except as otherwise provided in a written employment or severance
agreement between the Grantee and the Company or a severance plan of the Company covering the Grantee (including a change in control severance
agreement or plan), “Cause” shall mean: the commission of any act of fraud, embezzlement or dishonesty by Grantee, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Company or an Affiliate or a successor company (or a subsidiary or parent thereof), or
any other intentional misconduct by such person adversely affecting the business affairs of the Company or an Affiliate or a successor company (or a
subsidiary or parent thereof) in a material manner.
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(f)
Automatic Extension of Exercise Period. Notwithstanding any provisions of Section 3 or paragraphs (a), (b), (c) or (d) of this
Section to the contrary, if on the last business day of the term of the Option under Section 3 or if following termination of Service and during any part of
the time period set forth in the applicable paragraph of this Section (i) exercise of the Option is prohibited by applicable law or (ii) the Grantee may not
purchase or sell Shares due to a “black-out period” of a Company insider trading policy, the term of the Option under Section 3 or the time period to
exercise the Option under Section 3 or paragraphs (a), (b), (c) or (d) of this Section, as applicable, shall be extended until the later of (x) thirty (30) days
after the end of the applicable legal prohibition or black-out period or (y) the end of the time period set forth in the applicable paragraph of this Section.
7.
Change in Control.
(a)
Effect on Option. In the event of a Change in Control, to the extent the successor company (or a subsidiary or parent thereof)
does not assume or substitute for the Option on substantially the same terms and conditions (which may include settlement in the common stock of the
successor company (or a subsidiary or parent thereof)), the Option shall (i) vest and become exercisable on the day prior to the date of the Change in
Control if the Grantee (A) is then providing Services or (B) was terminated without Cause as an Employee, Consultant or Director in connection with or in
contemplation of the Change in Control and (ii) terminate on the date of the Change in Control. In the event of a Change in Control and solely if the
Grantee was an Employee on the date of the Change of Control and is an Employee on the date of termination (as contemplated below), in both cases
regardless of whether the Grantee was also a Director on such dates, to the extent the successor company (or a subsidiary or parent thereof) assumes or
substitutes for the Option on substantially the same terms and conditions (which may include providing for settlement in the common stock of the successor
company (or a subsidiary or parent thereof)), if within 24 months following the date of the Change in Control the Grantee’s employment is terminated by
the Company or an Affiliate or the successor company (or a subsidiary or parent thereof) without Cause or by the Grantee for Good Reason, the Option
shall become fully vested and exercisable, and may be exercised by the Grantee at any time until the tenth anniversary of the Grant Date.
(b)
Good Reason. For purposes of this Agreement, except as otherwise provided in paragraph (c) of this Section, “Good
Reason” shall mean, in each case without Grantee’s explicit written consent, which Grantee may withhold or provide in Grantee’s sole and absolute
discretion, (i) a reduction by the Company or an Affiliate or a successor company (or a subsidiary or parent thereof) of more than 10% in Grantee’s rate of
annual base salary as in effect immediately prior to such Change in Control; (ii) a reduction by the Company or an Affiliate or a successor company (or a
subsidiary or parent thereof) of more than 10% of Grantee’s individual annual target or bonus opportunity, except under circumstances where the Company
or the Affiliate or the successor company (or a subsidiary or parent thereof) implement changes to the bonus structure of similarly situated employees,
including but not limited to changes to the bonus structure designed to integrate the Company’s or the Affiliate’s personnel with other personnel of the
successor company (or a subsidiary or parent thereof); (iii) a change in position that materially reduces Grantee’s level of responsibility, including the level
of person to whom Grantee reports; or (iv) a relocation following the Change in Control of Grantee’s primary office location (A) by more than 50 miles or
(B) that would reasonably be expected to increase Grantee’s commute such that Grantee’s total (i.e., round-trip) commute would reasonably be expected to
increase by more than 1 hour per day.
(c)
Other Agreement or Plan. The provisions of this Section (including the definitions of Cause and Good Reason), shall be
superseded by the specific provisions, if any, of a written employment or severance or service agreement between the Grantee and the Company or a
severance plan of the Company covering the Grantee, including a change in control severance agreement or plan, to the extent such a provision provides a
greater benefit to the Grantee.
8.
Miscellaneous.
this Option until such Shares have been issued upon the due exercise of the Option.
(a)
No Rights of Stockholder. The Grantee shall not have any of the rights of a stockholder with respect to the Shares subject to
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(b)
No Registration Rights; No Right to Settle in Cash. The Company has no obligation to register with any governmental body
or organization (including, without limitation, the U.S. Securities and Exchange Commission (“SEC”)) any of (i) the offer or issuance of any Award
(including this Option), (ii) any Shares issuable upon the exercise of this Option, or (iii) the sale of any Shares issued upon exercise of this Option,
regardless of whether the Company in fact undertakes to register any of the foregoing. In particular, in the event that any of (x) any offer or issuance of this
Option, (y) any Shares issuable upon exercise of this Option, or (z) the sale of any Shares issued upon exercise of this Option are not registered with any
governmental body or organization (including, without limitation, the SEC), the Company will not under any circumstance be required to settle its
obligations, if any, under this Plan in cash.
(c)
Nontransferability of Option. Except to the extent and under such terms and conditions as determined by the Committee, the
Option shall be nontransferable otherwise than by will or the laws of descent and distribution, and during the lifetime of the Grantee, the Option may be
exercised only by the Grantee or, during the period the Grantee is under a legal disability, by the Grantee’s guardian or legal representative.
Notwithstanding the foregoing, the Grantee may, by delivering written notice to the Company, in a form provided by or otherwise satisfactory to the
Company, designate a third party who, in the event of the Grantee’s death, shall thereafter be entitled to exercise the Option.
(d)
Severability. If any provision of this Agreement shall be held unlawful or otherwise invalid or unenforceable in whole or in
part by a court of competent jurisdiction, such provision shall (i) be deemed limited to the extent that such court of competent jurisdiction deems it lawful,
valid and/or enforceable and as so limited shall remain in full force and effect, and (ii) not affect any other provision of this Agreement or part thereof, each
of which shall remain in full force and effect.
California, other than its conflict of laws principles.
(e)
Governing Law. This Agreement shall be governed by, and interpreted in accordance with, the laws of the State of
of this Agreement.
(f)
Headings. The headings in this Agreement are for reference purposes only and shall not affect the meaning or interpretation
(g)
Notices. Any document relating to participation in the Plan or any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given (except to the extent that this Agreement provides for effectiveness only upon actual receipt of such notice)
upon personal delivery, electronic delivery at the e-mail address, if any, provided for Grantee by the Company (or, if applicable the Affiliate for whom
Grantee provides Services), or upon deposit in the U.S. Post Office or foreign postal service, by registered or certified mail, or with a nationally recognized
overnight courier service, with postage and fees prepaid, addressed to the other party at the address of such party set forth or at such other address as such
party may designate in writing from time to time to the other party. Notice by mail shall be deemed delivered on the date on which it is postmarked.
Mailed notices to the Company should be addressed to:
Savara Inc.
6836 Bee Cave Road,
Building III, Suite 200
Austin, TX 78746
Attention: Chief Financial Officer
Mailed notice to the Grantee should be addressed to the Grantee at the Grantee’s address as it appears on the records of the Company or the
Affiliate for whom Grantee is providing Services or a successor company (or a subsidiary or parent thereof). The Company or the Grantee may by writing
to the other party, designate a different address for notices.
-4-
Documents related to this Option, which may include but do not necessarily include: the Plan, this Agreement, the Plan Prospectus, and
any reports of the Company provided generally to the Company’s stockholders, may be delivered to Grantee electronically. In addition, if permitted by the
Company, Grantee may deliver electronically the Exercise Notice called for by paragraph (a) of Section 5 to the Company or to such third party involved in
administering the Plan as the Company may designate from time to time. Such means of electronic delivery may include but do not necessarily include the
delivery of a link to a Company intranet or the internet site of a third party involved in administering the Plan, the delivery of the document via e-mail or
such other means of electronic delivery specified by the Company.
Grantee acknowledges that Grantee has read this paragraph (g) of Section 8 and consents to the electronic delivery of the Plan documents
and, if permitted by the Company, the delivery of the Exercise Notice, as described above. Grantee acknowledges that he or she may receive from the
Company a paper copy of any documents delivered electronically at no cost to Grantee by contacting the Company by telephone or in writing. Grantee
further acknowledges that the Grantee will be provided with a paper copy of any documents if the attempted electronic delivery of such documents fails.
Similarly, Grantee understands that Grantee must provide the Company or any designated third-party administrator with a paper copy of any documents if the
attempted electronic delivery of such documents fails. Grantee may revoke his or her consent to the electronic delivery of documents described above or may
change the electronic mail address to which such documents are to be delivered (if Grantee has provided an electronic mail address) at any time by notifying
the Company of such revoked consent or revised e-mail address by telephone, postal service or electronic mail. Finally, Grantee understands that he or she is
not required to consent to electronic delivery of documents.
(h)
Agreement Not a Contract. This Agreement (and the grant of the Option) is not an employment or service contract, and
nothing in the Option shall be deemed to create in any way whatsoever any obligation on Grantee’s part to continue as an employee or director of or
consultant to the Company or any Affiliate or a successor company (or a subsidiary or parent thereof), or of the Company or any Affiliate or a successor
company (or a subsidiary or parent thereof) to continue Grantee’s Service as such an employee, director or consultant.
(i)
Entire Agreement; Modification. This Agreement is subject to the provisions of the Plan (despite the fact that the Option is
not granted under the Plan). This Agreement and the Plan contain the entire agreement between the parties with respect to the subject matter contained
herein and may not be modified, except as provided in the Plan or in a written document signed by each of the parties hereto and may be rescinded only by
a written agreement signed by both parties.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the Grant Date.
Savara Inc.
By: /s/ Dave Lowrance
Dave Lowrance, CFO
Grantee
/s/ Badrul Chowdhury
Badrul Chowdhury
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Exhibit 10.39
Badrul Chowdhury, MD, PhD
Transmitted via email to: badrulc@gmail.com
Dear Badrul,
Savara Inc. (“Savara’’ or “Company’’) is extremely pleased to extend to you an offer of employment with our Company as Chief Medical Officer.
This offer letter and the terms contained herein supersede all other communications verbal or written. Subject to your acceptance of the terms
herein, we would expect that your employment with the Company start on November 15th, 2019. Your actual first date of employment will
hereinafter be referred to as "Start Date".
In this position, you will report directly to the CEO, and you will assume the role of Chief Medical Officer at Savara, and will focus on the
development and implementation of the company's growth strategy, and will also be a key support person to the commercial,
corporate/business development, and R&D teams as a clinical expert, as well as oversee the regulatory approval process for our drug
candidates. As part of the Company's external facing activities, you will participate in the Company's medical communications and
publications activities, and interactions with investors, key opinion leaders, and other key external stakeholders. Performance of the duties
will require travel, as necessary, to vendors and international offices of Savara. Your responsibilities may be adjusted from time to time in line
with your performance, and growth of the company. A more detailed outline of your responsibilities (job description) is attached to this letter.
As a valued Savara employee, you will receive a salary and other benefits specified below where Savara is your primary employer. You should
note that the Company may modify job titles, wages and benefits from time to time as it deems necessary.
1.
2.
3.
Salary: Upon the commencement of your employment and your completion of requisite compliance and payroll documents, you
will receive an annual salary of $525,000 (before applicable withholding and taxes) to be paid in semimonthly installments on the
Company's regular paydays by direct deposit.
Signing Bonus: Upon the commencement of your employment and your completion of requisite compliance and payroll
documents, you will receive a one-time signing bonus of $150,000 (before applicable withholding and taxes) to be paid along with
your first scheduled semimonthly salary (or as soon as practical thereafter). If you resign within eighteen (18) months of
employment, you will be required to refund to the Company the full amount of your signing bonus. Additionally, subject to the
approval of Savara's Board of Directors (the “Board’’) and as a material inducement to your accepting of employment with the
Company, upon the commencement of your employment and your completion of requisite compliance and payroll documents,
you will receive a one-time signing bonus grant of 200,000 RSUs, vesting in full after eighteen (18) months (i.e. cliff-vesting).
Annual Bonus: Currently, Savara has a cash-based incentive plan (the “Bonus Award’’) in place for executives and employees. You
will be eligible for the Bonus Award, which is currently targeted at 40% of your base salary, beginning in 2020. The amount of the
Bonus Award is based upon achievement of performance objectives to be determined by the Board or the Compensation
Committee of the Board (the “Compensation Committee’’) or CEO (with potential of up to 100%
CONFIDENTIAL
4.
5.
6.
7.
8.
bonus based upon material Company success, determined at the discretion of the Board or the Compensation Committee). For
2019, you may earn a bonus of up to $50,000 at the discretion of the Board, which would be paid in January 2020. You may also
be eligible for other cash or equity bonuses from time to time as determined by the CEO and the Board, in their sole discretion.
The terms and conditions of the Bonus Award and/or any other bonus programs, and whether you have met the eligibility
objectives and earned the Bonus Award and/or bonuses related to other bonus programs will be determined by the Company.
The Company reserves the right to modify, interpret, and/or apply the terms of the Bonus Award and/or bonuses related to other
bonus programs in its sole discretion. Your eligibility for the Bonus Award and/or bonuses related to other bonus programs will be
reviewed from time to time as part of the Company's normal compensation review process.
Grant of Options: Subject to Board approval and as a material inducement to your accepting of employment with the Company,
effective on your Start Date or as soon as practical thereafter, you will receive a grant of 300,000 options to purchase the
Company's common stock. Such Options shall vest as to 1/16th of the total number of Options each quarter with vesting
commencing on your Start Date, subject to your continued employment with the Company. The Options will be granted under and
subject to the terms of the Company's 2015 Omnibus Incentive Plan (the “Incentive Plan’’) in the form of an Option Agreement.
You will be eligible for additional equity incentives from time to time, based on performance, and as determined by the CEO and
the Board, at their sole discretion.
Vacation: You will be eligible for the Company's vacation/PTO plan and will be provided with three weeks of vacation time per
calendar year (accumulating based on full-time employment). See Savara's Employee Handbook for complete policies on
vacation/PTO.
Health Care Plan and Other Benefits: You will be entitled to participate in the Company's health care, vision and dental plans,
401(k), and short-term and long-term disability plans, as well as receive paid holidays common to all employees as established by
Savara policy. Note some programs require employment at Savara for up to three months prior to eligibility (e.g., participation in
the Company's 401(k) plan).
Travel and Other Expenses: You will be entitled to reimbursement of typical business expenses associated with pre-approved
travel that are incurred in connection with the performance of your duties, against receipts or other appropriate written evidence of
such expenditures, as required by the appropriate United States Internal Revenue Service regulations and the Company's
standard policies and practices. In addition, you will be reimbursed for a Savara-approved cell phone plan and device, provided
that you submit applicable receipts or other appropriate written evidence of such expenditures on a monthly basis. See
Company's Employee Handbook for complete details.
At-Will Employment: Subject to information in this section, your employment relationship with Savara is on an at-will basis as
governed by Texas law. That is, even after accepting this employment offer, you will have the right to resign at any time, and the
Company will have the right to end your employment relationship with the Company for any reason, with or without Cause, or for
no reason subject to the below provisos. Of course, we hope everything works out for the best, but the Company wants to make
sure that you understand that nothing in this letter or in any Company policy or statement (including any other written or verbal
statements made to you during negotiations about working at Savara) is intended to or does create anything but an at-will
employment relationship. Only the Company's CEO in collaboration with the Board may modify your at-will employment status, or
guarantee that you will be employed for a specific period of time. Such modification must be in writing, signed by the CEO, and
approved by the Board. If for any reason, including a Change in Control (as defined in Section 10.3 of the Incentive Plan), you are
terminated by the Company (or the Company's successor) without Cause (as defined below), Savara will compensate you (1)
twelve-months of your then current base salary less applicable taxes, (2) the portion of the Bonus Award, if any, that the
Company, in its sole discretion, has
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determined you have earned as of the last day of your employment (the "Termination Date") based on your achievement of goals
established by the CEO, (3) reimbursement of any outstanding and reasonable business related expenses, (4) any accrued base
salary as of the Termination Date, and (5) a one-time payment equal to the cost of three (3) months of health, vision, and dental
benefits via Texas State Continuation coverage following the Termination Date. Additionally, if termination occurs related to a
Change in Control, your Options will be treated as outlined under Section 10 of the Incentive Plan. Any and all payments noted in
this paragraph are conditioned upon execution of a release of any and all claims against the Company in a form satisfactory to the
Company. Also, Savara requires 30-day notice period should you decide to terminate your employment.
9.
Prior Employment/Third Party Information: We ask that, if you have not already done so, you disclose to the Company any and
all agreements relating to your prior employment that may affect your eligibility to be employed by the Company or limit the
manner in which you may be employed. It is the Company's understanding that any such agreements will not prevent you from
performing the duties of your position and you represent that such is the case. Moreover, you agree that, during the term of your
employment with the Company, you will not engage in any other employment, occupation, consulting, or other business activity
directly related to the business in which the Company is now involved or becomes involved during the term of your employment,
nor will you engage in any other activities that conflict with your obligations to the Company. Similarly, you agree not to bring any
third-party confidential information to the Company, including that of your former employer, and that you will not in any way utilize
any such information in performing your duties for the Company. In addition, you agree that you will not disclose to any Savara
employee, any confidential information or trade secrets of any former employer or other person which would violate your legal
obligations to those parties. Performance of your duties at Savara will only require information and knowledge which is generally
known and used by persons with training and experience comparable to your own, which is common knowledge in the industry or
otherwise legally in the public domain, or which is otherwise provided or developed by Savara.
10. Background Check: As a condition of this offer, you will be required to consent to a background investigation and reference
check in accordance with applicable law. This background investigation and reference check may include an investigative
consumer report, as defined by the Fair Credit Reporting Act (“FCRA’’), 15 U.S.C. 1681a. This investigation may also include a
consumer report, as defined by the FCRA, 15 U.S.C. 1681a, which may include information bearing on your credit worthiness. This
job offer is contingent upon a clearance of such a background investigation, and upon your written authorization to obtain a
consumer report and/or investigative consumer report.
11.
Immigration Laws: For purposes of federal immigration law, you also will be required to provide to the Company documentary
evidence of your identity and eligibility for employment in the United States. Such documentation must be provided within three
(3) business days of the effective date of your employment, or your employment relationship with the Company may be terminated.
12. Proprietary Information and Inventions Agreement: As a condition of your employment with the Company, you will be
required to sign and comply with the Company's Proprietary Information and Inventions Agreement, which requires, among other
provisions, the assignment of patent rights to any invention made during your employment at the Company, and non-disclosure of
Company proprietary information. A copy of the Proprietary Information and Inventions Agreement is attached hereto. Please note
that we must receive your signed Proprietary Information and Inventions Agreement before your first day of employment with the
Company.
13. Company Policies: As a Company employee, you will be expected to abide by the Company's rules and standards. Specifically,
you will be required to sign an acknowledgment that you have read and that you understand the Company's policies which are
included in the Employee Handbook attached hereto.
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In addition, this offer of employment is contingent upon approval by the Board. The terms and conditions of the offer reflected in this letter are
subject to completion of our final reference and background checks or until the close of business on September 15th, 2019 unless revoked before
then by the Company. Upon execution, this letter, together with the Employee Handbook and Proprietary Information and Inventions Agreement
contains the entire agreement among the parties relating to your proposed employment with the Company and supersedes any previous
agreements, including consulting agreements, communications or offers of any kind, written or verbal, between the parties. This offer letter
will be governed by Texas law.
We have genuinely enjoyed our interactions to this point, and are excited about you joining the Savara team as a full-time employee. We all
believe that you will continue to make a significant contribution to the success of the Company and are eager to have you onboard.
To signify your acceptance of this offer and the terms cited herein, please sign the letter below and return a copy to me along with the other
employment documents described above.
With kind regards,
/s/ Rob Neville
Rob Neville
Date:
Aug 29, 2019
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Accepted and agreed:
/s/ Badrul Chowdhury
Badrul Chowdhury, MD, PhD
Sep 6, 2019
Date:
Enclosures:
Proprietary Information and Inventions Agreement Savara Inc. Employee Handbook
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statements (No. 333-225994) on Form S-3 and (No. 333-126551, 333-151903, 333-
174940, 333-190376, 333-198046, 333-206330, 333-217894 and 333-225998) on Form S-8 of Savara Inc. of our reports dated March 12, 2020, relating to
the consolidated financial statements and to the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of
Savara Inc. for the year ended December 31, 2019.
/s/ RSM US LLP
Austin, Texas
March 12, 2020
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.2
We hereby consent to the incorporation by reference in the Registration Statements on Form S‑3 (No. 333-225994) and Form S-8 (Nos. 333-126551, 333-
151903, 333-174940, 333-190376, 333-198046, 333-206330, 333-217894 and 333-225998) of Savara Inc. of our report dated March 13, 2019 relating to
the financial statements, which appears in this Form 10‑K.
/s/ PricewaterhouseCoopers LLP
Austin, Texas
March 12, 2020
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Robert Neville, certify that:
1.
2.
3.
4.
I have reviewed this report on Form 10-K of Savara Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 12, 2020
By: /s/ Robert Neville
Robert Neville
Chief Executive Officer
CERTIFICATION OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Dave Lowrance, certify that:
1.
2.
3.
4.
I have reviewed this report on Form 10-K of Savara Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 12, 2020
By: /s/ Dave Lowrance
Dave Lowrance
Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Savara Inc. (the “Company”) on Form 10-K for the year ended December 31, 2019, as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), I, Robert Neville, principal executive officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(i)
(ii)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 12, 2020
/s/ Robert Neville
Robert Neville
Chief Executive Officer
(Principal Executive Officer)
In connection with the Annual Report of Savara Inc. (the “Company”) on Form 10-K for the year ended December 31, 2019, as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), I, David Lowrance, principal financial and accounting officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(i)
(ii)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 12, 2020
/s/ David Lowrance
David Lowrance
Chief Financial Officer
(Principal Financial and Accounting Officer)